Accounts Receivable
Why is the practice of managing Accounts Receivables significant?
Much of the commercial world revolves around credit -- trade credit or accounts receivable and accounts payable. The management of accounts receivables encompasses a variety of substantive activities essential to the fiscal solvency of a company. Firms that offer sales on credit must establish policies, procedures, and practices that guide their transactions and comply with official regulations. Managing accounts receivables includes the establishment of terms and conditions for sales and the granting of credit, including processes for evaluating credit worthiness of potential customers and the associated risk assessment and any resulting receivables collections.
The importance of accounts receivable to the fiscal status of a company is reflected in the inclusion of accounts receivable on a firm's balance sheet as a short-term asset (Cotell, 2010). The value of accounts receivable is the potential for converting the credit accounts into cash flow (Cotell, 2010). Indeed, the liquidity of a company can be impacted by the conversion of accounts receivable into cash, an activity that is pivotal to maintaining a reasonable corpus of working capital, and avoiding operational constraints due to an absence of a comfortable cash margin (Cotell, 2010). But there is a flip side to accounts receivable in that trade credit activity will increase bad debt costs, management costs and opportunity costs (Song, 2013). It is apparent that successful management of trade credit is necessary if the investment income of accounts receivable is to be maximized (Song, 2013). Song refers to this dynamic as the unity of opposites, or the unity of production and marketing (2013).
The benefits of trade credit extend to both the company and the consumers who purchase goods or services from the company. Access to credit can enable...
Customers are able to use credit to purchase from a company while deferring their payments for access to the goods or services (Cotell, 2010). The use of credit can open up opportunities for the customers in their own enterprises such that they are better able to manage their cash flow and have more control over their business operational cycle (Cotell, 2010). Although trade credit is not commonly thought of as a tool to gain competitive edge, credit sales are a viable mechanism for increasing sales, right along with advertising, customer service, product quality, and price. It is generally held that credit sales will exceed cash sales when other conditions, such as the level of quality of the products and services, are the same (Song, 2013).
What is the influence of the management of Accounts Receivables on shareholder value, credit policy decisions, credit rating sources for potential clients, credit scoring models, and credit terms with analysis?
The assessment of risk analysis is a necessary stage that proceeds the granting of credit to a customer or client through the establishment of a credit agreement. A comprehensive evaluation of credit worthiness and short-term liquidity of a potential client or customer includes an examination of financial statements, general economic conditions and payment history. A central factor of the risk analysis is the ability of the customer or client to meet debt obligations, a factor that is gauged by the short-term and long-term liabilities (Cotell, 2010). As desired, the risk analysis can be outsourced or credit-risk analysis reports can be purchased from third parties serving the credit industry, such as Business Credit USA, Dun and Bradstreet, Equifax Business, and Experian Business.
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