accounts receivable management;
Financially, the monetary value of accounts receivable can be divided into two parts:
1⃣ A part of the company’s cash cost to supply the goods that have been sold and
2. Another part is the difference between cash expenses and sales of goods.
Decision on granting credit
Usually, companies give credit to three groups of their customers, other companies, individuals and government units. We will limit the discussion to granting credits to other companies and individuals.
Granting credit to individuals
Companies consider expensive credit for people who buy goods from the company. Usually, small merchants do not give credit directly to their customers, but accept customers’ credit cards.
Risk assessment
Risk assessment is a quantitative analysis of the possibility of not paying the price of the goods that the credit customer has purchased, the said evaluation helps in making a decision about providing credit to a customer.
Commercial credit
In most transactions between companies, the buyer does not pay immediately and does not sign any official loan agreement. Usually, the seller asks the buyer to pay the price of the goods by a certain time.
Usually, the credit conditions of the company in a specific competitive market are determined by the market. Companies of a specific field have similar credit conditions and usually their credit conditions are also similar.
Customer characteristics
Credit managers often assess the risk of granting credit based on the customer’s characteristics, which include:
1- The customer’s willingness to pay the debt, which is the most important feature.
2- General economic conditions and employment status of the customer
3- The customer’s ability to pay the debt, which is determined by the customer’s cash flow.
4- More financial services that depend on the special value relationship with debts.
5- An asset that can be used as collateral for a loan.
Credit policy
The decision to grant credit to a specific customer depends to some extent on the overall credit policy of the company.
And in terms of choosing the customer, if strictness is applied, the amount of investment in accounts receivable will be less. The level of doubtful debts will be low and the sales volume will probably decrease.
Accounts receivable risk
In normal conditions, the total loss resulting from non-receipt of claims can be predicted with acceptable accuracy, especially if the company does not change its credit policy and has many customers.
Accounts receivable control
The slower the customer’s payment speed, the more the company’s investment in accounts receivable. The average receivables collection period is a simple standard for calculating the average number of days it takes for customers to pay.
Average receivables collection period = accounts receivable divided by daily credit sales
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This post is written by Mahdi_kohsoltani