Unit 4 Receivables Management

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receivables and its aspects

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Receivables management

Introduction to recievables
• When goods are sold on credit in business, the price of the goods becomes receivable. We know this amount as 'Trade Debtors" or 'Debtors'" or ' 'Receivables'' or Accounts Receivables''. These receivables are assets of the business.

Important points of receivables
• (1) It involves an element of risk. There is no risk in cash sales, but in credit sales, there is a risk of bad debts. • (2) It is based on economic value. When sale is made, the economic value immediately passes to the buyer, while it will pass to the seller in future. • (3) It implies futurity in the sense that the money is receivable in future.

Definition of receivables
• Accorrding to Hampton "receivables are asset accounts representing amounts owed to the firm as a result of the sale of goods / services in the ordinary course of business". • O.M. Joy writes The term receivables is defined as a debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business".*

COSTS OF MAINTAINING RECEIVABLES:
• (a) Capital Cost: The increased level of accounts receivable arising out of liberal credit policy results in blocking of firm's resources in them. This is because there is a time lag between the sale of goods to customers and receipt of money from them. But, the firm has to arrange money, in the meantime, for meeting its own obligations such as suppliers of materials,

• Collection Cost: These costs are incurred in collecting the payments from the customers to whom credit sales have been made. It includes cost of additional steps taken to recover money from customers. It involves cost of stationery. postage, legal costs in extreme cases.

• Administrative Costs: The firm has to incur additional administrative costs in maintaining accounts receivable. It includes cost of credit department, staff cost, stationery cost and also the expenses incurred in making investigations regarding creditworthiness of the customer

• Collection Cost: These costs are incurred in collecting the payments from the customers to whom credit sales have been made. It includes cost of additional steps taken to recover money from customers. It involves cost of stationery. postage, legal costs in extreme cases.

• Default Cost: Bad debt losses arise when the firm is unable to collect some of its accounts receivable. Such debts are treated as bad debts and have to be written off.

Scope/importance of receivables management
• Decide credit policy: First of all, credit policy is to be framed in the management of receivables. Credit policy can be framed by considering the condition of market, estimation of sales; competition etc. on the basis of customers' creditworthiness, liberal or strict policy has to be decided. • In the determination of credit policy, credit standards, conditions of credit and efforts for collection are included while determining credit policy of a unit, efforts for developing optimum credit policy should be done.

• Determine conditions of credit: The gist of conditions of credit is framed by credit policy. Function of making credit policy more clear is carried out with regulated conditions. In the conditions of credit, time, proportion of cash return and decisions regarding determining credit standards are included. Determination of credit standards mostly depend on seasonal demand, estimation of bad debt loss, decision regarding return.

• Valuation of credit: Company should prepare a guideline for an effective credit management. If every customer or account holder is given the guideline which is prepared for giving credit or collection, then this can make the procedure of credit management proper. In order to give personal or individual credit to customers, management has to think properly. Here, information should be gathered about whether customer is worth allowing credit or not? How much credit should be granted? Etc. Customer's credit capacity should be checked.

• Decide policy of collection: Every firm should have a proper collection policy which aims at receiving timely collection from those who are slow in payment or do not pay and to reduce the loss of bad debts. In order to collect money in time, firm should use various methods of collection like on the period of payment from customer’s direct and strict collection, encash bills with commercial banks, receive help of financial companies.

• Increase in sales: Sales increases if goods are sold on credit instead of only on cash. In the time of tough competition, only cash sales are not beneficial. A firm may be thrown out. For increasing sales, credit sales are very necessary. • To maintain market: By credit sales, market can be obtained and maintained too. In order to introduce new product in the market, creation of receivables is very necessary. In the time of tough competition, if proper care is not taken, it is not only difficult to get market but almost impossible.

• Increase profit: When in this world of tough competition, rivals adopt liberal credit policy and encourage credit sales by different encouragements, unit cannot remain untouched, and otherwise it will be thrown out of market. • Attract customers: Units manufacturing industrial product have to maintain receivables on the demand of traders who purchase on credit. In the same way, receivables have to be maintained to increase the purchase capacity and attract customers for comfortfacility, costly things for entertainment of luxury etc.

• Establish relationship: Maintenance of receivables benefits in establishing long term relationship with customers and traders. Long term relations are established between producer (manufacturer) and trader, trader and other retailers by credit sales.

Objectives of maintaining Receivables:
• Increase Credit : In credit sales, customer do not have to pay money immediately after receiving goods, so goods are sold more on credit. It is natural that if sales are high, profit is also high but it is possible only when profit on credit sales is more than the damage or bad debts, opportunity expense, recovery expense boom out of credit policy.

• To maintain existence : In the time of tough competition, when rivals adopt credit policy and encourage credit sales, a unit cannot remain aloof from it or untouched, otherwise it will be thrown out of the market. • To obtain (get) market: Credit sales is an important tool for getting and developing market. In the time of financial stringency, it is not possible to get market by the option of cash sales.

• Attract customers, traders: If industrial products are sold to traders, traders will certainly expect credit. That is why if they are not permitted credit facility, not only customers

To establish relationship: If customers are traders, it is necessary to establish good relations with them and maintain them. So that they will not go anywhere else. Relations are helpful in transactions also and so receivables are maintained.

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