Meaning of Management of Receivables<\/h2>\n\n\n\n
Management of receivables is\nconcerned with planning, monitoring, and controlling of ‘debt’ owed to the firm\nfrom a customer(s) on account of credit sales. It is also referred to as trade\ncredit management. The primary objective\nof management of receivables (or debtors) is to optimize the return on\ninvestment on these assets, i.e., debtors.<\/strong><\/p>\n\n\n\n The finance manager has\noperating responsibility towards the overall management of the investment in\naccounts receivables. He must be actively involved in:<\/p>\n\n\n\n The management of receivables\nby the finance manager entails due consideration of the following three\nimportant aspects:<\/p>\n\n\n\n (A) Credit Policy<\/strong>: The credit policy of the business firm needs to be determined carefully. The decision pertaining to credit policy comprises decisions relating to credit standards, credit terms and collection efforts.<\/strong> This seeks to include credit period, cash discount and other relevant matters. The credit policy should be determined by establishing a risk-return trade-off between the profits on incremental sales that arise owing to the credit being extended on the one hand and the cost of carrying those debtors and bad debt losses on the other. Or simply put, the expected profit must be compared with the opportunity cost of investment in accounts receivables.<\/p>\n\n\n\n The credit period is usually\nquoted in terms of net days. For example, if a business entity’s credit terms\nare “net 50”, it is expected that the customers will repay their credit\nobligations not later than 50 days. Moreover, the cash discount policy states\nthe rate of cash discount offered, the cash discount period; and the net credit\nperiod. For instance, the credit terms may be expressed as “3\/15 net 60”.\nThis means that a 3% discount will be provided if the customer pays within 15\ndays; if he does not avail the offer, he must make the due payment within 60\ndays.<\/p>\n\n\n\n (B) Credit Analysis<\/strong>: Credit analysis requires the finance manager to determine as to how risky it is to advance credit to a particular customer or party. The credit-worthiness of a prospective customer must be analyzed based on his financial strengths and weaknesses, before according him valuable goods on credit.<\/p>\n\n\n\n (C) Control over Receivables<\/strong>: The finance manager is required to follow up the debtors and take decisions about a suitable credit collection policy for the firm. It not only involves laying down of credit collection policies, <\/strong>but also the execution of such policies. The cost of maintaining and controlling receivables comprises the following costs:<\/strong><\/p>\n\n\n\n The credit policy of a\nbusiness firm is an important factor determining both the quantity and the\nquality of accounts receivables. Companies may follow a lenient or stringent\ncredit policy. The company that adopts a lenient credit policy sells goods on credit\nto its customers on very liberal terms and conditions. On the other hand, a company\nthat adopts a stringent credit policy sells goods on credit to its customers on\na highly selective basis<\/a>, i.e., only to those peculiar customers who are financially\nsound and hold a proper track record strengthening their credit-worthiness.<\/p>\n\n\n\n Any\nincrease in accounts receivables or an additional extension of trade credit granted\nto customers not only results in higher sales but is also accompanied with\nadditional financing required to support the increased investment in accounts\nreceivables.<\/strong>\nMoreover, the costs of credit investigations, collection efforts and the\nchances of bad debts are also increased.<\/p>\n\n\n\n The size of the investment that a company makes in accounts receivables is determined by various factors such as:<\/strong><\/p>\n\n\n\n A proper evaluation of credit policies to be adopted by a company and those to be dispensed with by a company is indubitably one of the most significant tasks to be undertaken by finance managers. The firm must work out the optimum amount that it should spend on the collection of its debtors. This involves maintaining a trade-off between the levels of expenditure on the one hand and a decrease in bad debt losses\/increase in sales revenue on the other. To apprehend the role of different costs involved in the evaluation of credit policies, let us consider the following example<\/strong>:<\/p>\n\n\n\n A business trader whose\npresent sales are in the bracket of Rs. 12 lakh per annum and an average\ncollection period of 30 days wants to adopt a more liberal policy with a view\nto enhance sales revenue. The selling price per unit is Rs. 6, the average cost<\/a>\nper unit is Rs. 4.5 and variable costs per unit are Rs. 4. The current level of\nbad debt loss is 1%. The required rate of return on additional investment is\n20%. A study executed by a management consultant reveals the following\ninformation:<\/p>\n\n\n\n <\/p> Here, it is recommended to\nchoose Credit Policy A since the net expected benefits under this policy are\nhigher as compared to other policies.<\/p>\n\n\n\n The management of receivables\nshould be such that it strives to reduce the time lag between the sale and\ncollection. In recent years, a number of tools, techniques, and practices have\nbeen adopted by firms to enhance effectiveness in the management of accounts\nreceivables. Some of these significant innovations include the following:<\/p>\n\n\n\n 1.\nRe-engineering Receivable Process and Centralization: <\/strong>In some cases, real cost\nreductions and performance improvements can be achieved by a mere re-engineering\nof the accounts receivable process. Re-engineering involves fundamental\nre-thinking and re-designing of business processes by incorporating modern\nbusiness approaches. Centralization of high value or high nature transactions\nof accounts receivables and payables is also one of the practices for deriving better\nefficiency. It puts attention on specialized groups for a speedy recovery.<\/p>\n\n\n\n 2.\nAlternative Payment Strategies: <\/strong>So as to seek efficiencies in the management of accounts\nreceivables, it is observed by businesses that payment of accounts outstanding\nis likely to be quicker where a number of payment alternatives are made\navailable to the customers. Using alternative modes of payment like Direct\nDebit, Integrated Voice Response (IVR), Collection by Third Party, Lock Box\nProcessing, Payments via the Internet such as RTGS, NEFT, IPMS UPIs, PayTm,\nPhone Pe, etc. benefits in attracting and retaining customers.<\/p>\n\n\n\n 3.\nCustomer Orientation: <\/strong>For\nindividual customers or a group of customers who showcase some strategic\nimportance to the firm, a critical study approach can be followed to form a\nstrategy for prompt settlement of debt and to develop good customer relations\nwith them. <\/p>\n\n\n\n 4.\nEvaluation of Risk: <\/strong>To\nestablish an effective control mechanism, evaluation of processes and\nquestioning the way that tasks are performed is important. Once risks have been\nproperly assessed, controls can be introduced to either contain the risk to an\nacceptable level or to eliminate them entirely. It can also provide an\nopportunity for removing inefficient practices. <\/p>\n\n\n\nResponsibilities of the Finance Manager <\/h2>\n\n\n\n
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Most important aspects of Management of Receivables<\/h2>\n\n\n\n
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Factors affecting Credit Policy<\/h2>\n\n\n\n
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Evaluation of Credit Policies<\/h2>\n\n\n\n
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Evaluation of Different Credit Policies<\/h2>\n\n\n
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“Opportunity Cost = Total Cost × Collection period\/360 × Rate of Return\/100” <\/div>\n\n\n\nMonitoring and Controlling of Accounts Receivables<\/h2>\n\n\n\n