Business Finance

1. Accounts Receivable Management
Arshad Islam; Lecturer in Accounting and Finance; Cell No: 0092-313-9911865 Page 1
Accounts Receivable Management:
Company runs on sales. Both cash and credit sales are important for the company. Cash is
important for the profitability of company but company has to do credit sales for survivalof
company. Credit sales generate accounts receivables. Some receivables are timely
converted to cash but some receivables become bad debts. A proper credit policy mustbe
designed to manage the accounts receivable.
I) - Credit Policy:
A good credit policy helps the organizations to recover the amounts due to the customers.
Every credit policy contains four factors:
- Credit Period: Credit period means the maximum amounts of the days allowed to a
customer for payment of accounts receivables. This period is calculated on the basis of
organizations cash ability.
- Discount: Discount is allowed to all those debtors and customers who pay earlier than
the due date. If someone is paying 10 days early he is allowed 2 % discount. 2/10.
- Credit Standards: Credit standard means the minimum worth of a customer for allotment
of credit sales. This component also depends upon the ability of company to handle
cash. Some organization keeps strict standards but some keep a lenient way of credit
policies.
- Collection Policy: Collection policy is the method of collecting cash from the customers.
This component of credit policy varies from customer to customer.
I) - Limits of Accounts Receivables:
Amount of accounts receivables depends upon the credit sales. How much credit
sales is allowed? There are two components of accounts receivables limits:
a) - Credit Sales Per Day = Total Credit Sales / 365
b) - Average Collection Period/ DSO = Accounts Receivables/ Sales/365
Accounts Receivables = Credit Sales/ Day * DSO

2. Accounts Receivable Management
Arshad Islam; Lecturer in Accounting and Finance; Cell No: 0092-313-9911865 Page 2
II) - Monitoring ReceivablesPositions:
The position of receivables is monitored through aging schedule:
Names 1 - - - 5 6 - - - 12 13 - - - 18 19 - - - 24
Mr.A ***
Mr.B ***
Mr.C ** ** **
Mr.D ***
Mr.E ***