Main elements of Debtors management:
For efficient debtor management, following elements must be analyzed:
1. Credit policy:
It effects debtor management since it guides management regarding how to control debtors and how to create balance between liberal and strict credit. When company does not restrict to sell the products on credit subsequent to a given limit of sale. This liberated credit policy will raise the amount of sale and abundance. However risk will also rise with rising of sale. When we sell the good to such debtors whose capability to pay is not good, and then it is possible that a few amounts will become bad debts. Company can raise the time limit for paying by these debtors. On other hand, when company’s credit policy is strict, then it will raise liquidity and security, however decrease the profitability. Therefore, finance manager must make credit policy at optimum level where profitability and liquidity will be equivalent. We can demonstrate it graphically.
Sub-part of credit policy:
(a) Length of Credit period: It is also an element which affects decisions of finance manager associating to manage debtors. This is the time that permits to debtor to pay his debt for purchasing goods on credit from vendor. The Finance manager can raise the length of credit period according to the reputation of customers.
(b) Cash discount: It is the method to get money vastly from debtors. This is cost of investment in the credit sale.2. Credit policy analysis:
This means decision concerning to analysis of credit policy. Assessment and analysis of credit policy is based on factors illustrated below:
a) Collection of debtor’s information: For analysis, the financial position of debtors, we have to gather the information associating to debtors. This information can be achieved from customer’s financial statements of prior years, bank reports, and information provided by credit rating agencies. This information will be helpful for deciding where debtors will our debt or not. It will as well be helpful for knowing the capability to pay debt.
b) Credit Decisions: After collection and analysis the debtor’s information, manager has to choose whether company must facilitate to sell goods on credit or not. When company sells the goods on credit to specific debtor, then at what level it will be sold subsequent to seeing his position. For this, manager can fix the standard for giving goods on credit. When a particular debtor is below than given standard, then he must not accept his proposal of buying goods on credit.3. Formulation Collection Policy:
For obtaining fund vastly from debtor, the steps below will be taken under formulation of collection policy:
a) Send reminding letter for paying the debtb) Take the aid of debt collection agency for receiving bad debt.c) To do legal act against bad debtors.d) Requesting personally to debtor to pay his dues on email or mobile.e) Finance manager must monitor collection position via average collection period from past sundry debtor and their turn-over ratio.f) To build ageing schedule. Sample of ageing schedule is illustrated below.
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