ACCOUNTS RECEIVABLE MANAGEMENT

Question 1

TBS Guide - Managing AR

Answer 1

In most firms, AR is is significant asset especially to those selling goods and services on account. Effective management of AR is critical to a firm’s profitability and viability.

Consider the following:

• the conditions leading to the recognition
  of AR - sales
• process that results in elimination of AR -
  collection

Managing AR involves these activities:

1. General terms of credit - influenced by
   common industry
2. Determining credit worthiness and
   setting credit limits
3. Collection of AR
4. Monitoring continuously at aggregate
   and individual account level

Over all objective of AR management…
Policy too loose …
Policy to strict…

Question 2

Determining Customer creditworthiness of each customer

Answer 2

Objective - to maximize profit not to minimize losses

Determining creditworthiness involves

1. setting credit limit
2. obtaining credit rating from credit-rating service
3. financial analysis

Not too loose and not too strict.

Question 3

General terms of Credit

Answer 3

General terms under which credit will be granted.

This involves:

total credit period - maximum period
discounts for early payment
penalty for late payment
documentation requirements

Question 4

Aggregate level analysis

Answer 4

Average collection period
Day's sales in AR
AR turnover
AR to CA or TA
Bad Debts to Sales

Question 5

Individual analysis

Answer 5

Aging of AR shows

the amount owed and
how long it has been due from each customer

Overdue accounts:

use prompt past due billings
send dunning letters/ serious demands
use a collection agency
analyzed on an individual basis because
   of possible financial and goodwill costs

Question 6

Effect of very strict AR policy

Answer 6

Will result in not making credit sales that would be paid, and, thereby, increase profit.

Question 7

Effect of very loose AR policy

Answer 7

Will grant credit to those who are not creditworthy and result in unnecessary uncollectible accounts and lower profit.

Question 8

In managing collection - what is the objective?

Answer 8

Minimize post-sales losses

Question 9

Formula for Reorder Point

Answer 9

Average Daily Demand X Ave Lead Time

Question 10

Formula - Reorder Point with Safety Stock

Answer 10

(Ave Daily Demand X Ave Lead Time ) + Safety Stock

Question 11

Economic Order Quantity

Answer 11

Square Root of

2 x A x C
_______
S

A annual usage
C cost to place an order
S storage cost for one period