RECEIVABLES MANAGEMENT - Accounts and Finance for Managers

Management of Receivables

Concept of Receivables Management

The receivables are normally arising out of the credit sales of the firm.

What is meant by the accounts receivable?

It is an asset owed to the firm by the buyer out of the credit sales with the terms and conditions of repayment on an agreed time period.

Meaning of the receivables management: The receivables out of the credit sales crunch the availability of the resources to meet the day today requirements. The acute competition requires the firm to sustain among the other competitors through more volume of credit sales and in the intention of retaining the existing customers. This requires the firm to sell more through credit sales only in order to encourage the buyers to grab the opportunities unlike the other competitors they offer in the market.

Objectives of Accounts Receivables

  1. Achieving the growth in the volume of sales
  2. Increasing the volume of profits
  3. Meeting the acute competition

Cost of Maintaining the Accounts Receivables

Capital cost: Due to in sufficient amount of working capital with reference to more volume of credit sales which drastically affects the existence of the working capital of the firm. The firm may be required to borrow which may lead to pay certain amount of interest on the borrowings. The interest which is paid by the firm due to the borrowings in order to meet the shortage of working capital is known as capital cost of receivables.

Administrative cost: Cost of maintaining the receivables.

Collection cost: Whatever the cost incurred for the collection of the receivables are known as collection cost.

Defaulting cost: This may arise due to defaulters and the cost is in other words as cost of bad debts and so on.

Factors Affecting the Accounts Receivables

Level of sales: The volume of sales is the best indicator of accounts receivables. It differs from one firm to another.

Credit policies: The credit policies are another major force of determinant in deciding the size of the accounts receivable. There are two types of credit policies viz lenient and stringent credit policies.

Lenient credit policy: Enhances the volume of the accounts receivable due to liberal terms of the trade which normally encourage the buyers to buy more and more.

Stringent credit policy: It curtails the motive buying the goods on credit due stiff terms of the trade put forth by the supplier unlike the earlier.

Terms of trade: The terms of the trade are normally bifurcated into two categories viz credit period and cash discount

Credit period: Higher the credit period will lead to more volume of receivables, on the other side that will lead to greater volume of debts from the side of buyers.

Cash discount: If the discount on sales is more, that will enhance the volume of sales on the other hand that will affect the income of the enterprise.

Management of Accounts Payable/Financing the Resources

It is more important at par with the management of receivable, in order to avail the short term resources for the smooth conduct of the firm.


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