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Meaning of Receivable Management
Receivable management is a process of managing the account receivables within a business organisation. Account receivables simply mean credit extended by the company to its customers and are treated as liquid assets. It involves taking decisions regarding the investment to be made in trade debtors by organisation. Deciding the proper amount be lent by the company to its customers in the form of credit sales is quite important. It affects the overall cash availability for undertaking various operations.
Receivable management business ensures that a sufficient amount of cash is always maintained within the business so that operations can continue uninterrupted. It helps in deciding the optimum proportion of credit sales. The overall process of receivable management involves properly recording all credit sales invoices, sending notices on due date to collection department, recording all collections, calculation of outstanding interest on late payments etc.
Receivable management aims at raising the sales volumes and profit of the business by managing and providing credit facilities to customers. A proper receivable management process aims at monitoring and avoidance of occurrence of any overdue payment and non-payment. It is an effective way of improving the financial and liquidity position of the company. Credit facilities are important for attracting and retaining customers and this makes management of credit facilities by business crucial. Objectives of receivable management are as follows:
Objectives or Features of Receivable Management
Monitor and Improve Cash Flow
Receivable management monitors and control all cash movements of organisations. It maintains a systematic record of all sales transactions. Receivable management helps business in deciding appropriate investment in trade debtors. It aims that a sufficient amount of cash needed for day-to-day activities is maintained at business. Credit facilities are extended by doing proper analysis and planning to ensure optimum cash flow in a business organisation.
Minimises bad debt losses
Bad debts are harmful to organisations and may lead to heavy losses. Receivable management takes all necessary steps to avoid bad debts in business transactions. It designs and implement schedules for collection of outstanding amount timely and informs the collection department on due dates. Customers are notified for amount standing against them and charges interest on delay in payments.
Avoids invoice disputes
Receivable management has an efficient role in avoiding any disputes arising in business. Disputes adversely affect the relationship between customers and business organisations. Complete and fair record of all transactions with customers are maintained on a daily basis. There is no chance of confusion and dispute arising as all sales transactions are accurately maintained. Automated receivable management systems present full evidence in a short time in case of dispute arising for resolving them.
Boost up sales volume
Receivable management increase the sales and the profitability of the organisation. By extending the credit facilities to their customers business are able to boost up their sales volume. More and more customers are able to do transactions with the business by purchasing products on a credit basis. Receivable management helps business in managing and deciding their investment in credit sales. This leads to increase in the number of sales and profit level.
Improve customer satisfaction
Customer satisfaction and retention are key goals of every business. By lending credit, it supports financially weaken customers who can’t purchase business products fully on a cash basis. This strengthens the relationship between customer and organisation. Customers are happy with the services of their business partners. Receivable management help in organising better credit facilities for their customers.
Helps in facing competition
Receivable management helps in facing stiff competition in the market. Several competitors existing in market offers different credit options to attract more and more customers. Receivable management process analysis all information about market and helps the business in farming its credit lending policies. Customers are provided better services by extending credit at convenient rates. Appropriate amount and rates of credit transactions can be easily decided through receivable management process. All credit and payment terms are decided for every customer as per their needs.
Nature of Receivable Management
Regulate Cash Flow
Receivable management regulates all cash flows in an organization. It controls all inflow and outflow of funds and ensure that an efficient amount of cash is always available. Proper management of receivables enables organizations in efficient functioning at all the times.
Credit Analysis
It perform proper analysis of customer credentials for determining their credit ratings. Monitoring and scanning of customers before provide them any credit facility helps in minimizing the credit risk.
Decide Credit Policy
Receivable management decides the credit policy and standards as per which credit facility should be extended to customers. A company may have a lenient credit policy where customer credit-worthiness is not at all considered or a stringent policy where credit-worthiness is considered for providing credit.
Credit Collection
Receivable management focuses on efficient and timely collection of business payments from its customers. It works towards reducing the time gap in between the moments when bills are raised and payment is collected.
Maintain Up-to-date Records
Receivable management maintains a systematic record of all business transactions on a regular basis. All transactions are maintained fairly in the form of proper billing and invoices which helps in avoiding any confusion or settling of disputes arising later.
Importance and Function of Receivable Management
Evaluates Customer Credit Ratings
Receivable management evaluates its customers borrowing capacity and repaying ability for determining their credit ratings. It approves any credit facility to its customers after analyzing their information both qualitatively and quantitatively. Proper investigation of client details helps in reducing the credit risk.
Minimizes investment in Receivables
It reduces investment in receivable by ensuring optimum funds are available within organization at all the times. Receivable management decides proper credit limit and credit period for avoiding any bankruptcy situations. Attempts are made to collect account receivable as soon as they become due for payment which reduces the overall investment in receivables.
Optimize Sales
Efficient receivable management assist business in raising their sales volume. Business are able to attract more and more customers by providing them credit facilities. They are able to properly decide and monitor credit facilities with the help of a receivable management.
Reduce risk of bad Debts
It takes all steps to avoid any instances of bad debts. Receivable management notify all customers for the payment as soon as the amount gets due. It charges interest on delay payments and aims at optimum collection of all payment timely. Implementation of proper schedule and monitoring of collection process results in minimizing the risk of bad debts.
Maintain Efficient Cash
Maintaince of efficient cash is crucial for the survival of every organization. Receivables management properly records all cash inflows and outflows of a business. All credit facilities are extended after analyzing the capability of organization and due payments are collected timely. This results in steady cash flow within the organization.
Lower cost of Credit
Receivable management helps business in lowering its cost of credit by limiting the credit amount and credit period for its customers. It performs all processes such as acquiring credit information of clients and collecting all due payments in an efficient way which lower the overall cost associated with credit facilities.
Scope of Receivable Management
Formulation of Credit Policy
Receivable management is the one which formulates and implements an effective credit policy in an organization. Credit policies are decided as per the capabilities of an organization. A company may either follow a liberal policy or stringent credit policy for providing credit facilities to its customers.
Credit Evaluation
Credit evaluation involves examining the credit worthiness of customer before approving any credit amount. Proper investigation of customer’s information lowers the risk of bad debts. Receivable management acquire all credentials of client for determining their borrowing capacity and repaying ability.
Credit Control
Receivable management implement a proper structure for monitoring all credit functions of business. It records credit sales with proper documents on a daily basis. Invoices are raised immediately after goods get dispatch and amount are collected soon as they become due for payment.
Maximize Profit
It plays an efficient role in maximizing the profit of organizations. Receivable management helps in boosting the sales volume by providing credit facilities to customers. More and more people are able to purchase goods on credit which maximizes the overall profit level.
Better Competition
Efficient account receivable management helps business in facing the strong competition in market. It enables in providing credit facilities to customers as per their needs and capabilities. Receivable management analyses the credit strategies adopted by competitors and according frame policy for an organization. It attracts more and more customers by offering them credit facilities at convenient rates.
