Basically what receivable management means is that it is the process of making decisions relating to investment in debtors related to trade. As we know that credit is the soul of every business. Certain type of investments in receivables is necessary to increase the sales and the profits of the company or firm. A sound managerial control requires proper management of liquid assets and various kinds of inventories. These assets are most important part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress and it financial resources play an important role. Receivables constitute a significant portion of current assets of a company but to invest in receivables, a firm goes through certain costs. Further, there is a risk of bad debts too which can be really bad sometime. It is really necessary to have a proper control and management of receivables.
Receivables management involves around consideration of following aspects:
- Forming of credit policy :
- Quality of trade accounts of credit standards :
- Length of credit period :
- Cash discount :
- Discount period :
- Executing credit policy :
- Collecting credit information :
- Credit analysis :
- Credit decision :
- Formulating and implementing the collection policy or credit policy :
For efficient management of receivables, a concern must adopt a policy which is there for credit and known as credit policy. A credit policy is related to decisions such as credit standards, length of credit period, various cash discounts and period of discount, etc. It consists:-
The volume of sales will be influenced by the policy related to credit. By liberalising credit policy the volume of sales can be increased which results in increased profits. The increased volume of sales is associated with certain risks too so it means somehow it has risk and is not totally risk free. A finance manager has to match the increased revenue with additional costs which are there. The credit should be liberalised only to a certain level where incremental revenue which is present matches the costs which are additional.
Credit period length means the period which is allowed to the customers paying well in time may also be allowed certain cash discount. A concern fixes its own terms of credit which is dependent on customers and the volume of the sales which is present.
Cash discount is allowed to expedite the collection of receivables which are there. The concern will be able to use the additional funds which are received from expedited collections due to discount on cash.
the collection of receivables is influenced somehow by the period which is allowed for availing the discount. The additional period allowed for this facility may prompt some more customers to avail discount and make such payments.
After formulating the credit policy, the proper execution of it is very important. The evaluation of credit applications and finding out the credit worthiness of customers should be undertaken and should be considered well. It Consists of :
The first basic step is to collect credit information about the customers. This information should be adequate enough so that proper analysis about the financial position can be done or can become possible for the customers.
After gathering the required information, it is now time to analyse it. The finance manager should analyse it to find out the credit worthiness of potential customers and also to see whether they satisfy the standards of the concern or not. It also helps in recognising the degree of risk.
After analysing the credit worthiness of the customer, the finance manager has to take a decision whether the credit is to be extended or not and if yes than up to what level will it be good. If it is has not been met than they should look for some other alternatives.
After forming and analysing the last step is to formulate the policy which is made and implementation is left which is done in this last step. This is the most important step as until the formulation is done forming and analysing the policy is total waste.