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Receivables Management

Receivables Management

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Published by Manas Batra

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Published by: Manas Batra on Jul 26, 2012
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07/26/2012

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Receivables Management
Prof. Prapti Paul
 
Introduction
The receivables (including the debtors and the bills) is an asset to the firm asit represents a claim of the firm against its customers, expected to be realizedin near future. Since credit sales assumes a sizeable proportion of total sales inany firm, the receivable management becomes an area of attention.
Every firm has a set of credit terms and policies under which goods are soldon credit, and every policy has a cost and benefit associated with it.
 A careful analysis of various aspects of the credit policy is required. This isknown as Receivables Management (RM). The term RM maybe defined ascollection of steps and procedure required to properly weigh the costs and benefits attached with the credit policies.
The RM consists of matching the cost of increasing sales (particularly creditsales) with the benefits arising out of increased sales with the objective of maximizing the return on investment for the firm.
 
Costs and benefits of receivables
If a firm takes its credit policy towards making more and more liberal, itsliquidity decreases whereas profitability increases. On the other hand, if thefirm makes its credit policy more and more stringent, the liquidity may increase but the profitability will go down. This is referred to as
Tradeoff In Receivables.
The firm should try to frame its credit policy in such a way as to attain the best possible combination of profitability and liquidity.
Costs: Benefits:
Cost of financing Increase in sales Administrative cost Increase in profitsDelinquency cost Extra profitCost of default by customers

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