Unit 4 Receivables Management

7/29/2019 Unit 4 Receivables Management

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Receivables management


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Introduction to recievables

When goods are sold on credit in business, the

price of the goods becomes receivable. We

know this amount as 'Trade Debtors" or

'Debtors'" or ' 'Receivables'' or Accounts

Receivables''. These receivables are assets of

the business.


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Important points of receivables

(1) It involves an element of risk. There is norisk in cash sales, but in credit sales, there is arisk of bad debts.

(2) It is based on economic value. When sale ismade, the economic value immediately passesto the buyer, while it will pass to the seller infuture.

(3) It implies futurity in the sense that themoney is receivable in future.


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Definition of receivables

Accorrding to Hampton "receivables are asset

accounts representing amounts owed to the

firm as a result of the sale of goods / services

in the ordinary course of business".

O.M. Joy writes The term receivables is

defined as a debt owed to the firm by

customers arising from sale of goods orservices in the ordinary course of business".*


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COSTS OF MAINTAINING RECEIVABLES:

(a) Capital Cost: The increased level of

accounts receivable arising out of liberal credit

policy results in blocking of firm's resources in

them. This is because there is a time lag

between the sale of goods to customers and

receipt of money from them. But, the firm has

to arrange money, in the meantime, formeeting its own obligations such as suppliers

of materials,


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Collection Cost: These costs are incurred in

collecting the payments from the customers

to whom credit sales have been made. It

includes cost of additional steps taken to

recover money from customers. It involves

cost of stationery. postage, legal costs in

extreme cases.


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Administrative Costs: The firm has to incur

additional administrative costs in maintaining

accounts receivable. It includes cost of credit

department, staff cost, stationery cost and

also the expenses incurred in making

investigations regarding creditworthiness of

the customer


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Collection Cost: These costs are incurred in

collecting the payments from the customers

to whom credit sales have been made. It

includes cost of additional steps taken to

recover money from customers. It involves

cost of stationery. postage, legal costs in

extreme cases.


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Default Cost: Bad debt losses arise when the

firm is unable to collect some of its accounts

receivable. Such debts are treated as bad

debts and have to be written off.


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Scope/importance of receivables

management

Decide credit policy: First of all, credit policy is to beframed in the management of receivables. Credit policycan be framed by considering the condition of market,estimation of sales; competition etc. on the basis of

customers' creditworthiness, liberal or strict policy hasto be decided.

In the determination of credit policy, credit standards,conditions of credit and efforts for collection are

included while determining credit policy of a unit,efforts for developing optimum credit policy should bedone.


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Determine conditions of credit: The gist ofconditions of credit is framed by credit policy.Function of making credit policy more clear is

carried out with regulated conditions. In theconditions of credit, time, proportion of cashreturn and decisions regarding determiningcredit standards are included. Determination

of credit standards mostly depend on seasonaldemand, estimation of bad debt loss, decisionregarding return.


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Valuation of credit: Company should prepare aguideline for an effective credit management. Ifevery customer or account holder is given theguideline which is prepared for giving credit or

collection, then this can make the procedure ofcredit management proper. In order to givepersonal or individual credit to customers,management has to think properly. Here,

information should be gathered about whethercustomer is worth allowing credit or not? Howmuch credit should be granted? Etc. Customer'scredit capacity should be checked.


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Decide policy of collection: Every firm shouldhave a proper collection policy which aims atreceiving timely collection from those who are

slow in payment or do not pay and to reducethe loss of bad debts. In order to collectmoney in time, firm should use variousmethods of collection like on the period of

payment from customers direct and strictcollection, encash bills with commercial banks,receive help of financial companies.


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Increase in sales: Sales increases if goods are soldon credit instead of only on cash. In the time oftough competition, only cash sales are notbeneficial. A firm may be thrown out. For

increasing sales, credit sales are very necessary. To maintain market: By credit sales, market can

be obtained and maintained too. In order tointroduce new product in the market, creation of

receivables is very necessary. In the time of toughcompetition, if proper care is not taken, it is notonly difficult to get market but almost impossible.


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Increase profit: When in this world of toughcompetition, rivals adopt liberal credit policy andencourage credit sales by different encouragements,unit cannot remain untouched, and otherwise it will be

thrown out of market. Attract customers: Units manufacturing industrial

product have to maintain receivables on the demand oftraders who purchase on credit. In the same way,

receivables have to be maintained to increase thepurchase capacity and attract customers for comfort-facility, costly things for entertainment of luxury etc.


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Establish relationship: Maintenance of

receivables benefits in establishing long term

relationship with customers and traders. Long

term relations are established betweenproducer (manufacturer) and trader, trader

and other retailers by credit sales.

Obj ti f i t i i


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Objectives of maintaining

Receivables:

Increase Credit : In credit sales, customer do

not have to pay money immediately after

receiving goods, so goods are sold more on

credit. It is natural that if sales are high, profitis also high but it is possible only when profit

on credit sales is more than the damage or

bad debts, opportunity expense, recoveryexpense boom out of credit policy.


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To maintain existence : In the time of toughcompetition, when rivals adopt credit policy andencourage credit sales, a unit cannot remain

aloof from it or untouched, otherwise it will bethrown out of the market.

To obtain (get) market: Credit sales is animportant tool for getting and developing market.

In the time of financial stringency, it is notpossible to get market by the option of cashsales.


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Attract customers, traders: If industrial

products are sold to traders, traders will

certainly expect credit. That is why if they are

not permitted credit facility, not onlycustomers


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To establish relationship: If customers are traders, it is necessary

to establish good relations with them and maintain them. So that

they will not go anywhere else. Relations are helpful in

transactions also and so receivables are maintained.

Documents

Unit 4 Receivables Management