Receivables represent amounts owed to the firm as a result of sale of goods or services in the
ordinary course of business.The purpose of maintaining or investing in receivables is to meet
competition, and to increase the sales and profits
The purpose of receivables can be understood if we can grasp the basic objective of
receivables management. The objective of receivables management is to promote sales
and profits until that point is reached where the returns that the company gets from
funding of receivable is less than the cost that the company has to incur in order to fund
these receivables. Hence, the purpose of receivables is less than the cost that the company
has to incur in order to fund these receivables. Hence, the purpose of receivables is
directly connected with the company’s objectives of making credit sales, which are:
• Increasing total sales as, if a company sells goods on credit, it will be in a position to
sell more goods than if it insists on immediate cash payment.
• Increasing profits as a result of increase in sales not only in volume, but also because
companies charge a higher margin of profit on credit sales as compared to cash sales.
• In order to meet increasing competition, the company may have to grant better credit
facilities than those offered by its competitors.
CAclubindia
