Receivables Management

RECEIVABLES MANAGEMENT

The management of accounts receivables management deals with viable credit and collection policies. A very liberal credit policy will increase sales and also bad debt losses. On the other hand a conservative credit policy will reduce bad debt losses but also reduce sales. A good credit policy should seek to strike a reasonable balance between sales and bad debt losses.

The objective of receivables management is to promote sales and profits until that point is reached where the returns that the firm gels from funding of receivables is less than the cost that the firm has to incur in order to fund these receivables. This, the purpose of receivables is directly connected with the firms objective

of making credit sales.The following aspects of receivables management are important:

(A) Credit Policy:

Credit policy means the decisions with regard to the credit standards, i.e. who gets credit and up to what amount and on what specific terms. The firms credit policy influences the sales level, the investment .level,in cash, inventories, accounts receivables and physical equipments, bad debt losses and collection costs. The various factors associated with credit policy are:(i) Credit Standards

(ii) Credit Period(iii) Cash Discount(iv) Collection Programme.

Credit Standard

means classification of customers to whom credit can not be expended or can be extended. A firm can take the help of credit rating agencies for this purpose.

Credit Period

means the length of time customers are allowed to pay for their purchases. It may vary from 15 days to 60 days.

Cash Discount

is generally offered to induce prompt payment by the customers, credit terms provide the percentage of discount and the period during which it may be available, for example, credit terms of 2/10 net 30means that a discount of 2 percent is offered if the payment is made by the10th day otherwise the full payment is due by the 30th day.

The Collection Programme

means the collection effort of a firm as decided by the credit policy. The objective of the collection policy is to collect the receivables in time. The collection programme consists of the following details:(1) Monitoring the state of receivables,(2) Dispatch the letters to customers, whose due date is approaching, (3) communicate the customers by telephone at about the due date,(4) Threat of legal action to overdue accounts,(5) Actual legal action against overdue accounts.

(B) Credit Evaluation:

Credit evaluation means a review of a prospective customer by obtaining the information to judge the customers willingness and ability to pay his debt. In judging the credit worthiness of an applicant the three basic factors which should be considered are, character, capacity and collateral. The character refers to the willingness of the customer to honour his obligations. The capacity ' refers to the ability of a customers to pay on time and the collateral represents the security offered by him in the form of mortgages. A firm can use different ways to judge the creditworthiness of an applicant. Some of the ways are as follows:- Analysis of financial statements

- obtaining of bank certificate- Analysis of past experience- Numerical credit scoring.

(C) Credit Granting Decision:

Credit evaluation helps to judge the creditworthiness of a prospective customer. Credit granting decision is a procedure of final decision whether to grant credit to the prospective customer or not.The decision to grant credit or not depends upon the (cost benefit analysis.The manager can form a subjective opinion based on credit evaluation about the chance of getting payment and the chance of not getting payment. The relative chances of getting the payment or not getting the payment are at the back of his mind while taking such a decision.