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by RajaRajeswari L on Tuesday 24 April 2012, 1:13 PM | Category: Banking and Finance| View: 6730 views
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·        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.


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


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


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