Receivable Management

Account receivables refer to the outstanding invoices or money which is

yet to be paid by your customers. Until it is paid, such invoices or
money is accounted as accounts receivables. Also known as bills
receivables. You need cash all the time to keep your business running
smoothly and ensuring the accounts receivables are paid on time is
essential to manage cash flow efficiently. Receivable management
business ensures that a sufficient amount of cash is always maintained
within the business so that operations can continue. It helps in deciding
the optimum proportion of credit sales. The overall process of
receivable management involves properly recording all credit sales
invoices, sending notices on due date to collection department,
recording all collections, calculation of outstanding interest on late
payments etc.
Objectives of receivable management
1. Monitor And Improve Cash Flow
Receivable management monitors and control all cash movements
of organisations. It maintains a systematic record of all sales
transactions.
2. Avoids Invoice Disputes-Receivable management has an efficient role
in avoiding any disputes arising in business. Disputes adversely affect
the relationship between customers and business organisations.
Complete and fair record of all transactions with customers are
maintained on a daily basis.
3.Minimises Bad Debt Losses-Bad debts are harmful to organisations
and may lead to heavy losses. Receivable management takes all
necessary steps to avoid bad debts in business transactions
4.Boost Up Sales Volume-Receivable management increase the sales
and the profitability of the organisation. By extending the credit
facilities to their customers business are able to boost up their sales
volume.
5. Improve Customer Satisfaction-Customer satisfaction and retention
are key goals of every business. By lending credit, it supports financially
weaken customers who can’t purchase business products fully on a
cash basis. This strengthens the relationship between customer and
organisation. Customers are happy with the services of their business
partners.
Natureof Receivable Management
1.Regulate Cash Flow- Receivable management regulates all cash flows
in an organization. It controls all inflow and outflow of funds and ensure
that an efficient amount of cash is always available. Proper
management of receivables enables organizations in efficient
functioning at all the times.
2.Credit Analysis-It perform proper analysis of customer credentials for
determining their credit ratings. Monitoring and scanning of customers
before provide them any credit facility helps in minimizing the credit
risk.
3Decide Credit Policy- Receivable management decides the credit policy
and standards as per which credit facility should be extended to
customers. A company may have a lenient credit policy where customer
credit-worthiness is not at all considered or a stringent policy where
credit-worthiness is considered for providing credit.
4.Credit Collection-Receivable management focuses on efficient and
timely collection of business payments from its customers. It works
towards reducing the time gap in between the moments when bills are
raised and payment is collected.
5.Maintain Up-To-Date Records-Receivable management maintains a
systematic record of all business transactions on a regular basis. All
transactions are maintained fairly in the form of proper billing and
invoices which helps in avoiding any confusion or settling of disputes
arising later.

