MANAGEMENT OF RECEIVABLES &PAYABLES

Management of accounts receivables

Receivables represent amount owned to the firm as a result of sale of goods or services in the ordinary course of business. These are claims of firm against its customers and form part of its current asset. Receivables are also known as accounts Receivables, trade Receivables, customer Receivables, or book debts. the Receivables are carried for the customers. The purpose of maintaining or investing in Receivables is to meet competition, and to increase the sales and profit. In simple term sale of goods and service in credit and make a promissory note to receive payment later

Cost of maintaining receivables

1. Cost of financing receivables 2. Cost of collection

3. Bad debts

Factors influencing the size of Receivables

Size of credit sale Credit policies Terms of trade Expansion plans Relation with profits Credit collection efforts Habits of customers

Forecasting the Receivables Credit period allowed Effect of cost of goods sold Forecasting expenses Forecasting average collection period and discounts Average size of receivables

Receivables management
Receivables management is the process of making decision relating to trade debtors. The objective is to promote sales and profit until that point is reached where the return on investment in further funding of receivables is less than the cost of fund raised to finance the additional credit.

Dimensions of receivable's management

1. Forming of credit policy 2. Executing the credit policy 3. Formulating and executing collection policy

(1)Forming of credit policy

a) Quality of trade accounts or credit standerd b) Length of credit period

c) Cash discount
d) Discount period

(2)Executing credit policy

a) Collecting credit information b) Credit analysis

c) Credit decision
d) Financing investments in Receivables and Factoring

(3) Formulating and executing collection policy

The collection policy should also devise the steps to be followed in collecting over due amounts. The objective is to collect the dues and not to annoy the customers. The steps are ; a) Sending a reminder for payments b) Personal request through communication mediums c) Personal visit to the customer d) Taking help of collecting agencies and lastly e) Taking legal action

Factoring and Receivables management

A factor is a financial institution which offers service relating to management and financing of debts arising out of credit sale. Factoring may be broadly be defined as relationship, created by an agreement, between the seller of goods/service and a financial institution called factor. It enables the later purchases the receivables of the former and also controls and administers the receivables of the former.

Functions of a factor
Factors render a number of services to the selling firm. some of the functions are; Bill discounting facilities Administration of credit sales Maintenance of sales ledger Collection of accounts receivables Credit control Protection from bad debts Provision of finance Rendering advisory services

Types of factoring
1) Resource and non-resource factoring 2) Advance and maturity factoring 3) Conventional or full factoring 4) Domestic and export factoring

Management of accounts payables

Management of accounts payable is as much important as Management of accounts receivables. There is a basic difference between these two. The objective of accounts receivable is to maximize the acceleration of the collection process, the objective of accounts parable is to slow down the payment process as much possible.

 The delay in payment of accounts payable may result in saving of some interest cost. The finance manager has to ensure that the payments to the creditors are made at the stipulated time period after obtaining the best credit terms possible.