Management of Debtors
Company can sell the goods on credit or cash. Cash sale is influx of cash and it is checked under cash flow analysis. But credit sale produces sundry debtors. Company has to get money from them. If company begins to sell on return of cash, then it decreases the level of sale and profitability of company'. On the other hand, if company encourages credit sale, it can increase the risk of bad debts. So, it is anticipated to control and to manage debtors.
Debtor management means the procedure of decisions relating to the investment in business debtors. In credit selling, it is certain that investor have to pay the cost of acquiring money from debtors and to take some risk of loss due to bad debts. To derogate the loss due to not receiving money from debtors is the main aim of debtor management.
For effective debtor management, following elements should be analyzed.
1. Credit policy:
Credit policy effects debtor management because it guides management about how to check debtors and how to make balance between liberal and strict credit. If company does not limit to sell the products on credit after a given limit of sale. This emancipated credit policy will increase the amount of sale and profitability. But risk will increase with increase in sale. If investor sell the good to those debtors whose capability to pay is not good, then there are chances that some amount will become bad debts. Company can enhance the time limit for paying by such debtors. In case, if company's credit policy is strict, then it will increase liquidity and security, but decrease the profitability. Thus, finance manager should make credit policy at optimal level where profitability and liquidity will be equal. investor can show it graphically.
Sub part of credit policy
(a) Length of Credit period
Length of credit period is also an element that affects conclusions of finance manager relating to manage debtors. It is the time which permits to debtor to pay his debt for purchasing goods on credit from vendor. Finance manager can increase the length of credit period as per reputation of customers.
(b) Cash discount
Cash discount is technique to acquire money fastly from debtors which is price of investment in credit sale.
2. Credit Policy Analysis
It means decision pertaining to analysis of credit policy. Valuation and analysis of credit policy is based on following factors.
a) Collection of Debtor's Information
For investigation the financial position of debtors, investor have to collect the information relating to debtors. This information can be received from customer's financial statements of previous years, bank reports, and information given by credit rating agencies. These information will be useful for determining where debtors will our debt or not. It will also be practicable for knowing capability to pay the debt.
b) Credit Decisions
After collection and analysis the debtor's information, manager has to determine whether company should help to sell goods on credit or not. If company sells the goods on credit to specific debtor, then at what level it will be sold after checking his position. For this manager can fix the standard for rendering goods on credit. If a particular debtor is lower than the given standard, then he should not accept his proposal of purchasing goods on credit.
3. Conceptualization Collection Policy
For getting fund fastly from debtor, the following steps will be taken under conceptualization of collection policy.
a) Send reminding letter for payment of debt
b) Take the assistance of debt collection agency for getting bad debt.
c) To take legal action against bad debtors.
d) To call for personally to debtor to pay his dues on mobile or email.
e) Finance manager should supervise collection position through average collection period from past sundry debtor and their turnover ratio.
f) To make aging agenda. Sample of Aging agenda is given below.
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