Trade receivables

Question 1

Define efficiency in trade receivables management

Answer 1

The ability of a business to collect its debts quickly.

Question 2

Why it is important for a business to manage its trade receivables efficiently

Answer 2

when a business takes longer than usual to collect payment from its credit customers, it would mean that less cash is available causing the business’s liquidity position to worsen. Business may not be able to pay for daily operational needs, immediate debts, and unforeseen emergencies.
At the same time, increasing trade receivables runs the risk of possible uncollectible debts.

Question 3

Rate of trade receivables turnover

Answer 3

Net credit sales revenue
————————————
Average net trade receivables

Question 4

Trade receivables collection period

Answer 4

Average net trade receivables
——————————————- × 365day
Net credit sales revenue

Question 5

Ways to improve efficiency in trade receivables management

Answer 5

Provide monetary incentives by offering cash discounts to encourage credit customer to pay early