Management of Receivables
Problem of management of receivables arises only when merchandise is sold on credit. If a company makes all series for cash, it would have no accounts receivables and therefore, the question of management of such assets does not rise at all. Although concessions like price discount are granted to induce customers to make immediate cash payments. Practice of extending credit to the customers is very popular. If other concerns engaged in the same line of business activity are selling goods on liberal credit terms, the firm will have to pursue liberal lending policy to maintain an increase volume of sales. Since trade credit device is used to simulate sales, there is a greater possibility of business profits to expand. But it should be remembered that flow of funds from cash back to cash does not cycle as rapidly in credit sales as if credit were not offered. The funds tied in inventory are converted into receivables rather than in cash and it will take some time for collection of the receivables.
- Dimensions of Receivables Management:
The following aspects must effective attention of a finance manager desirous of improving efficiency of receivables management :
(1) Formulation of credit policies ;
(2) Execution of credit policies ; and
(3) Formulation of collection policy and its execution
- Formulation or Credit Policies:
This aspect of receivables management is concerned, with deciding about
(i) The quality of the trade accounts to be accepted i.e., Credit standards.
(ii) The length of the credit period.
(iii) Cash discount
(iv) Discount period
(v) Seasonal dating