receivabbles management an overview

7/29/2019 Receivabbles Management an Overview

1/10

RECEIVABLES MANAGEMENT AN

OVERVIEW

by :-Neha chopraMBA IInd sem.IMS


2/10

Receivables are recorded as an asset by the

company because it expects to receive payment forthe outstanding amounts soon. Long-term

receivables, which do not come due for a significant

length of time, are recorded as long-term assets on

the balance sheet; most short-term receivables are

considered part of a company's current assets.

Definition of 'Receivables


3/10

Meaning of Receivable Management

Credit is the soul of business according to this axiom andto survive in a competitive environment, each and every firm

adopts the policy of selling goods, on credit. Receivables are a

direct result of credit sales which ultimately increase the profit

earned by the firm. Credit sale also result in blocking of morefunds in receivables that involves extra cost in term of interest.

Moreover, increase in receivables step up the bad debts. Thus

receivables involves some cost (interest and bad debts) as well

as benefits (increases in profits due to credit sales) to the firm.

This is, known as Receivables Management.

Receivable Management may therefore, be defined as the

process of making decisions relating to the investments of

funds in this assets as part of short term operating process.


4/10

Objectives of Receivables Management

The objective of receivables management likeother assets is to maximise the return oninvestment in receivables or to maximise thesales to the extent the risk involved remains

within the acceptable limits. To accomplish thisobjective, it is necessary to :-a). Achieve optimum (not maximum) volume ofsales;

b). Control and minimize the cost of credit;c).Maintain optimum level of investment inreceivables


5/10

Factors affecting investment in

Receivables

1) Level of sales

2) Nature and condition of business

3) Credit policy of the firm4) The terms of credit

5) Capability of credit department


6/10

Scope of Receivable Management

The scope of Receivables Management is

very wide. It must, therefore be attempt by

adopting a systematic approach and

considering the various aspect of Receivables

Management which are presented in the chart


7/10

Formulation of

credit policy

Credit

EvaluationCredit Control

Credit

standard

Credit

Limits

Collection

policy

Credit

Analysis

Credit

Decisions

Collection of

information

Monitoring

and

controlling

Formulation of

collection

procedure

Scope of Receivables Management


8/10

Formulation of credit policy: Credit policy refers to theapplication of those factors which influence the amount of trade

credit i.e. Investment in receivables.

Credit policy may be defined as the set of parameters and

principles that govern the extension of credit to the customers.

These parameters also known as components of credit policy,

are:1). Credit Standards

These are the basis criteria for the extension of credit to

customer. The choice of optimum standards involves a

trade-off between incremental return and cost.2). Credit Terms

These refer to the set of the stipulation or condition under

which the credit extended to the customer. These relate to

the payment of goods sold.


9/10

3). Collection Policy

It refers to the procedure adopted by a firm to collect payment

due on past account

Credit Evaluation:The objective of such evaluation is to select those

customer who satisfy the pre-determined norms of credit. Thefollowing steps are involved in this process:

1). Collection of information

2). Credit analysis

The evaluation of the borrowing capacity of theapplicant and the promptness and repaying ability of a customer

accroding to the terms of contract. the well known five cs of

credit i.e. Character capacity, capital, collateral and conditions

provide a framework for the evaluation of a customer.


10/10

3).Credit decision or credit limit

A line of credit is the maximum amount of credit

which can be extended by the firm at a given period. the line of

credit can be fixed on the basis of customers normal buying trend

and the regularity in payment

Control of Receivable

The main purpose of controlling receivables is to ensurethat the credit policies laid down and adopted are being

adhered to. To control the receivables efforts are

required in the following two direction

1). Formulation of collection procedure

2). Monitoring and controlling receivables

receivabbles management an overview

Documents