This lesson examines the management of accounts receivable, exploring the trade-off between sales growth and the cost of extending credit.

• Accounts Receivable: Accounts receivable (often shortened to “receivables”) represent money owed to a firm by customers for goods or services delivered on credit .

• The Credit Management System: Effective management of receivables involves a comprehensive system that includes:

  • Credit Policy: Setting clear terms for extending credit (e.g., payment terms, discounts).

  • Credit Analysis: Assessing the creditworthiness of potential customers.

  • Collections: Managing the timely collection of outstanding receivables.

• Benefits and Costs of Extending Credit:

  • Benefits: Extending credit can boost sales, enhance customer relationships, and improve market share.

  • Costs: Extending credit ties up funds, increases the risk of bad debts, and incurs administrative costs for credit monitoring and collections .

• Tools and Techniques for Receivables Management: Monitoring receivables involves tracking metrics like Days Sales Outstanding (DSO), aging schedules, and collection effectiveness indicators . Techniques to manage risk include factoring, credit insurance, and the use of letters of credit .

• Factors Determining Creditworthiness: The evaluation of a borrower’s creditworthiness involves assessing the “5 C’s of Credit”: Character, Capacity, Capital, Collateral, and Conditions .