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Working Capital Management > Accounts Receivable
Accounts Receivable
• Defining Accounts Receivable
• Setting a Credit Policy
• Terms of Trade
• Collecting Receivables
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Working Capital Management > Accounts Receivable
Defining Accounts Receivable
• In most businesses, accounts receivable is executed by generating an invoice
and either mailing or electronically delivering it to the customer, who, in turn, must
pay it within an established timeframe.
• Account receivables are classified as current assets assuming that they are due
within one year.
• Revenue has a big impact on bottom-line profitability, so managers may be
tempted to "manage" revenue recognition.
Accrual Recognition
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Working Capital Management > Accounts Receivable
Setting a Credit Policy
• Management must decide on credit standards, which involves decisions on how
much credit risk to assume.
• Another important factor in determining credit standards involves a company
evaluating the credit worthiness of an individual or business.
• After establishing credit standards, the firm must decide on the length of the
period before payment must be made and whether or not they will offer a discount
for early payments.
• The last step is to establish a collection policy.
Credit Score Factors
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Working Capital Management > Accounts Receivable
Terms of Trade
• Credit terms are often quoted "net X" with X being a certain number of days.
• An example of a common payment term is Net 30, which means that payment is
due at the end of 30 days from the date the invoice is issued.
• The debtor is free to pay before the due date, and many businesses can offer a
discount for early payment.
• A discount stated as 2/10, net 30 means that the buying firm will receive a two
percent discount if it pays by the tenth day, or else they will pay the full amount in
30 days.
Markup
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Working Capital Management > Accounts Receivable
Collecting Receivables
• Collecting on accounts receivable is the final step in the credit extension process,
and arguably the most difficult.
• Accounts receivable days and an aging schedule are tools used to monitor
accounts receivable.
• The accounts receivable days is the average number of days that it takes a firm to
collect on its sales. The aging schedule categorizes accounts by the number of
days they have been on the books.
• A company may protect against bad-debts losses by purchasing trade credit
insurance.
Collection Letter
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Appendix
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Working Capital Management
Key terms
• accrual accounting A method of accounting in which funds are recorded when they are earned and deductions are claimed
when expenses are incurred.
• bad-debt losses losses resulting from an uncollectible debt.
• collateral A security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to
repay. (Originally supplied as "accompanying" security. )
• collection policy the set of rules for receiving accounts payable or debt
• credit period the amount of time required to receive payment for debt extended
• creditors a person or institution to whom money is owed.
• franchising The establishment, granting, or use of a franchise.
• subsidiary A company owned by the parent company or holding company
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Working Capital Management
Collection Letter
This is an example of a letter from a collection agency offering to settle a debt.
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Flickr. "Debt Settlement Offer | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/sercasey/512307249/ View on Boundless.com
Working Capital Management
Credit Score Factors
This chart depicts the factors that go into an individual's credit score.
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Working Capital Management
Accrual Recognition
This chart lays out methods for accruing revenue and expenses in accounting.
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Flickr. "y2cary3n6mng-76r9m3-accruals | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/sampjb/7690680336/in/photostream View on
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Working Capital Management
Markup
This equation shows the finding of selling price for a vendor by adding its markup to its cost.
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Flickr. "y2cary3n6mng-fwrdxb-markup-formula | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/sampjb/7690683622/in/photostream View on
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Working Capital Management
If a company has yet to receive payment for its goods, which of
the following describes a situation when it can recognize revenue
from the sale?
A) Once the company has sustained a portion of the costs associated
with providing the good or service.
B) Once the company has performed a portion of the services to be
provided.
C) All of these answers.
D) When the goods have been delivered and the title has been
transferred to the buyer.
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Working Capital Management
If a company has yet to receive payment for its goods, which of
the following describes a situation when it can recognize revenue
from the sale?
A) Once the company has sustained a portion of the costs associated
with providing the good or service.
B) Once the company has performed a portion of the services to be
provided.
C) All of these answers.
D) When the goods have been delivered and the title has been
transferred to the buyer.
