## Management of Receivables
Meaning: Planning and controlling of debt owed to the firm from customers on account of credit sales. Also known as trade credit management.
Basic Objective: Optimize the return on investment in receivables.
The Balance:
- Large receivables → Higher bad debt risk + higher collection cost
- Low receivables → Restricts sales volume
- Solution: Implement a proper, well-calibrated credit policy
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### Three Aspects of Debtor Management
#### 1. Credit Policy
Involves decisions on credit standards, credit terms, and collection efforts.
Cash Discount Policy of a firm specifies:
- Cash Discount Period
- Cash Discount Rate
- Net Credit Period
#### 2. Credit Analysis
- Determine how risky it is to extend credit to a particular customer
- Involves due diligence of the customer's creditworthiness
#### 3. Control of Receivables
- Follow up on debtors and execute suitable collection policies
Four Costs of Maintaining Receivables:
| Cost | Description |
|---|---|
| Cost of funds blocked | Opportunity cost of capital tied up in receivables |
| Administrative costs | Record-keeping, billing expenses |
| Collection costs | Efforts and expenses to recover dues |
| Defaulting costs | Bad debts written off |
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### Factors Determining Credit Policy
- Impact on sales
- Credit terms
- Cash discount offered
- Customer selection practices
- Customer payment habits
- Collection policies
- Billing & record-keeping efficiency, interest charges, bad debts
> Lenient policy → Increases sales but risks bad debts
> Stringent policy → Reduces bad debt risk but may lose customers
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### Factors Under the Control of the Finance Manager
1. Supervising credit administration
2. Policy contribution to top management decisions
3. Deciding criteria for credit application selection
4. Speeding up conversion of receivables through aggressive collection policy
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### Financing Receivables
When goods/services are sold on credit, money is locked in receivables. To free up funds and manage cash flow, businesses use financing methods (e.g., factoring, invoice discounting).