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Assignment of Receivables Management

Receivables management is the process of managing the payments a company receives from customers who purchase goods or services on credit. The objectives of receivables management are to establish a comprehensive credit policy, perform credit analysis to only extend credit to financially sound customers, maintain up-to-date records of credit sales, expand sales volume while ensuring optimal capital is invested in receivables. When developing a credit policy, a company must consider factors like financing costs, administrative costs, manufacturing costs, opportunity costs, and costs of defaults.

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Harsh Chauhan
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618 views

Assignment of Receivables Management

Receivables management is the process of managing the payments a company receives from customers who purchase goods or services on credit. The objectives of receivables management are to establish a comprehensive credit policy, perform credit analysis to only extend credit to financially sound customers, maintain up-to-date records of credit sales, expand sales volume while ensuring optimal capital is invested in receivables. When developing a credit policy, a company must consider factors like financing costs, administrative costs, manufacturing costs, opportunity costs, and costs of defaults.

Uploaded by

Harsh Chauhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Q.1 What is Receivables Management?

Also
explain its objectives?
Ans:- According to Accounts Receivables (AR):- is the
process or payment which the company will receive from
its customers who have purchased its goods and services
on credit. Usually the credit period is short ranging from
few days to months on in some cases may be a year.
From the above discussions, it is clear that the firms,
individual or entities to whom sales is made on credit are
called debtor of the business. The other name of the
debtors is receivables. Management of debtor is called
Receivables Management.
The process of receivable management include decision
regarding:-
Credit Standards.
Credit Terms and Conditions.
Credit Analysis.
Credit Collection.
Credit Control.

Objectives Of Receivables Management:-


1. Establishing Sound Credit Policy
The ultimate aim of the receivables management is to
establish comprehensive credit policy to deal with
receivables. The credit policy generally deals with two
aspects firstly to whom credit should be offered and finally
of how much amount credit should be allowed to a specific
customer.
2. Credit Analysis
The credit should be allowed only to those customers, who
have sound financial positions and are not likely to make a
default.
3. Maintaining up to Date Record
It is also helpful to maintain up to date record of all the
credit sales. It will help in proper monitoring and
supervision of the accounts receivables.
4. Expansion of Sales
It is very helpful in increase sales volume to cover
increased cost of manufacturing. The level of sales at which
both selling price and cost are equal is called break-even
point.
5. Ensure Investment of Optimum Capital in
Receivables
Proper credit policy and procedure helps the organisation
to keep debtors to the minimum possible level at all times.
It helps in reducing debtor collection period leading to
minimum investment in receivables.

Q.2 What is Credit Collection Policy? Explain


various methods of collection and Credit Control
also?
Ans:- It refers to the rules, regulations and guidelines that
determine the quality, investment and collection
procedures of receivables. The credit policy of an
organisation is affected by the demand for its products
supply, the level of competition, cost of receivables and
risk of default.
All these activities are listed in following five dimensions of
the credit policy
1. Credit Standard.
2. Credit Terms & Conditions.
3. Credit Analysis.
4. Credit Control.
1. Credit Standard
The first needs to set a minimum condition for allowing
customer to avail credit facility. This minimum condition is
called credit standards. It should be depend upon the
match between the profits and the costs arising due to
increased sales.
2. Credit Terms & Conditions
After the settlement of credit standards, the firm needs to
finalize the term and conditions of allowing credit to the
customers before offering goods on credit.
3. Credit Analysis
Credit Analysis of customer makes him eligible or non
eligible for extension of credit policy. If the customers is
eligible, how much credit should be offered to him
depends upon his credit worthiness.
4. Credit Collection
It deals with the procedures to be followed when payment
becomes overdue. The organisation should followed a
collection policy that provides consistent and equitable
treatment to all the debtor. It must assist to manage
accounts receivables effectively, guaranteeing prompt and
collection to minimize the bad debts.
5. Credit Control
The account receivables should be regularly monitored,
controlled and reviewed to have am efficient system of
credit control in place in the organisation. There are two
methods to do the same nearly – Debtors Outstanding and
Ageing Analysis. A low debtor outstanding means that it
takes a company fewer days to collect debtors.

Q.3 Write the Important points to be taken into


consideration while framing a credit policy of the
organisation?
Ans:- The following are the points to be taken into
consideration while framing a credit policy of the
organisation:-
1. Financing Cost
If a firm sells on credit, a sizeable amount of the money is
required to be invested in debtors. The business has to
arrange alternative source of money to meet above said
obligations. It involves financing cost.
2. Administrative Cost
If an organisation adopts a soft credit policy to boost its
sales, it will lead to the increase in the size of receivables.
The firm will need more staff and other office resources to
monitor and collect the money from receivables.
3. Manufacturing Cost
The additional goods to be sold on credit leads to increase
in both variable and fixed cost of the organisation. If the
increased sale is within the production capacity, only
variable cost will increase.
4. Opportunity Cost
The cost of best alternatives foregone due to amount being
stuck up in the receivables is called its opportunity cost.
Had the money not been invested in credit sales, it could
have been invested somewhere else.
5. Default Cost
When the customers fail to play the money against credit
sales; it will result in bad debts that have to be written off
against firm profit. Sometimes, firms make provisions for
the same as well. In any case, it reduces the profitability of
the organisation.

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