Controller's Guide to Planning and Controlling Operations

9

PLANNING AND CONTROL OF RECEIVABLES

INTRODUCTION

The typical goals of the accounts receivable area are to keep the receivable amount as low as possible, in order to reduce working capital needs, while reducing bad debts to a very low level. Unfortunately, a controller may also be subjected to the opposing pressure of granting very high credit levels to customers in order to spur revenue growth, which inevitably leads to high levels of accounts receivable and larger amounts of bad debt. Although it is not possible to fully reconcile these conflicting goals and instructions, this chapter describes a number of methods for setting up rational systems for granting credit, analyzing customers, and collecting funds from them. In addition, a number of control methods for ensuring that established credit levels are strictly followed are discussed, as well as how to predict the investment in accounts receivable for budgeting purposes. In short, this chapter describes how to control accounts receivable and predict receivable levels.

GRANTING CREDIT TO CUSTOMERS

When reducing the amount of accounts receivable outstanding, it is best to view the collections process as a funnel. The collections person is dealing with a continuous stream of poor credit risks that are emerging from a funnel full of accounts receivable. Going into the other end of the funnel are sales to customers; unless those sales are filtered somehow, there will be an unending stream of potential bad debt problems. Clearly, ...