Q. Show the Costs of Investment in Receivables?
Costs of Investment in Receivables: - When a firm sells goods or else services on credit it has to bear numerous types of costs. These costs are as follows:-
(i) Administrative Cost: - To record the credit sale as well as collections from customers, accounting records, a separate credit department with additional staff, stationery etc is needed. Expenses have as well to be incurred on acquiring information about the credit worthiness of the customers.
(ii) Capital Cost: - There is a time lag among sale of goods and its collection from customers. In that time period the firm has to pay for wages, purchases, salary and other expenses. Consequently the firm needs additional funds which may arrange either from external sources or from retained earnings. Mutually of these sources involve cost. If funds are arranged from external sources interest has to be paid. Alternatively if retained earnings are used for this purpose the firm has to bear opportunity cost. Opportunity cost signifies the income which could have been earned by investing this amount elsewhere.
(iii) Collection Cost: - These are the expenses acquired by the firm on collection from the customers after expiry of the credit period.
(iv) Default Cost: - Although all efforts by the management the firm mayn't be able to recover full amount due from the customers. Such obligations are known as bad debts or default cost.
Objectives of Receivable Management:-
(i) To get hold of optimum (not maximum) volume of sales.
(ii) To reduce cost of credit sales.
(iii)To optimize investment in receivables.