Financial Management: Core Concepts, Third Edition

13.2 Managing Accounts Receivable and Setting Credit Policy

When we first start to interpret the business effects of the cash conversion cycle, we note that accounts receivable and accounts payable play major roles in determining the number of days in the cycle. In Section 13.1, we took a simple approach—smooth or steady cash flow—to find the average collection cycle and the average payment cycle. Cash flow, however, is usually not smooth or steady, but rather is often influenced by seasonal and weekly fluctuations. We will see these fluctuations as we turn to accounts receivable and ways to speed up the receipt of future cash payments.

Collecting Accounts Receivable

A company’s future cash inflow from the sale of its products or services—accounts ...