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Management of Receivables^243

l the guarantor does not normally expect to be called upon to pay, and there may be
difficulties in obtaining money from him when the need arises.

These problems do not occur to the same extent when the guarantor is another company,
often the parent company in the customerís group.

So the objective of the receivables management remains as the most effective way to
receive the cash back without sacrificing the sales and future prospects of the company.

Factors affecting policies for managing

accounts receivables

There are several affects of extending credit to the customers on various operating
parameters of the company. These include:

1. Revenue effects: As the customers are extended credit, payment for goods is
   received later giving the customers time to generate sales from the goods and pay
   back the company. This may allow the company to charge a higher price and also
   the quantity sold may increase.


2. Cost effects: Extending credit means that the company has to maintain a credit
   department. This involves costs. Also collecting receivables has its own costs
   associated with it.


3. The cost of debt: If the company has to extend credit it must finance these
   receivables from its own money or from borrowings. Both of these methods involve
   costs.


4. The probability of nonpayment: The company always gets paid if it sells for
   cash but if it extends credit there is a probability that the customer may not pay.
   This means that the company may not get its payments resulting in a loss to the
   company.


5. The cash discount: The cash discount affects payment patterns and amounts
   that the company recieves early. If the cash discount is high then there is higher
   probability that the company will get more cash upfront and vice versa.