Convincing someone to believe in your product and service and then going to the extent to make the person (potential customer) develop a liking and interest for your product and thereafter you (seller) make an extra effort by extending a line of credit to your potential customer in order to leave no stone unturned to crack the deal (to make sale) is in itself a big mountain to climb.
But wait, work is not yet done, as difficult it makes a sale happen, it is even more difficult to receive the payment back from the customers in a stipulated time-frame. And that is where receivable management comes into role. Management of accounts receivable is not just confined to the act of collection of payment though it happens to be the key function of receivable management it (receivable management) has a wider role of action to perform. Receivable management has to see for the smooth flow of working capital in the company and that the company grows and thereby earns a profit.
Generally, credit sales sound appealing to the customers as they get some time in hand to make the payment and even before making the payment for the product or services they (customer) get their hands on the product and even get to avail the services. This counts as one of the reasons behind credit sales happening in huge volume. Sound management of receivable is essential and even crucial for receiving the accounts receivable timely so that daily operations of the firm does not get hampered due to crunched working-capital.
Meaning of Receivable Management
Receivable Management means the collection of the due payments of sales from the customers in a timely manner. The customers owe money to the company in exchange for the goods or services sold to them (customers) by the company on credit terms. Simply, the collection of that due money is termed as Receivable Management. Management of accounts receivable is a key function in a business. In accounting terms, customers who purchase on credit basis are termed as Sundry Debtors because they owe money to the company. Other terms for receivable management are Accounts Receivable, Collection Management and Payment Collection.
Quite a few companies sell their goods for advance payment but most of the companies sell on credit. In the balance sheet, accounts receivable are shown on the assets side as a current asset. Therefore, it becomes more important to manage and to timely collect the receivables as they happen to be the assets for a company. Management of receivable involves a lot of complexities when it comes to receiving the payments back from customers and therefore the management of receivables has to be dealt with utmost care and diligence.
Why Manage Receivables?
It looks easy to collect the payment on due date but it is not that easy. Due to intense competition in the market, it is very important for a company to first sustain in the market and therefore for survival company has to sell on credit basis to increase the sales and to attract each and every potential customer through this offer of purchase on credit (for customers).
While every trustworthy customer will make the due payments at regular intervals timely but definitely there will be some customers who will make default in payments either by doing late payments or even non-payments. And because of such defaults, the company faces huge loss, as the whole operations of the company get hampered due to disturbed inflow of working capital. Cash happens to be the most important working capital for any company.
To run a company without cash can be fatal as without sufficient and timely inflow of cash there is no way to carry out daily operations. Hence, to ensure the smooth inflow of cash in a timely manner, management of receivables is a must. Since the company carry out its credit sales in huge volume, it is not possible for the company to chase every customer to collect the payment if they default in making payment. In this case, receivable management can contract with the collection agency to recover the due payment from such default making customers.
Objectives of Receivable Management
Receivable management help to obtain various objectives and target set by the manager. They are:
- To build and improve customer relations It is essential for every company to satisfy its customers. Being considerate about customer?s needs and benefits is the key for every company to establish a huge customer base by attracting new customers and sustaining the existing ones. By credit sales, the company gives an option of purchase to its customers who belong to the financially weaker section as these customers can make payment in instalments in a timely manner as per agreed terms. This will strengthen the relationship between buyer and seller.
- To minimise bad debt losses Bad debts will brutally hamper the growth and even the survival of a company and it may also lead to heavy losses. Receivable management takes all necessary steps in order to avoid bad debts. The management also designs the whole schedule for timely collection of due payments and also notifies the customer for the payment of the amount standing against them. The company charges interest on delay in payments and in case of non-payment the company informs the collection agency or department on due dates to collect payments from the customers.
- To track and improve cash-in-flow Credit facility is extended only after evaluating the financial capacity, payment history and credit rating of the customer. Prospecting the requirement of working-capital for carrying out day-to-day activities is also equally important. Only after the evaluation and prospection, the company gives credit facility to its customers. Receivable management monitors and controls all the cash movements in the company. The management records all the sales transaction and maintains a systematic record of it to avoid any delay in collection of due payments. The management aims towards achieving the smooth flow of sufficient cash for the daily operations of the company. The automation in the management of receivables will help in easy maintenance of all the sales transactions in very minimal time and will avoid any confusion from arising.?
