In terms of payments crisis in particular, the role of effective accounts receivable management, timely and prevent the return of bad debts. It should be remembered that the receivables management policy is both part of not only financial but also the marketing strategy. Indeed, through mitigation payments to buyers of products can expand its implementation and thereby increase revenue and profit from operations.
In the implementation of various industrial and commercial operations in the Company may occur receivables on settlements with buyers of products, personnel, owners, budget and off-budget funds and so on. But economic practice shows that the settlements with customers for goods shipped (work performed and services) accounted for over 80% of total accounts receivable of enterprises, making it the main object of financial management.
The main purpose accounts receivable management is to minimize the amount and timing of collection of the debt. During the administration following tasks:
• definition of investment in accounts receivable for commercial and consumer credit;
• Formation of principles and conditions of the credit policy on customers products;
• identifying the potential debtors;
• ensuring collection of receivables;
• speed up payments by refinancing modern forms of receivables.
Sometimes mistakenly believe that the task of managing accounts receivable limited to the balance of the volume of accounts payable of the enterprise. In fact, not enough to amount receivable does not exceed the amount payable. It ordered the company to pay its debts to creditors, regardless of whether it receives the debts from their debtors or not. More crucial, in terms of financial management, ensuring a benign receivables and accelerate its turnover.
Substantiating the expediency of granting deferrals of payment products customers need to evaluate how increased investment in receivables will:
- The general level of receivables of the company (its share in total current assets)
- Ratio of overdue receivables (its share in total receivables);
- The average collection period and the number of revolutions of receivables;
- The amount of additional revenues, operating costs and direct financial losses.
In the decision making process to provide trade credit products customers need to weigh the pros and cons of such tactics and determine the overall effect of investment in receivables.
The benefits of widespread use of monetary policy in relations with buyers of products include the increase in sales and an increase in income and company profits in a highly competitive market.
The disadvantages of monetary policy are:
- The possible occurrence of bad receivables;
- Additional expenditure in cases involving short-term bank loans to offset receivables;
- Possible (alternative) costs in connection with the diversion of money from circulation.
For more reliable results, the decision to grant commercial loans should be based on the assessment of probabilities of debt repayment each individual debtor. If the probability that the buyer will pay is R, then the probability of default of debt is defined as (1 - P).
Obligations debtor means that as a result of company-seller will receive additional proceeds (realizable income) and through it compensates for the additional operating costs related to the conduct of monetary policy. Net income in this case equals present (current) value of the magnitude of the excess of income over expenditure.
If the debtor does not pay the debts, the company sells will be a loss to the extent of costs incurred that also reduced to present value. To determine the overall effect of the decision to grant deferred payment summarized the results of the two alternatives, taking into account the probability of their occurrence.
The choice of the type of monetary policy should take into account: the solvency of customers; conditions in the market of finished products; potential increase of production volumes in the expansion of its realization by providing deferrals of payments; legal bases of debt collection; financial possibilities of investing in receivables with a corresponding withdrawal them from circulation; acceptable level of risk.
An important aspect in the management of accounts receivable is improving its quality. To achieve this goal, management can be achieved by:
- A comprehensive assessment of the financial condition of potential lenders, their solvency, reputation term existence of market stage in which partners carry out its activities;
- Diversification of clientele;
- Determine the maximum amount of debt in general and per customer (limiting receivables);
- The use of various forms of security for the repayment of debt (mortgage, insurance, bank guarantee or other third parties, registration of secured promissory note, etc.);
- Improving the effectiveness of penalties on debtors.
For determination of solvent debtors advisable to perform periodic inspection.
In the management of accounts receivable to speed up calculations appropriate to use modern forms of refinancing. When refinancing understand the transfer of receivables to other forms of current assets of the company (cash or marketable securities) in order to speed up payments. The main forms of refinancing receivables include: spontaneous financing, factoring, bill discounting or selling in the stock market, forfeiting.
Regardless of the type of refinancing operations of its use based on common principles:
- The total cost of refinancing may not exceed the expected profit from the use of surplus funds in the economic turnover;
- The cost of refinancing may not exceed the cost of short-term loans to maintain solvency to the collection of receivables;
- The cost of refinancing may not exceed the inflationary losses in case of delay in payment.
Record "8/10, computers, Net 60" (or "8/10, computer, net 60") means that the buyer can get 8 percent discount on the price of products, if you pay invoices within 10 days after the end of the month (computers - end of month). In case of refusal to discount it must make full payment within 60 days of billing. A common pattern of commercial credit is the credit conditions "1/10, net thirty", ie a 10 percent discount on the price the seller can get if promptly pay for products with a maximum grace period of one month.
Factoring is irrevocable bank or factoring company the right to receive cash for payment documents for delivered products. Further debt charges are the buyers bank or factoring company, but if the seller violated contractual obligations (ie quality does not meet the supply agreement), all the risks associated with debt collection goes back to the enterprise.
Price refinancing using factoring services consisting of commission and interest for the use of credit. It should be borne in mind that at the time of execution of the factoring agreement the factor pays no more than 80% of total debt, and the final payments are made only after full receipt of funds from the payer.
Accounting bills issued to customers of products (if the receivables secured promissory note issued).
For this form of refinancing of the bank note is sold at a discount (discount on the price).
If the bill is sold on the stock market, the total cost of refinancing consists of the exchange brokers paid commission and possible exchange rate differences in selling bills at a price less than the face value.
Forfaiting is the transformation of commercial loans in bank credit. In this case, the sale of debt issued negotiable instruments (bills of exchange or transferable letter of credit), carried out in conditions of failure (or forfeiting) Bank of requirements for recourse creditor (vendor products) if the debtor (buyer) was insolvent. But in order to reduce the risk of possible losses in the non-return of the debt, the bank requires a significant discount on the price (discount). The size of this discount and the price stands refinancing receivables through forfaiting.
Often used in forfaiting export operations.