# Management of Receivables (Debtors)

## Meaning

Receivables management is the planning and controlling of the 'debt' owed to the firm by customers on account of credit sales. It is also called trade credit management.

## Objective

The basic objective is to optimise the return on investment tied up in receivables — striking a balance:

Too much in receivables → risk of bad debts and collection costs.
Too little in receivables (very tight credit) → restricted sales, because competitors may offer more liberal terms.

Hence receivables management needs proper policies and their implementation.

## Three aspects of managing debtors

### 1. Credit Policy

A balanced credit policy covering three decisions — credit standards, credit terms, and collection efforts.

Credit period is stated in net days. E.g. "net 50" means customers must pay within 50 days.
Cash discount policy specifies: (i) the rate of cash discount, (ii) the cash discount period, and (iii) the net credit period.
E.g. "3/15 net 60" = a 3% discount if paid within 15 days; otherwise the full amount is due within 60 days.

### 2. Credit Analysis

Assessing how risky it is to grant credit to a particular customer — i.e. due diligence / reputation check on the customer's creditworthiness.

### 3. Control of Receivables

Following up with debtors and deciding a suitable collection policy — both laying down credit policies and executing them.

## Quick recall

Three aspects = Policy → Analysis → Control: set the terms, screen the customer, then chase and collect.

Worked example

### Example 1

Decoding credit terms "2/10 net 45":

A 2% cash discount is offered if the customer pays within 10 days (the discount period).
If the discount is not taken, the full invoice amount is payable within 45 days (the net credit period).

So on a ₹1,00,000 invoice: pay ₹98,000 if paid by day 10; otherwise pay ₹1,00,000 by day 45.

⚠️ Common exam mistakes

Misreading credit terms: in '3/15 net 60', the 3 is the discount %, 15 is the discount period (days), and 60 is the net credit period — not the other way around.
Believing that minimising receivables is always best — overly tight credit restricts sales, since competitors may offer more liberal terms.
Confusing the three aspects: Credit Policy (setting standards/terms/collection effort), Credit Analysis (assessing a customer's creditworthiness), and Control of Receivables (follow-up and collection).

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Management of Receivables — Meaning, Objectives and Aspects

Worked example

⚠️ Common exam mistakes