ACCOUNTS RECEIVABLES MANAGEMENT
Chapter-V
Accounts Receivable Management
• Introduction
• Goals of Receivable Management
• Credit Management
• Optimum Credit Policy
• Credit of Account Receivable
155
Introduction
Accounts receivable represent the amount due form customers (book debts) or debtors as a result of selling goods on credit. “The term debtors is defined as ‘debt’ owned to the firm by customers arising from sale of goods or services in the ordinary course of business.” The three characteristics of receivables the element of risk, economic value and futurity explain the basis and the need for efficient management of receivables. The element of risk should be carefully analyzed.
Cash sales are totally riskless but not the credit sales, as the same has yet to be received. To the buyer the economic value in goods and services process immediately at the time of sale, while the seller expect an equivalent value to be received later on. The cash payment for goods and services received by the buyer will be made by him in a future period. The customer from whom receivables or book debts have to be collected in future are called Trade debtor and represent the firm’s claim on assets. Receivables
management,
also
termed
as
credit
management, deals with the formulation of credit policy, in terms of liberal or restrictive, concerning credit standard and credit period, the discount offered for early payment and the
156
collection policy and procedures undertaken. It does so in such a way that taken together these policy variables determine an optimal level of investment in receivables where the return on that investment is maximum to the firm. The credit period extended by business firm usually ranges from 15 to 60 days.
When goods are sold on credit, finished goods get converted into accounts receivable (trade debtors) in the books of the seller. In the books of the buyer, the obligation arising from credit purchase is represented as
Accounts Receivable Management
• Introduction
• Goals of Receivable Management
• Credit Management
• Optimum Credit Policy
• Credit of Account Receivable
155
Introduction
Accounts receivable represent the amount due form customers (book debts) or debtors as a result of selling goods on credit. “The term debtors is defined as ‘debt’ owned to the firm by customers arising from sale of goods or services in the ordinary course of business.” The three characteristics of receivables the element of risk, economic value and futurity explain the basis and the need for efficient management of receivables. The element of risk should be carefully analyzed.
Cash sales are totally riskless but not the credit sales, as the same has yet to be received. To the buyer the economic value in goods and services process immediately at the time of sale, while the seller expect an equivalent value to be received later on. The cash payment for goods and services received by the buyer will be made by him in a future period. The customer from whom receivables or book debts have to be collected in future are called Trade debtor and represent the firm’s claim on assets. Receivables
management,
also
termed
as
credit
management, deals with the formulation of credit policy, in terms of liberal or restrictive, concerning credit standard and credit period, the discount offered for early payment and the
156
collection policy and procedures undertaken. It does so in such a way that taken together these policy variables determine an optimal level of investment in receivables where the return on that investment is maximum to the firm. The credit period extended by business firm usually ranges from 15 to 60 days.
When goods are sold on credit, finished goods get converted into accounts receivable (trade debtors) in the books of the seller. In the books of the buyer, the obligation arising from credit purchase is represented as
References: S.E Bolten, Managerial Finance, (Boston: Houghton Mitten Co., 1976). Prentice Hall, 1962. Martin H. Seiden, The Quality of Trade Credit (New York : National Bureau of Economic Research, 1964. Theodore N. Backman, Credit and Collection: Management and Theory (New York : McGraw Hill Book Company, 1962).