Please enable JavaScript.
Coggle requires JavaScript to display documents.
Management of trade receivables - Coggle Diagram
Management of trade receivables
In highly competitive industries, companies often use credit sales as a promotional tool
The management of trade receivables is a key aspect of working capital management as a substantial amount of cash is tied up in trade receiavables
The ultimate goal of trade receivables management is to maintain an optimum level of trade receivables by acheiving a trade off between
Profitability from credit sales
Liquidity
Objectives
To control the costs associated with the collection and management of trade receivables: administrative costs associated with trade receivables include maintenance of records, collection costs, defaulting costs and writing off bad debts
To achieve and maintain an optimum level of trade receivables in accordance with the company's credit policies
To achieve an optimum level of sales
Factors affecting the size of trade receivables
Size of credit sales
Terms of trade
Sometimes companies make credit sales at higher prices than the usual cash sales price
This gives them the opportunity to make extra profit over and above normal profit
If the company allows a customer a longer credit period than normal then the trade receivables amount will also increase
Credit policies
Credit policies are another major determinant in deciding the size of trade receivables. A liberal credit policy will create more trade receivables while the conservative credit policy will reduce trade receivables
Collecton policies
A company should have a strong and well equipped credit collection system
Periodical reminders should be sent to customers tor educe the trade receivables outstanding amounts
If proper attention is not paid to this, it will create potential issues such as additional cost on follow ups or even the need to write off bad debts
Expansion plans
Companies looking to expand their business encourage credit sales t attract customers
In the early stages of expansion, trade receivables are usually at a high level
Credit policy
Terms of credit
Terms of credit are the stipulations recognised by the company for making credit sales to its customers
They provide an agreement between a seller and a buyer regarding the timing and amount of payments the buyer will make
Credit limits should be set for each customer and monitored on a regular basis
A longer credit period increases the WC or cash operating cycle thus increasing costs
Customers prefer a generous credit period
Assesing creditworthiness
A company should investigate the creditworthiness of all new customers by checking previous track record or credit files
This should be reviewed and monitored at regular intervals
Alterations should be made to the credit terms if necessary
Collection policies
A credit period only begins once an invoice is issued to the customer
Promopt invoicing is essentail
The risk of default increases if debts are allowed to go overdue, therefore a system of follow up procedures is required
A stringent collection process is expensive for the company because of high costs but it reduces bad debts