Receivables Essay

Receivables are one of the three primary components of working capital, the other being inventory and cash. Receivables occupy second important place after inventories and thereby constitute a substantial portion of current assets in several firms. The capital invested in receivables is almost of the same amount as that invested in cash and inventories. Receivables thus, form about one third of current assets in India. Receivables provide protection to sales from competitions. It acts no less than a magnet in attracting potential customers to buy the product at terms and conditions favorable to them as well as to the firm.

Receivables management demands due consideration not financial executive not only because cost and risk are associated with this investment but also for the reason that each rupee can contribute to firm’s net worth. Receivables are assets accounts representing amounts owed to the firm as a result of the credit sale of goods and services in the ordinary course of business. This term can also be defined as “debt owed to the firm by customers arising from sale of goods or services in ordinary course of business. ” According to Robert N. Anthony, “Accounts receivables are amounts owed to the business enterprise, usually by its customers. Sometimes it is broken down into trade accounts receivables; the former refers to amounts owed by customers, and the latter refers to amounts owed by employees and others”. Trade credit gives rise to certain receivables or book debts expected to be collected by the firm in the near future. In other words, sale of goods on credit converts finished goods of a selling firm into receivables or book debts, on their maturity these receivables are realized and cash 167is generated.

According to Prasanna Chandra, “The balance in the receivables accounts would be; average daily credit sales x average collection period. ” The customer who represent the firm’s claim or assets, from whom receivables or book-debts are to be collected in the near future, are known as debtors or trade debtors. PRINCIPLES OF CREDIT MANGEMENT Joseph L. Wood is of the opinion, “The purpose of any commercial enterprise is the earning of profit, credit in itself is utilized to increase sale, but sales must return a profit. 5 The primary objective of management or receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be confined to mere collection or receivables within the shortest possible period but is required to focus due attention to the benefit-cost trade-off relating to numerous receivables management. RELATED LITERATURE: A. Studies Foreign Receivables act as no less than a magnet in attracting potential customers to buy the products at terms and conditions favorable to them as well as to the firm.

Joseph L. Wood is of the opinion, “The purpose of any commercial enterprise is the earning of profit, credit in itself is utilized to increase sale, but sales must return a profit. ” The primary objective of management or receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be confined to mere collection or receivables within the shortest possible period but is required to focus due attention to the benefit-cost trade-off relating to numerous receivables management.

In order to add profitability, soundness and effectiveness to receivables management, an enterprise must make it a point to follow certain well-established and duly recognized principles of credit management. “The first of these principles relate to the allocation of authority pertaining to credit and collections of some specific management. The second principle puts stress on the selection of proper credit terms. The third principles emphasizes a through credit investigation before a decision on granting a credit is taken. And the last principle touches upon the establishment of sound collection policies and procedures.