Receivables Management

Cost Accounts 6071 views 1 replies

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.

Replies (1)

Cost of maintaining Receivables

Additional fund requirement for the company: When a firm maintains

receivables, some of the firm’s resources remain blocked in them because there is a

time lag between the credit sale to customer and receipt of cash from them as

payment. To the extent that the firm’s resources are blocked in its receivables, it

has to arrange additional finance to meet it own obligations toward its creditors

andemployees, like payments for purchases, salaries and other production and

administrative expenses. Where this additional finances is met from its own resources or

from outside, it involves a cost to the firm in terms of interest ( if financed from outside

or opportunity costs (if internal resources which could have been put to some other use

are taken).

Administrative costs: When a company maintains receivables, it has to incur

additional administrative expenses in the form of salaries to clerks who maintain

records of debtors, expenses on investigating the creditworthiness of debtors etc.

Collection costs: These are costs, which the firm has to incur for collection of the

amount at the appropriate time from he customers.

Defaulting cost: When customers make default in payment not only is the collection

effort to be increased but the firm may also have to incur losses from bad debts.

 

Complete analysis can be studied with the help of the attached file


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