|
MANAGEMENT OF RECEIVABLES Meaning: · Receivables represent amounts owed to the firm as a result of sale of goods or services in the business. · Receivables results from credit sales · It forms a part of current assets. · Also known as Accounts receivable, trade receivables, customer receivables and book debts. · The purpose of maintaining or investing in receivables is to meet competition and to increase the sales and profits. COST OF MAINTAINING RECEIVABLES: 1. Cost of financing receivables: · Concern incurs some costs for collecting receivables 2. Cost of collection: · Proper collection of receivables is essential for receivables management. · Customers who do not pay the money during a stipulated credit period are sent reminders for payment or sent some persons for collecting the amount. · All these costs are known as collection cost 3. Bad debts: · Amount which the customer fail to pay are known as bad debts. · Concern may able to reduce bad debts through efficient collection machinery Factors influencing the size of receivables: 1. Size of credit sales 2. Credit policies 3. Terms of trade 4. Expansion plans 5. Relation with profits 6. Credit collection efforts 7. Habits of customers Forecasting the receivables: Forecasting the receivables is an estimation which will help the concern in planning its receivables. The following factors will help in forecasting receivables: 1. Credit period allowed: · The ageing of receivables is helpful in forecasting · Longer the amounts remain due, the higher will be the size of receivables · Increase in receivables will result in more profits as well as higher costs too · Collection expenses and bad debts will also be more. · If credit period is less, then the size of receivables will also be less 2. Effect of cost of goods sold: · Increase in sales results in decrease in cost of goods sold. · Sales should be increased to that extent where costs are low. 3. Forecasting expenses: · Receivables are associated with number of expenses · Costs of receivables are more than the income, further credit sales should not be allowed. 4. Forecasting average collection period and discounts: · Average collection period is more than the size of receivables will be more. · Average collection period:  X No.of working days 5. Average size of receivables: · Determination of average size of receivables will helpful in forecasting receivables. · Average size of receivables: = Estimated annual sales X Average collection period DIMENSIONS OF RECEIVABLES MANAGEMENT: Receivables management involves the following aspects: 1. Forming of credit policy: · Every company must adopt a credit policy. Credit policy relates to a. Quality of Trade accounts or credit standards: · Volume of sales will be influenced by the credit policy of a concern. · By liberalizing credit policy, the sales will be increased, · The increased volume of sales will be increased the cost and risk of bad debts · Credit to only creditworthy customers will save costs like bad debt losses, collection costs and investigation costs etc · Quality of trade accounts should be decided so that credit facilities are extended only upto the optimum level. b. Length of credit period: · It means the period allowed to the customers for making the payment · Customers paying well in time also be allowed certain cash discount. · Concern fixes its own terms of credit depending upon its customers and volume of sales. c. Cash discount: · Cash discount is allowed to immediate payment of customers · Discount allowed involves cost · Financial manager compare the cost of discount and the amount of fund realized · Discount should be allowed only if its cost is less than the earnings. d. Discount period: · Collection of receivables influenced by the period allowed for availing discount · Additional period allowed for this facility may prompt some more customers to avail discount and make payments. 2. Executing credit policy: · After formulating credit policy proper execution is important. · Evaluation of credit applications and finding out the credit worthiness of customers should be undertaken a. Collecting credit information: · Collecting credit information about the customers is the first step in implementing credit policy. · Information should be adequate and proper analysis about the financial position of the customers is possible. · Sources of collecting credit information are financial statements, credit rating agencies, reports from banks etc. b. Credit analysis: · After gathering information , analyse the creditworthiness of the customer · Credit analysis will determine the degree of risk associated, the capacity of the customer to borrow and his ability and willingness to pay. c. Credit decision: · After analyzing the creditworthiness of the customer, decision has to take whether the credit is to be extended and then upto what level. · Match the creditworthiness of the customer with the credit standard of the company. · If customers creditworthiness is above the credit standards then the credit is allowed. 3. Formulating and executing collection policy: · Collection policy be termed as Strict and Lenient. · Strict policy of collection will involve more efforts on collection · Such policy will enable early collection of dues and will reduce bad debts losses. · It may also reduce the volume of sales. · Some customers may not appreciate the efforts of the concern and may shift to another concern thus causing reduced sales and profits. · A lenient policy may increase the debt collection period and more bad debt losses. · Collection policy should devise the following steps: § Sending a reminder for payments § Personal request through telephone etc § Personal visits to the customers § |
