Working Capital: Account Management for Receipt
The receivables ( receivables ) are the account that occurs as a result of trading without prepayment and without cash settlement, when the firm delivers its products on credit or by transfer, without waiting for the actual arrival of money from a buyer of a decent standard trust. Terms of payment for the delivered products are agreed by the parties. In normal practice, it is considered in the order of things calculation within 30 days. This period is usually sufficient for a normal postal, administrative and bank flow of payments. Many US firms trade on standard terms 2/10 EOM, which means a 2% discount if the buyer pays for the purchase within the first ten days of the following month.
For most businesses, this is one of the most important accounts, one of the company's current assets, the dimensions of which require careful management. The maintenance of accounts receivable has three main objectives, generally aimed at increasing the volume of cost-effective sales:
- promote the growth of volume sales and provide its potential customers the convenience of buying on credit;
- increase the amount of profit by increasing the total sales flow (if the sale on credit in this firm does not lead to the final increase in profits, the firm should reduce this account);
- increase competitiveness by providing normal and additional services and concessions to pay for the firm's products (credit provision throughout the world is considered normal commercial practice, and conditions COD - cash on delivery, i.e., "cash on delivery", is considered the first step in punishing a sloppy payer).
Costs of maintaining accounts receivable
As well as maintaining any assets, providing loans and maintaining the relevant accounts leads to some costs.
1. Financing of the due, ie. the overlap of the company's exempted payments from the expected payments for the waiting period due to retained earnings, additional share capital and (or) borrowed funds. This type of costs is estimated by the cost of a bank loan, which has to be additionally attracted, and the average rate of return on investment in which the firm could invest funds diverted to sales on credit.
2. Administrative costs for keeping accounts, processing payments, making payments, paying communications, maintaining office equipment and other additional work. With an increase in the level of accounts receivable, these costs vary by no more than 5-10% of their previous level.
3. Charges on demanding payments, delayed against an acceptable period, what happens to everyone when trading on credit: sending reminders, phone calls, visits to an inaccurate payer, etc. As statistics show, this group of costs is a very stable part of the total amount of accounts receivable, typical for each particular business. Therefore, if you can see from practice that, for example, the cost of a call was equal to 5000 rubles. with an average amount due in 80 000 rubles, then when you change the rules of sale on credit and the corresponding transfer to the level due to about 120,000 rubles. it is to be expected that the demand costs will change proportionally, i.e. will be equal to 7500 rubles. (5/80 × 120). One might expect that the liberalization of the trade policy on credit can lead to a relative increase in the number of unreliable customers, but firms that undertake such liberalization take into account what can be consciously taken into account. They take preventive measures. The stable part of the proportion, i.е. something that the firm can not catch, remains very close to the previous level.
4. Losses on non-payments (bad loans) as a result of bankruptcy of the payer, fraud, errors, etc. When trading on credit, such losses are inevitable. To reduce such direct losses, it takes a lot of experience, a thorough procedure for making a sale on credit and keeping information files about the clients' credit history. From the experience of American companies, it is known that bad loans grow faster than the amount of accounts receivable that changes as a result of credit liberalization. This means that if at the level of accounts receivable, for example, in 500 000 rubles. non-payments were 3000 rubles, then when you go to the level of 1 000000 rub. the losses due will not be 6,000 rubles, but more.
Factors determining the average level of accounts receivable in the balance sheet of the firm:
- The level of sales on credit. The more such sales, the greater will be the corresponding level of credits;
- Credit policy. When formulating a policy regarding customers, one should keep in mind the power profile of the clientele. If among the clients of the organization there are strong firms that can not be pressured, then trade on credit will be associated with delays. Strong delay payments because they do not attach much importance to strengthening ties with weak suppliers. If there are many weak firms among the clientele, then it is necessary to expect non-payments as a result of bankruptcies. This category of buyers should be given constant pressure and closely monitor the payment terms, but this increases the seller's costs. From what has been said, it follows that for the trade on credit, groups of many similar customers are best suited, each of which is comparable in potential to the seller;
- terms of trade. If the firm goes over to payment terms from 15 days of delay without fines and discounts for 30 days, it should be expected that with a certain increase in the number of sales, accounts receivable will grow twice. Well, who does not take the opportunity to pay later! But if you switch to a discount of 2% on payment no later than 10 days and without discounts and penalties within 30 days, then with an increase in the number of transactions, accounts receivable will grow less. The discount of 2% will be attractive enough for some part of the clientele to make it pay no later than the first 10 days of the next month. However, you should carefully consider: is it profitable for the seller to go to a 2% discount?
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