Receivable Management Process

1. Credit Analysis 2. Credit Standards 3. Credit Terms 4. Credit Polices 5. Credit Control and Monitoring

1. Credit Analysis

I.

Collection of information about the customers: both financial as well as qualitative type of information is needed relating to customers:-

a) Financial statements: These are published accounts containing the profit and loss

account and balance sheet.

b) Trade references: Some enterprises may request the potential customers to furnish

them with references from other suppliers who have had dealings with them.
c) Bankers Enquiries: It is possible to ask the potential customer for a bank

references.
d) Credit Rating agencies: Specialists agencies now exist to provide information

which can be used to assess the creditworthiness of a potential customer.

e) Own experience of the concern: The enterprise may use its own experience in

collecting information about the potential customers.

II.

Analysis of collected information: This analysis attempts to measure the creditworthiness of the customers as well as risk involved. Normally, following six Cs are considered in analyzing the creditworthiness: Character Capacity Capital Conditions Cost Collateral 3. Credit Terms: After analyzing the customers creditworthiness and setting up enterprises credit standards, one has to determine the terms and condition s on which trade credit will be made available to the customers.

I.

Credit period: Credit period is the time for which an enterprise allows its customers not to pay their bills. It is length of credit period by the end of which enterprise expects that the customers would pay their bills.

II.

Cash Discount: An enterprise may decide to offer a cash discount in order to encourage prompt payment from its customers, particularly when it finds itself short of cash resources and is facing liquidity problem.

III.

Cash Discount Period: A cash discount period is the time period allowed to the debtors within whom the debtors are encouraged to pay their dues and to avail the cash discount.

4. Credit collection policies: Another aspect of receivables management is related to collection policy, which is basically concerned with the procedure to be followed in collecting the accounts not realized within the credit period allowed.

I.

Types of collection efforts: Some efforts are to be taken to collect payment from those customers who do not pay within the time given. Such efforts may include dunning letters, telephone, personal visit, help from collecting agencies and ultimately legal action.

II.

Degree of collection efforts: Degree of collection efforts in one sense refers to the policy which is being adopted in pursuing credit policy, i.e. whether conservative or aggressive which is already indicated with the concept of credit standards.

5. Control and Monitoring: Once the business concern has set credit standards, credit terms, collection policies, etc., it is important for the financial manager to control and monitor the effectiveness of the collections.

I.

Through aging schedule: This schedule provides the primary basis for controlling or monitoring accounts receivables. The age wise distribution of accounts receivables at a given moment of time is depicted in aging schedule.

II.

Through collection matrix: Sometimes, collection matrix may be prepared for correct study of the changes in the payment behavior of the customers. One can easily deduce from the collection pattern whether the collection is improving, stable or deteriorating.