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Management of Receivables

Management of receivables

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Felix
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17 views12 pages

Management of Receivables

Management of receivables

Uploaded by

Felix
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MANAGEMENT OF RECEIVABLES

GROUP 2
F E L I X WA F U L A
L E P L A S I A H Z A K AY O
INTRODUCTION

• Receivable, also regarded to as Accounts receivable (AR) is the balance of


money due to a firm for goods or services delivered or used but not yet paid
for by customers.
• By definition, receivable management is the management of accounts not
only for receivables but also for the entire process of defining credit policy
and deciding payment terms.
• It also includes ensuring the timely collection of payments and dues, as
well as sending follow-up letters and reminders for timely payments, all of
which are critical aspects of managing account receivables.
• The investment in accounts receivable is an important aspect which
requires careful management. Besides the cost of investment, there
are two types of risks which are associated with the accounts
receivable management. One is the risk of opportunity loss and the
other liquidity risk. The firm has to extend credit to its customers to
generate enough sales.
• The grant of credit is an important tool to realize the operating plans
and budgets of the company. But at the same time management has
to see that the company has not extended too much of credit to its
customers which might result to high degree of liquidity risk.
• By liquidity risk we mean the ability to collect back the amounts due
from the customers.
TYPES OF RECEIVABLES

1. Accounts Receivable
Accounts receivable usually occur because of credit sales. It arises as a
result of buying goods or services on credit.
2. Notes Receivable
This receivable has a physical form of a formal letter. This type of loan
has a bill of between 2-3 months. Debt settlement made within that time
will not be subject to interest.
3. Other Receivables
This receivable is of a broader type, as it includes interest receivables,
salary receivables, employee advances, and tax refunds. Due to their
general nature, notes can be reported separately on the balance sheet.
The accounts receivable management process includes the following steps:
1. Customer billing that includes the credit policy and the due date.
2. Keeping track of transactions and their due dates.
3. A collection and follow-up schedule is used to keep track of the due date.
4. Creating bills that are past due and bills that are due chronologically.
5. Sending reminder letters with bill details and due date.
6. When payment is received, a receipt, adjustment entry, and sales account
must be created.
7. If cash discounts are given for early payment, an appropriate adjustment
entry is made in the receivable account.
ACCOUNTS RECEIVABLE TURNOVER RATIO FORMULA
The accounts receivable turnover ratio, is an efficiency ratio that
measures how efficiently a company is collecting revenue, and how
efficiently it is using its assets. The accounts receivable turnover ratio
measures the number of times over a given period that a company
collects its average accounts receivable.
The accounts receivable turnover ratio formula is as follows:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average
Accounts Receivable
Where:
Net credit sales are sales where the cash is collected at a later date. The
formula for net credit sales is = Sales on credit – Sales returns –
Sales allowances.
Average accounts receivable is the sum of starting and ending accounts
receivable over a time period (such as monthly or quarterly), divided
by 2.
EXAMPLE
Trinity Bikes Shop is a retail store that sells biking equipment and
bikes. Due to declining cash sales, John, the CEO, decides to extend
credit sales to all his customers. In the fiscal year ended December 31,
2017, there were $100,000 gross credit sales and returns of $10,000.
Starting and ending accounts receivable for the year were $10,000 and
$15,000, respectively. John wants to know how many times his
company collects its average accounts receivable over the year.
Receivable Turnover Ratio = ($100,000 - $10,000) /
[($10,000 + $15,000) / 2] = 7.2
Therefore, Trinity Bikes Shop collected its average accounts receivable
approximately 7.2 times over the fiscal year ended December 31, 2017.
OBJECTIVES/GOAL OF RECEIVABLE MANAGEMENT
1. Helps Improve Cash Flow Management
Good receivable management will assist business owners in maintaining a
consistent cash inflow. This method will provide you with a clear picture of
where your money is stuck while keeping a systematic record of all sales
transactions.

2. Reduces Losses incurred due to Bad Debts


If receivables are not managed efficiently, they will result in bad debts, which
will lead to losses. Receivable management allows you to keep a close eye on
the payment schedule so that you can follow up with your debtors on a regular
basis and maintain optimal levels of cash flow.
3. Improved Customer Satisfaction
Because receivables management keeps track of the buyers and their payment
performance, you can improve your relationship with them by providing
discounts and offers in exchange for maintaining a consistent payment record.

4. Increase Sales Volume


Receivable management helps increase sales resulting in increased
profitability.
SCOPE OF RECEIVABLE MANAGEMENT
1. Record and track dues
2. Use credit period
3. Keep a close eye on long-pending bills
4. Payment performance of your customer
When you sell on credit, you will undoubtedly need to keep track of the
amounts owed to you by your customers. Your outstanding receivables
will include all such dues from your parties. Managing outstanding
receivables is important for your business because it not only helps you
understand how much your parties owe you, but it also allows you to
recover the dues on time and use them for your business as needed.
CONCLUSION
In conclusion, Effective account receivable management benefits
businesses in a variety of ways. It increases cash inflow by converting
sales into cash more quickly. It is also used to expand customer bases
through credit sales and to strengthen client relationships with loyal
customers by rewarding them. An effective Credit Management System
(CMS) also handles receivable management in financial management
by automatically sending you the entity's financial reports on accounts
receivable whenever you need them.
THANKYOU

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