Accounts Receivables Management
The term receivables refers to debt owned to
the firm by the customers resulting from the
sale of goods or services in the ordinary course
of business.
There are the funds blocked due to credit sales.
It refers to the decision a business makes
regarding to the overall credit, collection
policies and the evaluation of individual credit
applicants.
It is also called trade credit management.
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Features of Accounts Receivables Management
It is a process of decision making
regarding investment of receivables.
If receivables are low, sales becomes
restricted.
Receivables to be managed to optimise
profits.
It maximises the overall return on
investment of the firm.
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Purpose of Accounts Receivables Management
Increase in Sales
Increase in Profits
Meeting the Competition
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Cost of maintaining Accounts
Receivables
1. Capital Cost:
A cost generated as a time gap between cost
incurred and sales incurred.
It is the fund raised for payment of wages,
payment to the suppliers and even interest
against late payments to the suppliers.
This fund normally be raised from outside or
from retained earnings.
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2. Administrative Costs:
A cost normally incurred for maintenance of
customers’ accounts.
It is the cost incurred for investigating the
creditworthiness of the customers in the market.
3. Collection Costs:
It involves the expenses incurred for collection of
payments from credit customers.
It also includes those costs which help in
recovering from default customers.
4. Defaulting Costs:
Bad debts
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Aspects of Accounts Receivables
Management
1. Credit Policy:
Whether to grant credit or not?
How much is the credit limit?
These depend on the credit standards
that are either tight and restrictive OR
liberal and non- restrictive.
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2. Credit Standards:
It is based on different determinants:
a. Collection cost.
b. Average collection period.
c. Level of bad debts.
d. Level of sales.
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3. Credit Period:
It is the time for which the credit is
extended.
It is generally stated in terms of Net
Date.
If the policy of a company states “Net
30” , it means the payment will be made
after 30 days of credit sale.
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Collection Policy
It depends on the following factors:
1. Degree of Collection Efforts:
Item Direction of Effect on
Change profits
Bad Debt Losses Decrease Positive
Average Collection Decrease Positive
Period
Sales Volume Decrease Negative
Collection Cost Increase Negative
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2. Type of Collection Efforts:
Reminder letters to make the payment.
Telephone calls for follow up.
Personal visits.
Seek assistance from collection agencies.
Legal action.
3. Monitoring of Receivables
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