Credit Standards: Credit should be allowed to only those customers

who contribute good credit risk. Credit standards are the basic criteria
for extension of credit to customers. They are influenced by three C’s of
credit viz..
 1. Character: The willingness of the customer to pay.
2. Capacity: The ability of the customer to pay.
3. Condition: The prevailing economic condition.
Liberal credit standards push up sales by attracting more customers.
But, this increases the incidence of bad debts loss, investment in
receivables and cost of collection. Stiff credit standards tend to depress
sales but at the same time, also reduce the incidence of bad debt loss,
investment in receivables and collection costs.
What Is Creditworthiness?
Creditworthiness is how a lender determines that you will default on
your debt obligations, or how worthy you are to receive new credit.
Your creditworthiness is what creditors look at before they approve
any new credit to you.
Your creditworthiness tells a creditor just how suitable you are for that
loan or credit card application you filled out. The decision the company
makes is based on how you've dealt with credit in the past. In order to
do this, they look at several different factors: your overall credit
report, credit score, and payment history.
Your credit report outlines how much debt you carry, the high
balances, the credit limits, and the current balance of each account. It
will also flag any important information for the potential lender
including whether you've had any past due amounts, any
defaults, bankruptcies, and collection items.
Your creditworthiness is also measured by your credit score,
which measures you on a numerical scale based on your credit report.
A high credit score means your creditworthiness is high. Conversely,
low creditworthiness stems from a lower credit score.
5Cs of Credit
1. Character-Although it's called character, the first C more specifically
refers to credit history, which is a borrower's reputation or track
record for repaying debts. This information appears on the
borrower's credit reports. Generated by the three major credit
bureaus (Experian, TransUnion, and Equifax), credit reports contain
detailed information about how much an applicant has borrowed in
the past and whether they have repaid loans on time. These reports
also contain information on collection accounts and bankruptcies, and
they retain most information for seven to 10 years
2. Capacity-Capacity measures the borrower's ability to repay a loan by
comparing income against recurring debts and assessing the
borrower's debt-to-income (DTI) ratio. Lenders calculate DTI by adding
a borrower's total monthly debt payments and dividing that by the
borrower's gross monthly income. The lower an applicant's DTI, the
better the chance of qualifying for a new loan. Every lender is different,
but many lenders prefer an applicant's DTI to be around 35% or less
before approving an application for new financing.
3. Capital-Lenders also consider any capital the borrower puts toward
a potential investment. A large contribution by the borrower decreases
the chance of default. Borrowers who can put a down payment on a
home, for example, typically find it easier to receive a mortgage. Even
special mortgages designed to make homeownership accessible to
more people, such as loans guaranteed by the Federal Housing
Administration (FHA) and the U.S. Department of Veterans Affairs (VA),
may require borrowers to put down 3.5% or higher on their
homes.67 Down payments indicate the borrower's level of seriousness,
which can make lenders more comfortable extending credit.
4. Collateral-Collateral can help a borrower secure loans. It gives the
lender the assurance that if the borrower defaults on the loan, the
lender can get something back by repossessing the collateral. The
collateral is often the object one is borrowing the money for: Auto
loans, for instance, are secured by cars, and mortgages are secured by
homes.
For this reason, collateral-backed loans are sometimes referred to
as secured loans or secured debt. They are generally considered to be
less risky for lenders to issue. As a result, loans that are secured by
some form of collateral are commonly offered with lower interest rates
and better terms compared to other unsecured forms of financing.
5. Conditions-In addition to examining income, lenders look at the
length of time an applicant has been employed at their current job and
future job stability.
The conditions of the loan, such as the interest rate and amount
of principal, influence the lender's desire to finance the borrower.
Conditions can refer to how a borrower intends to use the money.
Consider a borrower who applies for a car loan or a home improvement
loan. A lender may be more likely to approve those loans because of
their specific purpose, rather than a signature loan, which could be
used for anything. Additionally, lenders may consider conditions that
are outside of the borrower's control, such as the state of the economy,
industry trends, or pending legislative changes.

What are Marketable Securities

Marketable securities are liquid financial instruments that can be
quickly converted into cash at a reasonable price. The liquidity of
marketable securities comes from the fact that the maturities tend to
be less than one year, and that the rates at which they can be bought
or sold have little effect on prices.
Marketable securities are defined as any unrestricted financial
instrument that can be bought or sold on a public stock exchange or a
public bond exchange. Therefore, marketable securities are classified as
either marketable equity security or marketable debt security.
Types of Marketable Securities
Equity Securities
Marketable equity securities can be either common stock or preferred
stock. They are equity securities of a public company held by another
corporation and are listed in the balance sheet of the holding
company.5
If the stock is expected to be liquidated or traded within one year, the
holding company will list it as a current asset. Conversely, if the
company expects to hold the stock for longer than one year, it will list
the equity as a non-current asset. All marketable equity securities, both
current and non-current, are listed at the lower value of cost or
market.6
If, however, a company invests in another company's equity in order to
acquire or control that company, the securities aren't considered
marketable equity securities. The company instead lists them as a long-
term investment on its balance sheet.
Debt Securities
Marketable debt securities are considered to be any short-term bond
issued by a public company held by another company. Marketable debt
securities are normally held by a company in lieu of cash, so it's even
more important that there is an established secondary market. All
marketable debt securities are held at cost on a company's balance
sheet as a current asset until a gain or loss is realized upon the sale of
the debt instrument.7
Marketable debt securities are held as short-term investments and are
expected to be sold within one year. If a debt security is expected to be
held for longer than one year, it should be classified as a long-term
investment on the company's balance sheet

What Is Bank Credit?

The term bank credit refers to the amount of credit available to a
business or individual from a banking institution in the form of loans.
Bank credit, therefore, is the total amount of money a person or
business can borrow from a bank or other financial institution. A
borrower's bank credit depends on their ability to repay any loans and
the total amount of credit available to lend by the banking institution.
Types of bank credit include car loans, personal loans, and mortgages.