Receivable Management: Definition, Goals, and Importance

Account receivables are outstanding invoices or funds that have not yet been paid by your customers. To keep your business running smoothly, you need access to cashflow all the time, and making sure your accounts receivable are paid on time is critical to managing cash flow efficiently.

And, as the name implies, receivable management is the management of your accounts receivable. Receivables management encompasses the entire process of defining the credit policy, establishing payment terms, sending payment follow-ups, and timely collection of past-due payments. Receivables management is also known as:

• Payment Collection
• Collection Management
• Accounts Receivables

What is Receivable Management

The definition of receivable management is the management of accounts not only for receivables but also for the entire process of defining credit policy and deciding payment terms. It also includes ensuring the timely collection of payments and dues, as well as sending follow-up letters and reminders for timely payments, all of which are critical aspects of managing account receivables.

The accounts receivable management process typically includes the following steps:

• Customer billing that includes the credit policy and the due date.
• Keeping track of transactions and their due dates.
• A collection and follow-up schedule is used to keep track of the due date.
• Creating bills that are past due and bills that are due chronologically.
• Sending reminder letters with bill details and due date.
• When payment is received, a receipt, adjustment entry, and sales account must be created.
• If cash discounts are given for early payment, an appropriate adjustment entry is made in the receivable account.

Accounts receivable examples: On Aug 20, 2022, Suraj Enterprises sold goods worth Rs 50,000 to Sunil Traders on credit for 10 days.
From the 30th of Aug until the day the bill is paid by Sunil Traders, Rs 50,000 is an account receivable in Suraj Enterprises' books against Sunil Traders' account.
Assume that Sunil Traders pays Rs 30,000 to Suraj Enterprises on Aug 20th.
Sunil Trader's account has been debited by Rs 30,000.
Sunil Traders' total accounts receivable after the adjustment entry will be Rs 20,000.

Objectives of Receivable Management

Receivable Management: Definition, Goals, and Importance

Even though receivables management appears to be simple, depending on the nature of your business, it can become a very time-consuming task. As your company grows, your processes evolve and become more complex; therefore, the accounting software used to manage your receivables must adapt to meet your company's standards and needs. What is the one thing you must have in order to run a successful business? Isn't it money? So, in order to keep your cash inflow at its peak, you must keep a close eye on your receivables. As a result, the following are some of the primary goals of receivables management:

Helps Improve Cash Flow Management

It goes without saying that good receivable management will assist business owners in maintaining a consistent cash inflow. This method will provide you with a clear picture of where your money is stuck while keeping a systematic record of all sales transactions. It ensures that you have enough cash on hand to handle your daily transactions and that you do not extend credit beyond your credit policies or credit limit.

Reduces Losses incurred due to Bad Debts

Blocked cash indicates a lack of funds to carry out your daily activities. No company wants to incur any kind of loss. If receivables are not managed efficiently, they will result in bad debts, which will lead to losses. Receivable management allows you to keep a close eye on the payment schedule so that you can follow up with your debtors on a regular basis and maintain optimal levels of cash flow.

Improved Customer Satisfaction

Because receivables management keeps track of your buyers and their payment performance, you can improve your relationship with them by providing discounts and offers in exchange for maintaining a consistent payment record. This also contributes to increased transparency between your company and its customers, resulting in a stronger bond and a long-term relationship.

Increase Sales Volume

Receivable management helps increase sales resulting in increased profitability. Businesses can extend credit facilities to their customers which will help them boost their sales volume, as more customers would avail this facility by purchasing products on a credit basis.

Importance & Benefits of Receivable Management

Receivables management is the planning and control of debt owed to customers as a result of credit sales. Simply put, the successful completion of your order to sales is determined only when your sales are converted into cash. You must manage 'how much you need to receive? from whom?' until your sales are converted into cash. When will this happen?

Accounts receivable management, also known as a credit management system, is required for this.

Another reason is that accounts receivable are a major source of cash inflow, and given the volume of credit sales, a significant amount of money is locked up in accounts receivable. This simply means that a certain amount of money is not available until it is paid. If these are not managed effectively, they have a direct impact on the business's working capital and may impede its growth.

Scope of Receivable Management

When you sell on credit, you will undoubtedly need to keep track of the amounts owed to you by your customers. Your outstanding receivables will include all such dues from your parties. Managing outstanding receivables is important for your business because it not only helps you understand how much your parties owe you, but it also allows you to recover the dues on time and use them for your business as needed.

• Record and track dues
• Use credit period
• Keep a close eye on long-pending bills
• Payment performance of your customer

Accounts receivable management that is efficient will benefit the business in a variety of ways. The most important benefit is increased cash inflow due to faster conversion of sales to cash. It also aids in the development of a better relationship with your customer by eliminating discrepancies in pending bills and lowering the risk of bad debts. All of this necessitates keeping track of your receivables, which you can easily do with accounting software. It enables you to track, monitor, and take action on overdue/long-pending bills, resulting in an increased cash inflow that is critical for business growth.

Conclusion

Effective account receivable management benefits businesses in a variety of ways. It increases cash inflow by converting sales into cash more quickly. It is also used to expand customer bases through credit sales and to strengthen client relationships with loyal customers by rewarding them. An effective Credit Management System (CMS) also handles receivable management in financial management by automatically sending you the entity's financial reports on accounts receivable whenever you need them.

FAQ

Q: Where does receivable appear in the financial statements?

Ans:

Accounts receivable are funds that arrive in your account and are recorded on the debit side or as a current asset in financial statements. In financial statements, the total is also listed under various debtors.

Q: Are bills receivable and accounts receivable the same thing?

Ans:

Yes. More than one bill may be owed by a single party or account. Accounts receivable and bills receivable will show you which accounts owe you money and which bills are due.

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Also, Read

Basic Accounting Terms

Accounts Payable v/s Accounts Receivable

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