5.2 Accounts Receivable Management

Accounts receivable represents the amount due form customers (book debts) or debtors as a result of selling goods on credit. “It is the total of all credit extended by a firm to its customers.” Working capital is the difference between total current assets and total current liabilities. 

All companies by their very nature are involved in selling either goods or services. Although some of these sales will be for cash, a large portion will involve credit. Whenever a sale is made on credit, it increases the firm’s accounts receivable. Cash sales are totally riskless but not the credit sales, as the same has yet to be received. Thus, the importance of how a firm manages its accounts receivable depends on the degree to which the firm sells on credit. Management of accounts receivable starts with the decision to grant credit. This is the responsibility of the credit manager who needs an effective accounts receivable control system. An accounts receivable control system monitors the credit policy application. It helps prevent: