1. ACCOUNT RECEIVABLE MANAGEMENT
• Account receivable is a balance due from the customer when the firm sells the goods on
credit basis
• Firm faces a risk and return trade off in managing their account receivable
• The higher the level of account receivable, the greater the opportunity cost of financing
those debtors’ accounts
• Total amount of account receivable invested in a company depends on the volume of
credit sales and the average length of time between sales and collection
• If the firm decides to give longer credit period to the customer therefore the account
receivable will increase
• Therefore changes in credit and collection period will result in changes in the account
receivable
3 components of credit policies
i) Credit Standard : to screen the potential credit customer for their ability and
willingness to pay on credit
ii) Credit Term : terms of payment given consists of credit period, discount
given and discount period
iii) Collection Policy and Procedures : a strategy in collection overdue accounts
such as letter, phone calls , reminders and
monthly statement
Procedures for evaluating new credit applicants and reviewing the existing customers
1. Obtaining the information on the applicant through the applicant’s financial statements,
bank checking, exchange of information among the company in the same industry or
formal and informal meetings with the applicant
2. Analyzing the information to determine credit worthiness through the 5 C’s credit criteria:
i) Character : the customer character will determine the applicant’s
willingness to pay and it can be determined by looking at
his business and social reputation, his past payment
records and others
ii) Capital : concern with the availability of resources in possession or

2. the ability to generate resources to pay debt when due
iii) Capacity : involves the ability to manage the business and meet all
current obligation without affecting his business operations
iv) Collateral : the tangible and intangible assets offered to the bank as
commitment and as a guarantee that the debts will be paid
on time
v) Condition : concern with the uncontrollable factors which may affect
the applicant’s operations hence the ability to pay
3. Making the credit decision based on the above criteria