RECEIVABLES MANAGEMENT

RECEIVABLES MANAGEMENT

MEANING OF RECEIVABLES MANAGEMENT It refers to the sum of all monies owed to the firm by customers arising from the sale of goods or services in the ordinary course of business. It includes:

Debtors

Accounts Receivable

Book debts/customer receivable

Trade Receivable

Invoice

DEFINITION  Receivables may be defined as collection of steps and procedure required to properly weight the cost and benefits attached with the credit policies.

IMPORTANCE OF RECEIVABLES MANAGEMENT

1) Credit policy helps to meet the competition.

2) It helps to minimize bad debts.

3) Liberalised credit policy helps to increase the growth of sales.

4) Credit sales help to attract not only existing customers but also the new customers but also the new customers.

5) Helps to increase the operating profits because of more credit sales.

6) It helps to make effective coordination between finance, production, sales, profit and cost.

TRADE CREDIT -  Amounts due from customers, when goods are sold on credit are called trade credit.

 Management of accounts receivables may be defined as the process of making decision relating to the investment of funds in receivables which will result in maximizing the overall return on the investment of the firm.

 The receivables emerge whenever goods are sold on credit and payment is deferred by customers.

 Receivables are created when a firm sells goods or services to its customers and accepts, instead of the immediate cash payment, the promise to pay within the specified period.

 Cost associated with maintaining receivables:

1) Cost of financing/ capital cost- The credit sales delays the time of sales realization and therefore the time gap between incurring the cost and the sales realization is extended. This results in blocking of funds for a longer period. The firm on the other hand, has to arrange funds to meet its own obligation towards payment to the supplier, employees. These funds are to be procuredatone implicit or explicit cost.This is known as the cost of financing the receivables. 

2) Administrative cost- when a firm sells goods on credit it has incur two types of administrative costs

  1) credit investigation & supervision cost

2) Collection cost.

3) Delinquency cost- if there is a delay in payment by customer the firm may have to incur cost on reminder, phone calls, postage, legal notices etc. moreover there is always an opportunity cost of the fund tied up in the receivables due to delay in payment.

4) Bad debt or default cost- when the firm is unable to recover the amount due from its customers, its 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.

. Objectives of receivables cost-

 1) To generate sales

2) To maximize profit

 3) To reduce bad debts

 A period of NET 30 days means maximum time to pay the amount is 30 days.

 2/10 net of 30 means- maximum period is of 30 days but if customers pay in 10 days he will get a discount of 2%.

 Trade credit is spontaneous type of finance.

 The receivables management must be attempted by adopting a systematic approach and considering the following aspects-

1) Credit policy – The credit policy may be defined as the set of parameters and principles that govern the extension of credit to the customers.

The following are the four varieties of credit policy variables are-

 1) Credit standard 

2) Credit period

3)Cash discount

4)Collection programmed.

 Credit standard- when a firm sells on credit it takes a risk about the paying capacity of the customers. Therefore to be on a safer side, it must set credit standard which should be applied in selecting customers for credit sales. The problem is to balance the benefits of additional sales against the cost of increasing bad debts.

 Credit period- It refers to the length of the time over which the customers are allowed to delay the payment or to make the payment. Credit policy generally varies from 30 days to 60 days. Customary practices are important factor in deciding the credit period.

 Cash discounts have implications on sales volume, average collection period, investment in receivables, incidence of bad debts & profits

 Objectives of collection policy are as follows- 

1) To achieve timely payment in receivables 

2) Releasing funds locked in receivables 

3) Minimizing the incidence of bad debts.

Collection Programmed- monitoring the receivables, to remind the customer about due date, online interaction with customer about due date; initiating legal action, it shall not lead to bad relationship with the customers.

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Step 1

Determining the Loopholes

Step 2

Analyzing Consumer Demand and Spending Patterns

Step 3

Evaluating the Cost Involved

Step 4

Identifying the Extent of Process Automation

Step 5

Inspecting Supplier's Practices and Performance

Step 6

Classifying Inventories into Different Categories

Step 7

Setting Objectives for Each Inventory Category

Step 8

Prioritizing the Areas of Improvement

Step 9

Taking Advise or Opinion from Experts

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Preventing Dead Stock or Perishability

Reducing Purchase Cost of Goods

Enhancing Cash Flow

Inventory Management Objectives

Optimizing Storage Cost

Maintaining Sufficient Stock

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Objectives of Receivable Management

• Monitor and Improve Cash Flow

• Minimises bad debt losses

• Avoids invoice disputes

Boost up sales volume

Improve customer satisfaction

Helps in facing competition

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RECEIVABLES MANAGEMENT

MEANING

BENEFITS OF RECEIVABLES MANAGEMENT

1) Growth in sales.

2) Capability to Face competition.

3) Helps to increase customer satisfaction.

4) Increase in Profits.

5)  Takes control of sales processes.