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Working Capital Management
Which of the following correctly defines one of the "Five C's of
Credit?"
A) Capital: Does the borrower have enough cash flow to make its
payments?
B) Capacity: Does the borrower have sufficient assets to secure the
loan?
C) Character: Is the borrower trustworthy with a history of meeting its
debt obligations?
D) All of these answers.
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Working Capital Management
Which of the following correctly defines one of the "Five C's of
Credit?"
A) Capital: Does the borrower have enough cash flow to make its
payments?
B) Capacity: Does the borrower have sufficient assets to secure the
loan?
C) Character: Is the borrower trustworthy with a history of meeting its
debt obligations?
D) All of these answers.
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Working Capital Management
A customer has 45 days from the date of invoice to pay a bill in
full, but if he pays within 15 days of the invoice, he gets a 10%
discount. Which of the following describes these terms of trade?
A) 15/10, net 45.
B) 10/45, net 15.
C) 15/45, net 10.
D) 10/15, net 45.
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Working Capital Management
A customer has 45 days from the date of invoice to pay a bill in
full, but if he pays within 15 days of the invoice, he gets a 10%
discount. Which of the following describes these terms of trade?
A) 15/10, net 45.
B) 10/45, net 15.
C) 15/45, net 10.
D) 10/15, net 45.
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Working Capital Management
Which of the following correctly describes a method companies
can use to analyze their collections?
A) All of these answers.
B) The account receivable days is the average number of days it takes a
firm to collect on its sales.
C) An aging schedule categorizes accounts by the number of days they
have been on the books.
D) The receivable turnover ratio measures the number of times, on
average, receivables are collected.
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Working Capital Management
Which of the following correctly describes a method companies
can use to analyze their collections?
A) All of these answers.
B) The account receivable days is the average number of days it takes a
firm to collect on its sales.
C) An aging schedule categorizes accounts by the number of days they
have been on the books.
D) The receivable turnover ratio measures the number of times, on
average, receivables are collected.
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Working Capital Management
Attribution
• Wikipedia. "Discounts and allowances." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Discounts_and_allowances
• Wikipedia. "Credit worthiness." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Credit_worthiness
• Wikispaces. "SU3FINANCE - Chapter 18 - Working Capital Management." CC BY-SA
http://su3finance.wikispaces.com/Chapter+18+-+Working+Capital+Management
• Wikipedia. "Debtor collection period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Debtor_collection_period
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/collection-policy
• Wiktionary. "collateral." CC BY-SA 3.0 http://en.wiktionary.org/wiki/collateral
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/bad-debt-losses
• Wikipedia. "Accounts receivable." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accounts_receivable
• Wikibooks. "ERP Internals/Modules/Accounts Receivable." CC BY-SA 3.0
http://en.wikibooks.org/wiki/ERP_Internals/Modules/Accounts_Receivable
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//accounting/definition/accrual-accounting
• Wikipedia. "Accounts receivable." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accounts_receivable
• Wikipedia. "Net D." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_D
• Wikipedia. "Trade credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Trade_credit
• Wikispaces. "SU3FINANCE - Chapter 18 - Working Capital Management." CC BY-SA
http://su3finance.wikispaces.com/Chapter+18+-+Working+Capital+Management
• Wiktionary. "franchising." CC BY-SA 3.0 http://en.wiktionary.org/wiki/franchising
• Wikispaces. "SU3FINANCE - Chapter 18 - Working Capital Management." CC BY-SA
http://su3finance.wikispaces.com/Chapter+18+-+Working+Capital+Management
• Wikipedia. "Trade credit insurance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Trade_credit_insurance
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Working Capital Management
• Wikipedia. "Collection agency." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Collection_agency
• Wikipedia. "Receivables turnover ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Receivables_turnover_ratio
• Wiktionary. "subsidiary." CC BY-SA 3.0 http://en.wiktionary.org/wiki/subsidiary
• Wikipedia. "creditors." CC BY-SA 3.0 http://en.wikipedia.org/wiki/creditors
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