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Managing Accounts

Managing Accounts

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Published by Nitin Kashivale

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Published by: Nitin Kashivale on Nov 18, 2010
Copyright:Attribution Non-commercial


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Chapter 1: Introduction
Sales turnover and net profits may follow a rollercoaster pattern familiar to most business but when the cash flow dries up the game is over. Cash flow management iscritical not just to business performance but to business survival in the days andmonths of a credit crunch. Accounting software can offer many solutions but there isno substitute for astute management to boost cash flow and reduce liquidity risks.Most businesses will experience periods of lower sales and times when losses may beincurred as expenses exceed sales income. With a sound business the position isrecoverable by gaining extra sales growth or reducing expenditure. A business thatruns out of cash resources is dead in the water.The objective is to obtain payment from customers as fast as possible improving cashflow and minimizing the risk of bad debts and not being paid at all.Payment terms offered to customers should be clearly stated and fixed as standardaccounting figures according to the amount of funding the business is prepared tooffer its clients. Because that is exactly what credit terms to customers is, free cashfunding in exchange for eventual sales income.Consideration should be given to using a cash discount system to encourage salesinvoices to be paid faster. In some businesses it would be appropriate to obtain upfront deposits and scheduled payments. Review this practise to obtain a greate proportion of payments faster to improve liquidity.1
 New customers should be subjected to a strict credit check. All new customers wherecredit check details are not available should be invoiced by the accounting function ona pro forma basis. Any businesses who fail to meet the highest credit score requiredshould remain on a pro forma invoice basis.Each business should determine a set of credit control procedures including issuingsales invoices, producing customer statements of outstanding balances and a standardset of credit control letters that actually get the cash in. An essential process in thecredit control procedure would be to ensure the accountant or bookkeeper alwaysissues sales invoices and customer statements promptly.Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business toclaim interest and costs.Consider the possibility of factoring sales invoices due from debtors either by sellingthe sales invoices to a third party or raising cash on the value of those invoices pending payment. Factoring has the disadvantage of often not being cheap but doeshave the advantage of generating a regular stream of cash.Bad debts have a double impact on any business and all possible steps should be takento reduce the risk. A bad debt not only uses valuable resources in chasing the debtwith the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business.The term receivables is defined as ‘debt owed to the firm by customers arising fromsale of goods or services in the ordinary course of business’.When a firm makes anordinary sale of goods or services and does not receive payment, the firm grants tradecredit and creates accounts receivable which could be collected in the future.Receivables management is also called
trade credit management.
Thus, accountsreceivable represent an extension of credit to customers, allowing them a reasonable period of time in which to pay for the goods received.2
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

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