## Monitoring of Receivables
Definition: Monitoring receivables means regularly tracking, evaluating, and managing the status of customer dues to ensure timely collection and minimize bad debts and delays.
Goal: Ensure the receivable system is effective, efficient, and timely.
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### Key Steps in Monitoring Receivables
#### Step 1: Compute Average Age of Receivables (Average Collection Period)
$$\text{Average Collection Period (ACP)} = \frac{\text{Average Debtors} \times 365}{\text{Annual Credit Sales}}$$
- Compare ACP with the firm's stated credit terms
- Rising ACP signals deteriorating collection efficiency
#### Step 2: Ageing Schedule
Groups receivables by how long they have been outstanding.
Structure of an Ageing Schedule:
| Age Bracket | Amount (₹) | % of Total | Risk Level |
|---|---|---|---|
| 0–30 days | XX,XXX | XX% | Low |
| 31–60 days | XX,XXX | XX% | Medium |
| 61–90 days | XX,XXX | XX% | High |
| 91–180 days | XX,XXX | XX% | Very High |
| 180+ days | XX,XXX | XX% | Critical |
Purpose of Ageing Schedule:
- Compare with past quarters → measure if collection has improved
- Identify slow payers who need urgent follow-up
- Compare with industry peers to assess relative liquidity strength
- Flag accounts for potential write-off (180+ days)
#### Step 3: Debt Collection Programme
| Stage | Action |
|---|---|
| (a) | Ongoing monitoring of receivables status |
| (b) | Notify customers as due date approaches |
| (c) | Email and phone reminders on due date |
| (d) | Remind of legal consequences for overdue amounts; escalate per escalation matrix |
| (e) | Initiate legal action on significantly overdue accounts |
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### Collection Expenses vs Bad Debt Losses
- Initially, increasing collection expenses has only a small impact on reducing bad debts.
- Beyond a threshold, more spending on collections yields diminishing returns.
- The firm must find the optimal balance — the point where the marginal cost of collection equals the marginal reduction in bad debts.