The sale of goods on credit is an essential part of the modern competitive economicsystems. In fact, credit sales and, therefore, receivables are treated as a marketing toolto aid the sale of goods. The credit sales are generally made on open account in thesense that there are no formal acknowledgements of debt obligations through afinancial instrument. As a marketing tool, they are intended to promote sales andthereby profits. However, extension of credit involves risk and cost. Managementshould weigh the benefits as well as cost to determine the goal of receivablesmanagement. The objective of receivables management is to promote sales and profitsuntil that point is reached where the return on investment in further fundingreceivables is less than the cost of funds raised to finance that additional credit (i.e.cost of capital). The specific costs and benefits which are relevant to the derminationof the objectives of receivables management are examined below.
In marketing management accounts receivables holds importance due to followingreasons:
No sale is complete till the money is collected from the customer and hencethe responsibility for such collection should lie with the concerned sales personnel. Delay or non – collection of receivables could lead to erosion of profits generated through sales.
If a large part of the working capital gets blocked with the outstanding then itwill adversely affect the marketing margin because of higher interest chargesand may increase level of marketing investment, thus depressing the ROIsignificantly.
Most businesses will be required to extend credit and this credit will need to be on competitive terms, or customers may well go elsewhere. However a balance must be achieved in order to reduce the chances of overdue or uncollectable accounts. The development and execution of an effective credit policy is the best method of reducing this risk.
When evaluating the credit line offered to customers, it is of vital importanceto ensure we will have sufficient cash to meet your immediate needs. It takes3