The Definitive Guide to Receivable Management
Cash flow is the blood line for any business. Business can survive lack of profits, but cannot survive lack of Cash flow. Managing receivables is one of the most important parts of any Small or large businesses. Hence it is important to know about receivable management solutions.
When we start the business, the thing that looks most difficult is Sales. But once we have done Sales, then we are revealed to more difficult part – Receivables. Yes, collecting the due payment from our Buyers is a bigger task, sometimes than the Sales itself.
If working capital is lifeline of the Business, then Managing the Accounts receivables is soul of working Capital.
What does Receivable Management Mean?
Put simply, Receivable Management or Managing Accounts Receivables means collecting the payments due for Sales in a timely manner. When we sell any services, products or solutions to our clients or customers, they owe us the money. Collecting that money is called Receivables Management.
In Accounting terms Our Customers who owe us money are called as “Sundry Debtors”. Yes, they are called Debtors, because they owe us money.
In India, Management of Receivables is also known as:
- Payment Collection.
- Collection Management.
- Accounts Receivables.
In a survey, 90% of the respondents agreed that collecting Sales Receivables is bigger challenge than Sales itself.
What is receivable management?
There are very few businesses, which have the luxury of receiving money before selling, i.e. Selling for advance payments. Most of the Companies sell their offerings on a credit. Which means that they will collect the money after selling.
Although it looks very simple on the face of it, Managing receivables from Debtors can be a very complex task depending on the nature of our business. As our business grows and as our offering gets complex the process of collecting the payments needs to be designed accordingly.
So the entire process of defining the Credit Policy, Setting Payment Terms, Payment Follow-ups and finally a timely collection of the due payments can be defined as Receivables Management.
Many people might be able to sell, But only few know how to recover money.
Objectives of Receivable Management
In order to keep business running, we need cash. The whole purpose or objective of Receivables Management is to keep the inflow of cash healthy.
These are receivable management objectives.
- Collect receivables from our sundry debtors.
- Maintain a healthy cash flow for the company, so that it can pay our creditors.
- Have proper Policy for Credit management.
- A working process and mechanism for managing payment follow-ups and timely collection.
Its Importance
Why Receivables management is so important?
- Cash flow is always considered as the bloodline of any business organization. Badly managed Receivables can break the company.
- Most of the companies that go bankrupt have Cash flow problems. Companies with a lack of profit can survive, but a lack of cash flow is fatal.
- Working Capital is one of the costliest forms of capital. One of the ways of calculating working capital requirements can be defined as the difference between Sales and Receivables. Bad collections can mean higher working capital requirements. Which means higher interest costs for the company.
- A reliable and predictable Receivables will ensure steady cash flow management of the organization. Amounts receivables with no due dates are useless.