{"id":266259,"date":"2024-10-04T10:07:44","date_gmt":"2024-10-04T10:07:44","guid":{"rendered":"https:\/\/imarticus.org\/blog\/?p=266259"},"modified":"2024-10-14T15:35:29","modified_gmt":"2024-10-14T15:35:29","slug":"receivables-management","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/receivables-management\/","title":{"rendered":"Receivables Management: How Sales and Cash Flow Are Linked?"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The objective of any business is to generate profit by managing the cash flow system effectively. The entire gamut of activities which an organisation initiates from a sale process on credit is known as <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\">. The process is based on a credit policy determining the credit amount and credit days.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The process is customer-specific, and the term of this policy is a function of the credibility of the customer. After the organisation offers goods or services on credit, the transaction is tracked as per the credit policy guidance and periodical follow-ups are conducted till the due payment or receivables are paid back by the customer.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Receivables management meaning<\/span><span style=\"font-weight: 400;\"> can be understood in terms of liquid assets an organisation owes to its clients against deliverables on credit. Thus, this credit process is equivalent to an investment decision in trade debtors by the organisation.\u00a0\u00a0\u00a0\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Objectives of Receivables Management<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Every business needs cash and an organisation can make a profit when the cash (out) flow can be balanced periodically by receivables from clients. Though receivables management may seem to be an easy activity superficially, it becomes a difficult task given the complex nature and volume of the business. All reputed organisations engage advanced software to closely and effectively monitor the receivables management.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Some of the key <\/span><span style=\"font-weight: 400;\">objectives of receivables management <\/span><span style=\"font-weight: 400;\">are as follows &#8211;\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Helps improve cash flow\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The credit policy of an organisation is designed to strike a balance between improving the top line i.e. sales or revenue and maintaining a healthy cash flow. A better control of <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\"> helps the organisation with more inward cash flow. This supports the company to pay its outstanding bills timely.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Reduces losses incurred due to bad debts\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">No company would like to come across a poor bottom line although have a robust top line. One of the key reasons for poor bottom line is bad debts, that pile up due to poor <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\">. Thus, a strong<\/span><span style=\"font-weight: 400;\"> receivables management<\/span><span style=\"font-weight: 400;\"> ensures timely collection keeping bad debts and write-offs at bay. In the process, the bottom line improves, and the organisation gets liquid cash for day-to-day activities.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Increased customer satisfaction\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">When an organisation improves its bottom line through a robust <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\"> system, it has an opportunity to satisfy its customers further. The company can offer special discounts upon a certain benchmark of invoicing, and this makes the customer happy. Business transparency increases mutual trust and creates a strong relationship bond.\u00a0\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Increased sales volume\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">With a credit policy in place, sales are bound to increase.<\/span><span style=\"font-weight: 400;\"> Receivables management<\/span><span style=\"font-weight: 400;\"> ensures a shorter cycle of inward <a href=\"https:\/\/imarticus.org\/blog\/cash-flow\/\">cash flow<\/a> from the customer. With increased profit, organisations often choose to offer discounts to the customer. This is the second reason why sales are boosted.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Optimise working capital\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">With the standard liquid collection in place, organisations manage regular operational expenses. However, with an accelerated receivables management system, the organisation attempts to free up the working capital and moves on to further investment, expansion or acquisition.\u00a0\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Credit policy control<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Receivables management<\/span><span style=\"font-weight: 400;\"> is guided by a credit policy. The volume of credit to be allowed and the number of days of credit allowance to certain customers is determined by this policy. The <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\"> team keeps a vigil on the credibility or the CIBIL score of the client to control both the parameters of the credit policy.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Read about the job role of a <\/span><a href=\"https:\/\/imarticus.org\/blog\/financial-intermediary\/\"><span style=\"font-weight: 400;\">Financial Intermediary<\/span><\/a><span style=\"font-weight: 400;\"> to learn more.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Dimensions of Receivable Management<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Receivables management <\/span><span style=\"font-weight: 400;\">enforces a system within the organisation that tracks unpaid invoices and retrieves outstanding payments from the customer within the stipulated time frame. There are quite a few <\/span><span style=\"font-weight: 400;\">dimensions of receivables management <\/span><span style=\"font-weight: 400;\">that are instrumental to a business that offers credit to its customers.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">These aspects determine the business profit after fulfilling financial obligations like paying employees, and vendors and investing in expansion opportunities. Various dimensions of <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\"> are as follows &#8211;<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Credit policy\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This is the robust structure upon which the <\/span><span style=\"font-weight: 400;\">receivables management <\/span><span style=\"font-weight: 400;\">system is built. The policy empowers the organisation to offer goods or services on credit to its customers. However, the volume of the credit to be offered and the number of days for which the credit lasts are all well stipulated.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A good customer pays back the billed amount to the organisation before the fixed time and thereby earns a good credit score. A well-defined credit policy reduces the probability of bad debts and ensures timely collection. It also boosts up business.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Credit monitoring\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">A customer is offered a certain amount of credit based on their credentials. However, the activities of this customer should be monitored whenever the organisation offers this customer a credit. Over a period, when the organisation feels that the customer has set good precedence by making timely payments, it may feel so as to increase its credit limit.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">On the other hand, the organisation may also take a call to decrease or cancel the credit facility to any customer, whose payment records show irregularity. Thus, credit monitoring is a process that prevents serious bad debts.\u00a0\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Invoicing and billing\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These are crucial aspects of <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\">. Organisations must follow timeliness while invoicing a customer. The invoices should contain all essential information like product or service value, taxes, and final invoice value along with due dates before which the customer must pay the amount in full.