06-10-2012, 04:13 PM
Receivables Management
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Introduction:
Firms sell goods on credit to increase the volume of sales. In the present era of intense
competition, business firms, to improve their sales, offer to their customers relaxed
conditions of payment. When goods are sold on credit, finished goods get converted into
receivables. Trade credit is a marketing tool that functions as a bridge for the movement
of goods from the firm’s wear house to its customers. When a firm sells goods on credit
receivables are created. The receivables arising out of trade credit have three features.
1. It involves an element of risk. Therefore, before sanctioning credit, careful analysis of
the risk involved needs to be done;
2. It is based on economic value. Buyer gets economic value in goods immediately on
sale, while the seller will receive an equivalent value later on and
3. It has an element of futurity. The buyer makes payment in a future period.
Amounts due from customers, when goods are sold on credit, are called trade debits or
receivables. Receivables form part of current assets. They constitute a significant
portion of the total current assets of the buyers next to inventories.
Receivables are asset – accounts representing amounts owing to the firm as a result of
sale of goods/services in the ordinary course of business.
Learning Objectives:
After studying this unit, you should be able to understand the following.
1.Understand the meaning of receivables management.
2. What are the costs associated with maintaining receivable ?
3. Understand the credit policy variables.
4. Understand the process of evaluation of credit policy.
Meaning of Receivables Management:
Receivables are a direct result of credit sales are resorted to, by a firm to push up its
sales which ultimately result in pushing up the profits earned by the firm. At the same
time, selling goods on credit results in blocking of funds in accounts receivables.
Additional funds are, therefore, required for the operating needs of the business which
involve extra costs in terms of interest. Moreover, increase in receivables also increases
the chances of bad debts. Thus, creation of accounts receivables is beneficial as well as
dangerous to the firm.
Bad – Debts or Default cost:
When the firm is unable to recover the amount due from its customers, it results in bad
debts. When a firm relaxes its credit policy, selling to customers with relatively low credit
rating occurs. In this process a firm may make credit sales to its customers who do not
pay at all.
Summary
Receivables are a direct result of credit sales. Management of accounts receivables is
the process of making decision relating to investment of funds in receivable which will
result in maximising the overall return on the investment of the firm. Cost of maintaining
receivables are capital costs, administration costs and delinquency costs. Credit policy
variables are credit standards, credit period, cash discounts and collection programme.
Optimum credit policy is that which Maximises the value of the firm.