12.7 The management of recievables

Question 1

What are receivables?

Answer 1

Debts owed to a company by its customers for goods of services sold on credit.

Question 2

What is the ultimate goal of receivables management?

Answer 2

To maintain a balance between

• profitability
• liquidity

Question 3

What factors might affect the size of receivables?

Answer 3

• size of credit sales
• terms of trade
• credit policies
• collection policies
• expansion plans

Question 4

How might the size of credit sales affect receivables?

Answer 4

More sales on credit leads to a greater amount of receivables

Question 5

How might the terms of trade affect receivables?

Answer 5

Companies will often offer longer credit periods in exchange for a greater amount of receivables.

Question 6

How might credit policies affect receivables?

Answer 6

A liberal credit policy (i.e. being happy to lend to anyone) will increase receivables.

Question 7

How might collection policies affect receivables?

Answer 7

An inadequate collection policy may mean that monies due are never collected, and must be written of as bad debts.

Question 8

How might expansion plans affect receivables?

Answer 8

Companies who are expanding often offer credit to customers to encourage sales, thereby increasing receivables.

Question 9

What factors must be considered when developing a credit policy?

Answer 9

• level of credit sales required to optimise profit
• market conditions
• competition
• credit period
• terms of trade
• discounts
• efficiency in record keeping

Question 10

What steps do most companies’ collection policies follow?

Answer 10

1 Reminder letter
2 Email/telephone contact
3 Freeze account
4 Debt collectors
5 Legal action