Management of Accounts Receivable
ACCOUNTS RECEIVABLE MANAGEMENT directly affects corporate profitability and cash flow. For example, too much money tied up in accounts receivable would be a drag on earnings. The CFO must consider discount policy, whether to grant credit to marginal customers, how to hasten collections and reduce uncollectible accounts, and how to establish credit terms.
How should accounts receivable be handled?
The order entry, billing, and accounts receivable activities should be evaluated to ensure that proper procedures and controls exist from the day an order is received until collection is made. What is the average time lag between completing the sales transaction and invoicing the customer? If it is excessive, why?
There are two kinds of float in accounts receivable management—invoicing and mail. Invoicing float is the days between the time goods are shipped to the customer and the time the invoice is rendered. Invoices should be timely processed. Mail float is the time between the preparation of an invoice and the time it is received by the customer. Mail float can be reduced by:
- Decentralizing invoicing and mailing
- Coordinating outgoing mail with post office schedules
- Using express mail services for large invoices
- Enforcing due dates
- Offering discounts
In managing accounts receivable, the CFO should take into account the opportunity cost of holding receivables. The opportunity cost is tying up money in accounts ...