- To boost up the sales volume There is intense competition in the market, taking a form of cut-throat competition. And to sustain in the market it is important to reach sales potential. Sound receivable management helps in increasing the sales and the profitability of the organisation. By extending credit facilities to the customers, the company is able to achieve its objective of increasing the sales volume. Due to credit facilities, new customers are attracted towards purchasing on credit basis and the existing customers make more purchase due to credit facility.
- To face competition and grab market There are many players (competitors) in the market giving a variety of credit options to the customers and in order to face such stiff competition and to grab market it is important to have a sound receivable management which will study the factors affecting the market and based on the analysis the management design (form) its credit lending policies keeping customer satisfaction in mind and thereby to earn profit.
- To address complaints Receivable management plays an important role in avoiding any disputes from arising. A sale is considered only when an invoice is generated and a copy of the invoice is also given to the customer to make the payment on the due date. The company should not make any mistake in the invoice as it will drastically hamper the relationship between buyer and seller. The company should also generate the invoice in time as any delay made in invoice generation will surely delay the collection of payment. A systematic record of all the sales transactions will avoid any complaints from arising. Complete and fair record of all transactions will leave no space for any confusion to arise and due payments will be received within the stipulated time-frame.
Receivable management plays a key role in deciding to whom the company should extend its credit facilities. For effective receivable management, it becomes very important to evaluate the customers before extending the credit facilities.
There are few parameters to evaluate a customer, these are:
- Character: It is utmost important to check the character of a customer by evaluating his/her financial background and also the moral background as extending credit facility to a person with a criminal background will sure shot be risky and to check the credit rating of a person is equally important.
- Capacity: Whether the customer is financially sound and capable to make the payment at a due date is essential to be checked. The credit score and previous records of payment of the customer should be thoroughly checked.
- Capital: The company should not over credit or under credit the customer. The credit facilities should be given according to the financial stability of a person. If the company lend more on credit to a customer who is not very financially sound then there are high chances of bad debts and in case of under credit, the customer will not be fully satisfied. So both the conditions are brutal for the growth of the company.
- Collateral: In many cases, the customers make default in payments. In late payments, the company charges interest but in case of non-payments the company informs the collection department on the due date to collect the payments and if the customer is unable to pay, the customer becomes legally bound to keep book debts, stocks or immovable property as collateral security with the company.
- Conditions: There are many times when the customer is trustworthy and makes timely payment but due to the drastic shift in the economy and cut-throat competition, things might to what it wasn?t before. Therefore, economic conditions, market conditions, the financial condition of the customer, the intensity of the competition should be studied with due care and concentration.
Advantages of Receivable Management
Due to effective management of receivables the company is all allowed to open its doors to grab all the benefits arising from it, the benefits are:
- Improves the liquidity position of the company.
- Gains control over cash and other working capital.
- Improves the efficiency of accounts receivable management.
- Strengthens the relationship between buyer and seller.
- Improves customer satisfaction by addressing all the complaints in due time.
- ?Reduces the time gap between credit sales and receipt of payment.
- Minimises the credit risk.
- Improves sales volume.
- Receives profit as consideration for effective receivable management.
Steps involved in Receivable Management
To establish credit practices
After doing market research, the company should frame its own credit policies keeping in mind the target customers. The credit policies should be flexible enough to meet the needs of every type of customers and thereby to satisfy the needs of each and every customer.
To generate invoice
A sale is taken into consideration only when the invoice generated. A copy of the invoice is also given to the customer so as to make the payment on the due date. The invoice should contain all the details regarding the product sold or services rendered and the stipulated time period as per the agreed terms.
To monitor accounts receivable
It is very important to track the accounts receivable and collect the payment in time without leaving any room for any kind of delay in payments, non-payments or confusion.
To account for accounts receivable
An accountant is responsible for maintaining a systematic record of all the sales transaction and the due dates for receiving the payments in the financial books of the company. There should not be any delay in making the records of the sales transaction. Complete and fair record of all the transactions will help in collecting the payments in time and it will be easy to find out the due payments which are yet to be received.