Meaning of receivables management

It is necessary to properly manage the receivables under strong managerial control. Receivables mean the sum of debtors and bills receivable. Receivables are part of movable assets and are created as a result of credit sales. In this, a significant part of the working capital of the business remains continuously invested.

The present industrial and commercial era is the era of credit. Credit is closely related to sales and credit policies are adopted only to fulfill the objectives of sales. Therefore, in the present circumstances, no business can progress at a rapid pace unless it provides credit facilities to its customers. All business enterprises sell their goods and services on credit, in return for which they receive bills receivable from customers instead of cash. In various types of business companies, 5% to 25% of the total assets are invested in bills receivable. This ratio ranges from 5% to 10% in manufacturing companies and 20% to 25% in trading companies. In this ratio, the important place of receipts in the capital structure of companies becomes clear. Therefore, for the successful operation of the company, it is necessary to properly manage the receipts.

In the management of receivables, we decide what should be the amount of the receivables, to whom

Factors affecting the size of investment in receivables

the loan should be given and to whom not, for what period the loan should be given? When should a loan be given and when not? When, how, and by whom will the loan be recovered? The share of funds appropriated in the receivables should neither be more than the requirement nor less than the requirement. In this regard, it would be highly appropriate to say that maintaining the extent of appropriation of the receivables at the optimum level is the essence of the management of the receivables.

“Management of receivables means making decisions regarding the allocation of funds to these assets as a part of the internal short-term operating process.”

Objective of receivables management

The main objective of the management of receivables is to earn maximum profit from the investment made in receivables as a result of adopting a credit policy. The main objectives of receivables management can be explained in the following way-

(1) Maximum profitability: The main objective of receivables management is to maintain the receivable level to earn maximum profit.

(2) To reduce losses related to bad debts – The main objective of management of receivables should be to minimize the losses due to bad debts.

(3) Maintaining financial strength – If a business organization does not pay proper attention to the management of receivables, then it is very difficult to maintain financial strength. Therefore, maintaining financial strength is also a major objective of receivables management.

(4) To get a proper return on the amount invested – Every organization wants to get a proper return on the amount invested in the receivables, this is also the main objective of the receivables.

5) Determination of appropriate credit policy – Credit policy is determined under the management of receivables. In the credit policy, the amount of credit, period of credit, and parties to the credit are determined.

Factors affecting the size of investment in receivables

Management of investment in receivables means making decisions regarding the level of investment in it.

The management of investment in receivables is done by the credit department. This department creates and recovers credit and informs the finance management about this from time to time. The basic objective of investment in receivables is to obtain maximum returns so that the shareholders can get high returns. Dividends can be distributed at this rate. However, selling goods on credit can be risky. Therefore, it is necessary to properly estimate the risk of selling goods on credit. Therefore, before deciding the size of the investment in receipts, the finance manager should consider the following elements.

(1) Volume of credit sales – The volume of credit sales affects the size of investment in receivables. There is a direct relationship between the size of investment in receipts and the amount of credit sales. If a company decides to sell on credit in large quantities, the size of investment in receivables will definitely increase. On the contrary, if smaller quantities of goods are sold on credit then the size of investment in receipts will decrease.

Terms of sale are also an important factor in determining the size of investment in receivables. In such enterprises or organizations that decide not to sell on credit, it has no existence nor is there any scope for investment of receivables. The need for management arises. For example, departmental stores, chain stores supermarkets, etc. are not involved in the sale of goods on credit nor do they have to manage receipts.

(3) Policies and practices of credit sales: A major determining factor of the size of investment in receipts is the enterprise's credit sales policies and practices. If the same goods are sold in a short period, there will always be fewer sales. On the contrary, if the same goods are sold on credit for a longer period, then the ratio of the size of investment in receipts will increase.

(4) Credit recovery policy: An important determining factor of the size of investment in receivables is also the credit recovery policy of the enterprise. If the lending policy of the credit department is liberal then the size of investment for receivables is larger. On the contrary, if the policy of the enterprise is strict then naturally the size of the investment in receipts will be small. Similarly, the finance department's loan recovery policy and capacity also affect the size of receipts and investments.

Cash discount policy – The size of the cash discount is also an important element in determining the size of the capital cost and receipts of an enterprise. If the cost of capital of the enterprise is low. If the cash discount given by him is high, then in such a situation, giving a cash discount will cause less loss to the enterprise. If the cost of capital of the enterprise and the cash discount given are the same then the cash discount will have no effect on the firm. If the rate of cash discount is low and the rate of cost of capital is high, then in such a situation, by giving a cash discount, the present value of the venture sale will also be high.

(6) General factors - In addition to the appropriate factors affecting the size of investment in receipts, such factors are also included which influence the decisions related to investment in the entire assets of the enterprise; Such as the nature of business and its nature, size of sales, price level, quotations, availability of funds, size of business, the attitude of managers, etc. Terms of sale are also important in determining the size of investment in receivables. In enterprises or organizations that decide not to sell on credit, it does not exist, and neither does the need for managing the investment of receipts arise. For example, departmental stores, chain stores supermarkets, etc. are not involved in the sale of goods on credit nor do they have to manage receipts.

3) Policies and practices of credit sales: A major determining factor of the size of investment in receipts is the enterprise's credit sales policies and practices. If the same goods are sold in a short period, there will always be fewer sales. On the contrary, if the same goods are sold on credit for a longer period, the ratio of the size of investment in receipts will increase.

(5) Cash discount policy – The size of the cash discount is also an important element in determining the size of capital cost and receipts of an enterprise. If the cost of capital of the enterprise is low. If the cash discount given by him is high, then in such a situation, giving a cash discount will cause less loss to the enterprise. If the cost of capital of the enterprise and the cash discount given are the same then the cash discount will have no effect on the firm. If the rate of cash discount is low and the rate of cost of capital is high, then in such a situation, by giving a cash discount, the present value of the venture sale will also be high.