Purpose of Receivable Management

Receivables also termed as trade credit or debtors are components of current assets. When a firm sells its product in credit, account receivables are created. It is shown on its balance sheet as an asset. It is one of a series of accounts dealing with the billing of a customer for goods and services that the customer has ordered. The main purpose of managing receivables is to meet competition and to increase sales and profits.

Purpose of Receivable Management

The basic purpose of the firm’s receivable management is to determine effective credit policy that increases the efficiency of a firm’s credit and collection department and contributes to the maximization of the value of the firm. The specific purposes of receivable management are as follows:

  • To evaluate the creditworthiness of customers before granting or extending the credit.
  • To minimize the cost of investment in receivables.
  • To minimize the possible bad debt losses.
  • To formulate the credit terms in such a way that results in maximization of sales revenue and still maintaining a minimum investment in receivables.
  • To minimize the cost of running a credit and collection department.
  • To maintain a trade-off between costs and benefits associated with credit policy.

Good receivables management is essential not only from a working capital management perspective, but also gives businesses to have the confidence to invest in growth. The tenets of good account receivable management are:

  1. Having a proper credit policy in place (who to extend credit to, how much, and how to monitor)
  2. Ensuring credit (policy) awareness among all teams – sales, finance etc. so that there is no gap between policy and actual implementation
  3. Proper customer on-boarding and data management – so that the business has the ability to know, analyse and track (credit) customers at all points of time

Following are the areas covered by receivables management:

  • Credit Analysis,
  • Credit Terms,
  • Financing of Receivables,
  • Credit Collection,
  • Monitoring of Receivables.

 

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