Accounts Receivable Management
Accounts Receivable Management
Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. They are generally expected to be collected within thirty to sixty days and are the most significant type of claim held by a company. There are two costs associated with extending credit to customers:
1. The cost of the selling company not being able to deposit the monetary value of a completed sale in its bank that is, as a result of not collecting cash at the time of a sale, the vendor will forgo some bank account interest ( or if the vendor has a bank overdraft, it will incur additional interest expense).
2. The cost associated with lost revenue due to some accounts receivable proving to be uncollectible.
Companies extend credit to customers because credit facilities trade. This means that, considerable sales would be lost if credit was not extended. Most hotels allow customers to use their credit cards to settle their accounts. Although many individuals pay for their hotel stay with a credit card, there are others especially business groups that ask to be billed to a master account.
How hospitality firms manage accounts receivable is that first, they perform credit balancing. This means that hotels have to ensure that the credit period extended to customers is neither too much nor too little because of the cost associated with extending the trade credit facilities.
Then, a hotel has to ensure that credit is only granted to creditworthy customers. The five C’s of credit management provides a useful checklist of factors to consider when deciding whether to grant credit to a particular customer. The questions to ask with regard to the five C’s are:
1. Character: does the customer have a predisposition towards timely payment of accounts?
2. Capacity: does the customer have the capacity to run a successful business?
3. Capital: does the customer have sufficient working and long term capital to honour the account
Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. They are generally expected to be collected within thirty to sixty days and are the most significant type of claim held by a company. There are two costs associated with extending credit to customers:
1. The cost of the selling company not being able to deposit the monetary value of a completed sale in its bank that is, as a result of not collecting cash at the time of a sale, the vendor will forgo some bank account interest ( or if the vendor has a bank overdraft, it will incur additional interest expense).
2. The cost associated with lost revenue due to some accounts receivable proving to be uncollectible.
Companies extend credit to customers because credit facilities trade. This means that, considerable sales would be lost if credit was not extended. Most hotels allow customers to use their credit cards to settle their accounts. Although many individuals pay for their hotel stay with a credit card, there are others especially business groups that ask to be billed to a master account.
How hospitality firms manage accounts receivable is that first, they perform credit balancing. This means that hotels have to ensure that the credit period extended to customers is neither too much nor too little because of the cost associated with extending the trade credit facilities.
Then, a hotel has to ensure that credit is only granted to creditworthy customers. The five C’s of credit management provides a useful checklist of factors to consider when deciding whether to grant credit to a particular customer. The questions to ask with regard to the five C’s are:
1. Character: does the customer have a predisposition towards timely payment of accounts?
2. Capacity: does the customer have the capacity to run a successful business?
3. Capital: does the customer have sufficient working and long term capital to honour the account
References: Guilding, C. (2002). Financial Management for Hospitality Decision Makers. Oxford: Elseiver Butterworth-Heinemann. Weygandt, J. J., Kieso, D. E., Kimmel, P. D., & DeFranco, A. L. (2005). Hospitality Financial Accounting. Hoboken: John Wiley & Sons, Inc.