Imagine Rajesh & Co. Pvt. Ltd. sells goods worth ₹50 lakhs every month, but their customers pay after 60 days. That gap — between making the sale and actually getting the cash — is what Receivables Management is all about. The company has already spent money on raw materials and labour, but the cash hasn't come in yet. Managing this efficiently can make or break a firm's liquidity.
Receivables (also called Trade Debtors) arise because firms offer credit sales to attract customers and stay competitive. The goal of receivables management is to strike a balance: offer enough credit to grow sales, but not so much that you're stuck waiting forever for cash — or worse, facing bad debts. This is governed by the firm's Credit Policy, which has four key dimensions: (1) Credit Standards — who gets credit (creditworthiness of customers); (2) Credit Period — how many days customers get to pay (e.g., net 30, net 60); (3) Cash Discount — an early-payment incentive like "2/10 net 30" (2% off if paid within 10 days); and (4) Collection Policy — how aggressively you chase overdue payments.
The cost of maintaining receivables has two main parts. First, the opportunity cost (or investment cost) — the funds locked in debtors could have earned a return elsewhere; calculated as: (Total Debtors / 365) × Cost of Investment Rate. Second, bad debts and collection costs. When evaluating whether to relax or tighten credit policy, use incremental analysis: compare the incremental contribution (extra profit from new sales) against the incremental cost (extra investment in debtors + extra bad debts). If incremental contribution > incremental cost, relax the policy. Debtors Turnover Ratio = Net Credit Sales ÷ Average Debtors and Average Collection Period (ACP) = 365 ÷ Debtors Turnover are the two ratios the examiner loves. A rising ACP signals trouble — customers are taking longer to pay. This topic is exam gold: expect a 8–10 mark problem asking you to evaluate a change in credit policy.