## Management of Receivables

### Meaning

Management of receivables refers to planning and controlling the 'debt' owed to the firm by customers on account of credit sales. It is also known as trade credit management.

### Objective

The basic objective is to optimise the return on investment in these assets — i.e. strike a balance, not minimise or maximise receivables:

If large amounts are tied up in receivables → risk of bad debts and higher collection costs.
If investment in receivables is too low → sales get restricted, because competitors may offer more liberal credit terms.

Hence, sound policies and disciplined implementation are required.

### Three Aspects of Management of Debtors

1. Credit Policy — A balanced credit policy covering decisions on credit standards, credit terms and collection efforts.

Credit period is stated in net days. E.g. terms "net 50" → customers should repay not later than 50 days.
Cash discount policy specifies three things:
The rate of cash discount
The cash discount period
The net credit period
Example: "3/15 net 60" → a 3% discount if paid within 15 days; otherwise full payment due within 60 days.

2. Credit Analysis — Determining how risky it is to advance credit to a particular party. Involves due diligence / reputation check of customers regarding their creditworthiness.

3. Control of Receivables — Following up debtors and deciding a suitable credit collection policy. Involves both laying down credit policies and executing them.

### Cost of Maintaining Receivables

Maintaining receivables always carries a cost, comprising:

Cost of funds blocked — additional funds tied up in receivables, costing interest (on loan funds) or opportunity cost (on own funds)
Administrative costs — record keeping, investigation of creditworthiness
Collection costs
Defaulting (bad debt) costs

Worked example

### Example 1

Reading credit terms "3/15 net 60":

3 → the discount percentage (3%)
15 → the discount period (pay within 15 days to earn the 3%)
net 60 → the net credit period (full amount due within 60 days)

So a customer buying ₹1,00,000 of goods either pays ₹97,000 within 15 days, or ₹1,00,000 by day 60.

⚠️ Common exam mistakes

Thinking the goal of receivables management is to minimise receivables — the real objective is to optimise return; cutting credit too hard loses sales to competitors.
Misreading "3/15 net 60" — students confuse the discount period (15 days) with the net period (60 days), or treat 3 as days instead of the discount %.
Ignoring the opportunity cost on a firm's own funds tied up in receivables — cost exists even when no borrowing is involved.

Reference:

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Receivables Management — Meaning, Objective & Aspects

Worked example

⚠️ Common exam mistakes