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Debtors Management

Debtor Management (Finance)

Company can sell goods on credit or cash. Cash sale is inflow of cash and it is controlled under cash flow analysis. But credit sale creates sundry debtors. Company has to receive money from them. If company starts to sell on return of cash, then it decreases level of companys sale and profitability. On other side, if company promotes credit sale, it can increase risk of bad debts. So, it is required to control and to manage debtors. Meaning of Debtor management Debtor management means process of decisions relating to investment in business debtors. In credit selling, it is certain that we have to pay cost of ge tting money from debtors and to take some risk of loss due to bad debts. To minimize loss due to not receiving money from debtors is main aim of debtor management. Main elements or dimensions of Debtors management for effective debtor management, following elements should be analyzed 1. Credit policy Credit policy effects debtor management because it guides management about how to control debtors and how to make balance between liberal and strict credit. If company does not restrict to sell products on cr edit after a given limit, this liberated credit policy will increase amount of sale and profitability. But risk will also increase with increasing of sale. If we sell go od to those debtors whose capability to pay is not good, then

From the desk of: Qaiser Khan

Debtors Management

it is possible that some amount will become bad debts. Company can increase time limit for paying by such debtors. On other hand, if companys credit policy is strict, then it will increase liquidity and security, but decrease profitability. So, finance manager should make credit policy at optimum level where profitability and liquidity will be equal. We can show it graphically. Sub part of credit policy (a) Length of Credit period Length of credit period is also an element that affects decisions of fin ance manager relating to manage debtors. It is time which allows to debtor to pay his debt for purchasing goods on credit from vendor. Finance manager can increase length of credit period according to reputation of customers. (b) Cash discount Cash discount is technique to get money fastly from debtors. It is cost of

From the desk of: Qaiser Khan

Debtors Management

investment in credit sale. 2. Credit policy analysis it means decision relating to analysis of credit policy. Evaluation and analysis of credit policy is based on following factors. a) Collection of debtors information for analysis financial position of debtors, we have to collect information relating to debtors. This information can be obtained from customers financial statements of previous years, bank reports, and information given by cr edit rating agencies. This information will be useful for allowing credit sales to customer or not . It will also be useful for knowing capability to pay debt. b) Credit Decisions after collection and analysis debtors information, manager has to decide w hether company should facilitate to sell goods on credit or not. If company sells goods on credit to particular debtor, then at what level it will be sold after seeing his position. For this manager can fix standard for providing goods on credit. If a particular debtor is below than given standard, then he should not accept his proposal of buying goods on credit. 3. Formulation Collection Policy for getting fund fastly from debtor, following steps will be taken under formulation of collection policy. a) Send reminding letter for paying debt b) to do legal action against bad debtors. c) To request personally to debtor to pay his dues on mobile or email. d) Finance manager should monitor collection position through average collection period from past sundry debtor and their turnover ratio. e) To make ageing schedule. Sample of Aging schedule is given below.

From the desk of: Qaiser Khan

Debtors Management

Documents involved in Sales

Letter of enquiry
1. It is sent by buyer to seller to find out about goods required. (Availability, price, terms and conditions) 2. It informs seller about goods required. ( Quantity, time, terms and conditions) 3. buyer may write letters of enquiry to several suppliers to request for quotations so as to compare prices and terms of payment.

Quotation
It is sent by seller to buyer to inform buyer of goods requested, giving All relevant information: types of goods, their brands, their respective prices, terms of delivery and terms of payment.

Catalogue and price list

Sometimes, instead of sending a quotation, seller may send a catalogue Containing detailed and classified information of various types of goods offered for sale. Goods, which are either described or illustrated in catalogue, have a catalogue, number each for reference (when placing orders). Prices are not quoted in catalogue as they may fluctuate often. Instead, a separate price list is sent together with catalogue.

Order
1. It is sent by buyer to seller to place an order for goods. It states type, brand, quantity and price of goods (as given in quotation) as well as terms of delivery, terms of payment and expected delivery date. 2. Sometimes, seller may supply buyers with order forms for filling in details of goods required.

Finished goods dispatched approval

1. This is the approval by Sales and Marketing department regarding the possibility of producing and delivering goods on time. They also approve the quantity to be produced, price that is going to be charged

From the desk of: Qaiser Khan

Debtors Management

Invoice
1. It is sent by seller to buyer, to notify him about amount due against goods supplied. 2. It is a bill used for goods sold on credit. (Goods sold for cash need not have invoices. They are billed with cash receipts instead.) 3. It is used to write up Sales Journal (in case of a sales invoice) or purchases Journal (in case of a purchase invoice).

Loading advice
1. It is a document produced by dispatch department when goods are handed over to store. 2. It is signed by a) Quality assurance personnel regarding the quality of goods which are going to be dispatched. b) Store department personnel about the goods received of the same quantity as ordered or approved. 3. It helps in tracing the order to the delivery stage and plus produce a written record.

Advice note
1. It is sent by seller to buyer to inform buyer that goods have been dispatched. 2. It informs buyer of quantity and type of goods (minus its prices), date and means of dispatch. 3. It helps receiving firm to make arrangements for receipt and stocking of goods that are due to arrive.

Delivery note
1. It is sent by seller to buyer to inform buyer of goods delivered, stating quantity and type of goods delivered and quoting order number, if any. 2. It usually arrives together with goods so that buyer can check goods delivered. 3. A copy is usually handed back t o one who has delivered goods as proof of delivery

Credit note
1. it is not an invoice and to distinguish it from an invoice, it is printed in red. 2. It is made out by seller to buyer when: (a) goods sold have been overcharged in invoice (b) Buyer returns goods (damaged, of wrong type or specifications, etc.) (c) buyer returns empty containers for which he has been charged in invoice

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Debtors Management

3. It informs buyer that his account is credited, decreasing amount that he owes.

Statement of account
1. It is sent by seller to buyer at end of every month. 2. It summarizes monthly transactions between buyer and seller. 3. It shows amount of goods bought, returns made, payments, and cash discounts, if any, all of which can be checked by buyer with invoices, credit and debit notes and receipts received to date. 4. Balance outstanding is amount that buyer owes. 5. It serves as a reminder to buyer to pay up his debt. 6. It enables buyer to check his books of account and notify seller if there is any error.

Receipt
1. It is a proof of money received, issued by seller to buyer when buyer makes his payment. 2. When payment is made by cheque, it is not necessary to issue a receipt since cheque serves as proof of payment

From the desk of: Qaiser Khan