Accounts Receivables occupy an important position in the structure of current assets of a firm.

They are the outcome of rapid growth of credit sales granted by the firms to their customers. Credit sales are reflected in the value of Sundry Debtors. It is also known as Trade Debtors, Accounts Receivables, and Bills Receivables on the asset side of the balance sheet. Trade credit is more prominent force of modern business. It is considered as a marketing tool acting as a bridge between production and customers. Firm grants credit to protect it sales from the competitors and attract the potential customers. It is not possible to increase sales without credit facility; increase in sales also increases profits. But investment on account receivables involves certain costs and risks. Therefore, a great deal of attention is normally paid to the effective and efficient management of accounts receivables. Meaning of Accounts Receivables The term receivables are defined as debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business. When the firm sells its products services on credit, and it does not receive cash for it immediately, but would be collected in near future. Till collection they form as current assets. Meaning of Accounts Receivables Management Accounts Receivables Management means making decisions relating to the investment in these current assets as an integral part of operating process, the objective being maximisation of return on investment in receivables. In other words, accounts receivables management involves maintenance of receivables of optimum level, the degree of credit sales to be made, and the debtors collection. In simple words, the key function of credit management is to optimize the sales at the minimum possible cost of credit. According to Joseph, the purpose of any commercial enterprise is the earning of profit. Credit in itself is utilised to increase sales, but sales must return a profit. Management of receivables, therefore, should be based on sound credit policies and practices. Benefits of Accounts Receivables Management Accounts Receivables Management involves not only costs but also benefits. The benefits are: a) Increased Sales: Providing goods or services on credit expands sales, by training old customers and attraction of prospective customers. b) Market Share Increase: When the firms able to retain old customers and attract new customer automatically market share will be increased to the extent of new sales. c) Increase in Profits: Increased sales, leads to increase in profits , because , it need to produce more products with a given fixed cost and sales of products with a given sales network, in both cost per unit comes down and the profit will be increased.

Credit Policy: A firms credit policy regarding its credit standards, credit period, cash discounts, and collection procedures. The credit policy may be lenient or stringent. Lenient Credit Policy It is that policy where the seller sells gods on very liberal credit terms and standards. In other words, goods are sold to the customer whose credit worthiness is not up to the standards or whose financial position is doubtful. Advantages of Liberal Credit Policy: Increase in sales: Lenient credit policy expands sales because of the liberal credit terms and favourable incentives granted to customers. Higher profits: Increase in sales leads to increase in profits, because higher level of production and sales reduces permit cost.

Disadvantages of Liberal Credit Policy: Apart from the advantages it has some advantages: Bad Debt Loss: A firm that follows lenient credit policy may suffer from bad debt losses that arise due to the non payment credit sales. Liquidity problem: Lenient Credit policy not only increases bad debt losses but also creates liquidity problem, because when the firm is not able to receive the payment at a due date, it may became difficult to pay currently maturing obligation.

Stringent Credit Policy: Stringent Credit Policy seller sells goods on credit on a highly selective basis only i. e, the customers who have been proven credit worthiness and financially sound. Advantages of Stringent Credit Policy: Less Bad losses: A firm that adopts Stringent Credit Policy will have minimum bad debt losses, because it had granted credit only the customers who are creditworthy. Sound Liquidity Position: the firm that follows stringent credit policy will have sound liquidity position , due to the receipt of all payments from customers on due date , the firm can easily pay the currently maturing obligations.

Disadvantages of Stringent Credit Policy: Fewer Sales: Stringent credit policy restricts sales, because it is not extending credit o average creditworthiness customers. Less profits: Fewer sales automatically reduces profits, because firm may not be able to produce goods economically, and it may not be able to use resources efficiently that leads increase in production cost per unit.

CREDIT POLICY VARIABLES Optimum credit policy is one, which maximizez firms operating profit. For establishing optimum credit policy, the financial manager must consider the important decision variables, which have bearing on the level of receivables. In other credit policy variables have bearing on level of sales, bad debt loss, discounts taken by customers, and the collection expenses. The major credit policy variable includes the following: Credit Standards: Firm has to select some customers for extension of credit. For this firm has to evaluate the customer. Credit Standards refer to the minimum criteria for the extension of credit to a customer. Credit ratings, credit references, average payment periods, and certain financial ratios provide a questionnaire basis for establishing and enforcing credit standards Credit Terms: the second decision criteria in receivables management are the credit terms. Credit terms mean the stipulation under which goods or services are sold on credit. Once the credit terms have been established and the credit worthiness of the customer has been assessed, then the financial managers have to decide the terms and conditions on which the credit will be granted. The credit term specify the length of time over which credit is extended to a customer and the discount, if any, given for early payment. Credit terms have three components such as: Credit period Cash discount Cash discount period Credit period: the period of time, for which credit is allowed to a customer to economic value of purchases. It is generally expressed in terms of a net data. Generally the credit period id decided with the consideration of industry norms and depending on the firms ability to manage receivables. A decision regarding lengthening of credit period increases sales by inducing existing customers to purchase more and attracting new customers. But it also increases investment in receivables and lowers the quality of trade credit. Cash Discount: it represents a percent reduction in sales or purchase price allowed for early payment of invoices. It is an incentive for credit customers to pay invoices in a timely fashion. In other words, it encourages the customers to pay credit obligations within a specified period of time, which will be less than the normal credit period.

Cash Discount Period: it refers to the duration in which the discount can be availed from collection of receivables and is influenced by the cash discount period. Extension of cash discount period may prompt some more customers to avail discount and more payments, which will release additional funds. But extension of cash discount period will result in late collection of funds, because the customer who is able to pay will have less cash discount thus now they may delay their payments. Collection policy: this is the third aspect in receivables management. The collection of a firm is the procedures passed to collect amount receivables, when they become due. It is needed because all customers do not pay the bill receivables in time collection procedures included monitoring the state of receivables , dispatch of letters to customers whose due date is approaching ,