The Management of Accounts Receivable

Accounts receivable or debtors represent sales that are made on credit — that is, the payments for goods are made sometime after delivery or after change in legal possession. The level of accounts receivable are a function of the level of sales, the credit terms, the riskiness of the individual customers given credit, and any seasonal influences. Although the total figure of accounts receivable may be fairly constant over time, its individual component items are continually changing and these, therefore, need careful recording and monitoring. Apart from certain retailers such as supermarkets or small ‘high street’ shops, most companies in fact offer credit to their customers, and by so doing the business is providing a financial service as well as the basic goods or other services. Such credit terms are desired by customers as (a) they may be short of ready cash at that moment in time, or (b) they can earn a return on the cash held during the period of credit. By making the credit terms more attractive, management can increase sales turnover; however, granting credit also involves costs of the finance tied up in accounts receivables, increased administration expenses and the probabilities of bad debts occurring. The management of accounts receivable is therefore primarily concerned with the trade-off between the profits from increased sales generated by credit policies and the costs of such policies.