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It should also mention the rate of interest to be charged per month as a penalty if the customer fails to pay the amount on or before the due date mentioned in the invoice.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Collection procedures\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Collection procedures are continuous processes and are initiated after a reasonable period of offering credit to the customer. The process may be telephonic, through emails or letters and even in person, depending on the age of the outstanding. The process should contain the element of sensitivity such that customer complaints and legal actions may be avoided.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Payment processing\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Payment processing is an internal process of the organisation. A payment made by a customer must be allocated to the correct invoice. Correct reconciliation is a sign of a healthy accounting procedure.\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Reporting and analysis\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Last but not least, proper reporting is a must. Regular information regarding billed age-wise outstanding invoices and payments received should be forwarded to the management for review and analysis.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Relationship between Sales and Cash Flow<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Sales is very intimately with cash flow, which is the best index to measure the viability of the business. The understanding of this multidimensional relationship helps us to comprehend<\/span><span style=\"font-weight: 400;\"> what is receivables management<\/span><span style=\"font-weight: 400;\">. The correlation of these two topics may be better realised with the following points \u2013<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Keeping sales constant, businesses with more cash inflow create more profit than those with poor cash inflow. Thus, a healthy cash inflow is an indicator of organisational profit and sustainability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">As per business standards, the ratio of the operating cash flow (OCF) to net sales gives a fair indication of the financial health of the organisation during any given range of time.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The operating cash flow (OCF) is essentially the difference between the total cash received (cash inflows) from sales and the operating expenses (cash outflows) to generate such sales.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In the case of a steady business revenue, wherein the organisation does not borrow any money from outside sources, the OCF\/Net Sales ratio should be ideally smaller than one. However, it may be noted that with the expansion of business and borrowing of money from outside financial institutions, the ratio varies drastically and hence predicting a good value for it will be unreasonable.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The standard of any organisation can be measured by studying its three financial statements \u2013 the profit and loss statement, the balance sheet and the statement of cash flows.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The age of the business, the scale of the business and the type of industry determine the OCF\/ net sales ratio.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">All these critical elements in <\/span><span style=\"font-weight: 400;\">receivables management <\/span><span style=\"font-weight: 400;\">are to be mastered and delivered by professionals in this subject. Several reputed institutes in this country teach advanced <\/span><a href=\"https:\/\/imarticus.org\/postgraduate-financial-accounting-and-management-program\/\"><span style=\"font-weight: 400;\">financial accounting courses<\/span><\/a><span style=\"font-weight: 400;\"> to prospective candidates. Aspirants should enrol themselves in one of these institutes to chase their dream career in <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\">.\u00a0\u00a0\u00a0\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Conclusion<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Accounts receivable management is a vast subject and requires due diligence by hard-core professionals. There are a few simple steps to get things in the right direction. The selection of key performance indicators is a must to monitor the<\/span><span style=\"font-weight: 400;\"> receivables management<\/span><span style=\"font-weight: 400;\"> process.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Parameters such as Day Sales Outstanding (DSO), Average Day Delinquent (ADD), Turnover Ratio, Collection Effective Index (CEI) etc. should be set as meaningful KPIs. The bill should have all the relevant and adequate information so that no confusion is created in the customer\u2019s mind.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The organisation must stick to the credit policy and amend it periodically as required. Setting up automated polite reminders for payments is also a good practice. And finally, the organisation must engage relevant employees across departments in this process.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Imarticus Learning\u2019s <\/span><a href=\"https:\/\/imarticus.org\/postgraduate-financial-accounting-and-management-program\/\"><span style=\"font-weight: 400;\">Postgraduate Financial Accounting and Management Program<\/span><\/a><span style=\"font-weight: 400;\"> offers prospective candidates a perfect start at the beginning of their careers. Visit the official website of <\/span><a href=\"https:\/\/imarticus.org\/\"><span style=\"font-weight: 400;\">Imarticus<\/span><\/a><span style=\"font-weight: 400;\"> for more details.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">FAQs<\/span><\/h3>\n<ul>\n<li aria-level=\"1\"><b>What is the biggest risk associated with accounts receivables?<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The biggest risk factors are late payment from clients and excessively high days sales outstanding (DSOs).<\/span><b><\/b><\/p>\n<ul>\n<li aria-level=\"1\"><b>What are the 5 C\u2019s of accounts <\/b><b>receivables management<\/b><b>?<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The 5 C\u2019s of credit in accounts <\/span><span style=\"font-weight: 400;\">receivables management<\/span><span style=\"font-weight: 400;\"> are character, capacity, capital, collateral and conditions.<\/span><b><\/b><\/p>\n<ul>\n<li aria-level=\"1\"><b>What are the basic issues in <\/b><b>receivables management<\/b><b>?<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Critical issues to be handled are keeping accurate records of transactions and client information, handling client disputes or conflicts of interest, adapting to alternative payment methods and dealing with late payments.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/p>\n<ul>\n<li aria-level=\"1\"><b>What are the factors affecting <\/b><b>receivables management<\/b><b>?<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The factors affecting receivables management are credit terms, credit volume, credit days and cash discount offered.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The objective of any business is to generate profit by managing the cash flow system effectively. The entire gamut of activities which an organisation initiates from a sale process on credit is known as receivables management. The process is based on a credit policy determining the credit amount and credit days. The process is customer-specific, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":266260,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[22],"tags":[4847],"class_list":["post-266259","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-receivables-management"],"acf":[],"aioseo_notices":[],"modified_by":"Imarticus Learning","_links":{"self":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/266259","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/comments?post=266259"}],"version-history":[{"count":3,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/266259\/revisions"}],"predecessor-version":[{"id":266373,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/266259\/revisions\/266373"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/media\/266260"}],"wp:attachment":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/media?parent=266259"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/categories?post=266259"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/tags?post=266259"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}