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MANAGEMENT OF RECEIVABLES

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					                              MANAGEMENT OF RECEIVABLES

MEANING:

      Receivables represent amounts owed to the firm as a result of sale of goods or services in
       the business.
      Receivables results from credit sales
      It forms a part of current assets.
      Also known as Accounts receivable, trade receivables, customer receivables and book
       debts.
      The purpose of maintaining or investing in receivables is to meet competition and to
       increase the sales and profits.

COST OF MAINTAINING RECEIVABLES:

1. Cost of financing receivables:

               Concern incurs some costs for collecting receivables

2. Cost of collection:

               Proper collection of receivables is essential for receivables management.
               Customers who do not pay the money during a stipulated credit period are sent
                reminders for payment or sent some persons for collecting the amount.
               All these costs are known as collection cost

3. Bad debts:

               Amount which the customer fail to pay are known as bad debts.
               Concern may able to reduce bad debts through efficient collection machinery

FACTORS INFLUENCING THE SIZE OF RECEIVABLES:

                1. Size of credit sales

                2. Credit policies

                3. Terms of trade

                4. Expansion plans

                5. Relation with profits

                6. Credit collection efforts

                7. Habits of customers
FORECASTING THE RECEIVABLES:

Forecasting the receivables is an estimation which will help the concern in planning its
receivables. The following factors will help in forecasting receivables:

1. Credit period allowed:

              The ageing of receivables is helpful in forecasting
              Longer the amounts remain due, the higher will be the size of receivables
              Increase in receivables will result in more profits as well as higher costs too
              Collection expenses and bad debts will also be more.
              If credit period is less, then the size of receivables will also be less

2. Effect of cost of goods sold:

              Increase in sales results in decrease in cost of goods sold.
              Sales should be increased to that extent where costs are low.

3. Forecasting expenses:

              Receivables are associated with number of expenses
              Costs of receivables are more than the income, further credit sales should not be
               allowed.

4. Forecasting average collection period and discounts:

              Average collection period is more than the size of receivables will be more.
              Average collection period:
                                           X No.of working days

5. Average size of receivables:

              Determination of average size of receivables will helpful in forecasting
               receivables.
              Average size of receivables:

                              = Estimated annual sales X Average collection period

DIMENSIONS OF RECEIVABLES MANAGEMENT:

Receivables management involves the following aspects:
1. Forming of credit policy:

      Every company must adopt a credit policy. Credit policy relates to

   a. Quality of Trade accounts or credit standards:

      Volume of sales will be influenced by the credit policy of a concern.
      By liberalizing credit policy, the sales will be increased,
      The increased volume of sales will be increased the cost and risk of bad debts
      Credit to only creditworthy customers will save costs like bad debt losses, collection
       costs and investigation costs etc
      Quality of trade accounts should be decided so that credit facilities are extended only
       upto the optimum level.

   b. Length of credit period:

          It means the period allowed to the customers for making the payment
          Customers paying well in time also be allowed certain cash discount.
          Concern fixes its own terms of credit depending upon its customers and volume of
           sales.

c. Cash discount:

              Cash discount is allowed to immediate payment of customers
              Discount allowed involves cost
              Financial manager compare the cost of discount and the amount of fund realized
              Discount should be allowed only if its cost is less than the earnings.

d. Discount period:

              Collection of receivables influenced by the period allowed for availing discount
              Additional period allowed for this facility may prompt some more customers to
               avail discount and make payments.

2. Executing credit policy:

              After formulating credit policy proper execution is important.
              Evaluation of credit applications and finding out the credit worthiness          of
               customers should be undertaken

a. Collecting credit information:

              Collecting credit information about the customers is the first step in implementing
               credit policy.
              Information should be adequate and proper analysis about the financial position of
               the customers is possible.
              Sources of collecting credit information are financial statements, credit rating
               agencies, reports from banks etc.

b. Credit analysis:

              After gathering information , analyse the creditworthiness of the customer
              Credit analysis will determine the degree of risk associated, the capacity of the
               customer to borrow and his ability and willingness to pay.

c. Credit decision:

              After analyzing the creditworthiness of the customer, decision has to take
               whether the credit is to be extended and then upto what level.
              Match the creditworthiness of the customer with the credit standard of the
               company.
              If customers creditworthiness is above the credit standards then the credit is
               allowed.

3. Formulating and executing collection policy:

      Collection policy be termed as Strict and Lenient.
      Strict policy of collection will involve more efforts on collection
      Such policy will enable early collection of dues and will reduce bad debts losses.
      It may also reduce the volume of sales.
      Some customers may not appreciate the efforts of the concern and may shift to another
       concern thus causing reduced sales and profits.
      A lenient policy may increase the debt collection period and more bad debt losses.
      Collection policy should devise the following steps:
                    Sending a reminder for payments
                    Personal request through telephone etc
                    Personal visits to the customers
                    Taking help of collecting agencies and lastly
                    Taking legal action

				
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posted:4/24/2012
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