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MANAGEMENT OF
RECEIVABLES &PAYABLES
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Management of accounts receivables
Receivables represent amount owned to the firm as a result of sale of goods
or services in the ordinary course of business.
These are claims of firm against its customers and form part of its current
asset.
Receivables are also known as accounts Receivables, trade Receivables,customer Receivables, or book debts.
the Receivables are carried for the customers.
The purpose of maintaining or investing in Receivables is to meet
competition, and to increase the sales and profit.
In simple term sale of goods and service in credit and make a promissorynote to receive payment later
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Cost of maintaining receivables
1. Cost of financing receivables
2. Cost of collection
3. Bad debts
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Factors influencing the size of Receivables
Size of credit sale
Credit policies
Terms of trade
Expansion plans
Relation with profits
Credit collection efforts
Habits of customers
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Forecasting the Receivables
Credit period allowed
Effect of cost of goods sold
Forecasting expenses
Forecasting average collection period and discounts
Average size of receivables
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Receivables management
Receivables management is the process of making
decision relating to trade debtors.
The objective is to promote sales and profit until thatpoint is reached where the return on investment in
further funding of receivables is less than the cost of
fund raised to finance the additional credit.
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Dimensions of receivable's management
1. Forming of credit policy
2. Executing the credit policy
3. Formulating and executing collection policy
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(1)Forming of credit policy
a) Quality of trade accounts or credit standerd
b) Length of credit period
c) Cash discount
d) Discount period
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(2)Executing credit policy
a) Collecting credit information
b) Credit analysis
c) Credit decision
d) Financing investments in Receivables and Factoring
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(3) Formulating and executing collection policy
The collection policy should also devise the steps to be
followed in collecting over due amounts. The objective is
to collect the dues and not to annoy the customers. The
steps are ;
a) Sending a reminder for payments
b) Personal request through communication mediums
c) Personal visit to the customer
d) Taking help of collecting agencies and lastlye) Taking legal action
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Factoring and Receivables management
A factor is a financial institution which offers servicerelating to management and financing of debts arising out
of credit sale.
Factoring may be broadly be defined as relationship,created by an agreement, between the seller of
goods/service and a financial institution called factor.
It enables the later purchases the receivables of theformer and also controls and administers the receivables
of the former.
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Functions of a factor
Factors render a number of services to the selling firm. some of
the functions are;
Bill discounting facilities
Administration of credit sales
Maintenance of sales ledger Collection of accounts receivables
Credit control
Protection from bad debts
Provision of finance
Rendering advisory services
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Types of factoring
1) Resource and non-resource factoring
2) Advance and maturity factoring
3) Conventional or full factoring
4) Domestic and export factoring
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Management of accounts payables
Management of accounts payable is as much important asManagement of accounts receivables.
There is a basic difference between these two.
The objective of accounts receivable is to maximize the
acceleration of the collection process, the objective of
accounts parable is to slow down the payment process as
much possible.
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The delay in payment of accounts payable mayresult in saving of some interest cost.
The finance manager has to ensure that thepayments to the creditors are made at the
stipulated time period after obtaining the best
credit terms possible.
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