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:
- Having a proper credit policy in place (who to extend credit to, how much, and how to monitor)
- Ensuring credit (policy) awareness among all teams – sales, finance etc. so that there is no gap between policy and actual implementation
- 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.