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Tech which makes Sense

The profit is directly proportional to the volume of sales, as long as all your business transactions are made in cash. Is it possible for a manufacturer, wholesaler or retailer to conduct business without offering credit, in this competitive business environment? The answer is a resounding “no,” because extending credit improves your sales and therefore your profits. Problems arise only when a company is unable to recover the debt within the stipulated time period from the clients.

What is collection management or debtor management?

It covers two aspects. One, the type of money that is being invested in debt rotation. Second, the risk factor that includes the loss of money or the opportunity cost that the company foregoes. If these funds had not been tied to accounts receivable, the company would have invested the same elsewhere and earned income from it. An all-cash transaction is definitely a possible option, but whether it is lucrative in the long term should be considered. When customers are not offered credit, they choose companies that extend credit facilities and therefore you may lose your previous customers and also risk lower sales ratios.

In credit sales, the supplier offers credit for a specified period of time, which is an investment from the supplier’s point of view and the largest single source of short-term financing from the customer’s point of view. The provider must be able to recover the amount of interest from the credit investment it has made. As?

  • Debt recovery within the stipulated credit term
  • Take customer interest for the period of delay
  • Sales volume
  • Excess capital to offset these negative impacts on fund turnover
  • Adequate formulation and execution of credit policies by the finance manager
  • Discipline in the collection policy and its execution.

Many companies offer prompt payment discounts, quantity discounts, and trade discounts to customers to encourage credit sales by favoring bulk purchases. A company cannot be expected to survive long by following the cash sales policy, while similar companies can outperform it by adopting liberal credit policies.

The main aspects of accounts receivable management decisions are as follows:

  • credit time period
  • customer credibility
  • Discounts for prompt payment
  • Commercial discounts

The credit policy, on the one hand, stimulates sales and therefore also your gross profit, but, on the other hand, it can be accompanied by additional costs, such as:
1) administrative expenses related to the investigation of additional accounts and the servicing of the additional volume of accounts receivable,
2) higher bad debt losses due to the extension of credit to less creditworthy customers,
3) higher cost of capital.

Incremental earnings from increased sales should be matched by incremental costs arising from the terms of the credit, to avoid funds being tied up in accounts receivable. Over time, it would deprive him of his earnings. The fundamental consideration of your credit policy would be the selection of creditworthy customers or debtors. If your funds become rigid, recovery is by no means a mundane task and you must proceed legally to claim your rights. Properly maintained accounting records and vouchers will be kept as testimony in your favor in court of law.

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