Accounts Receivable
Why is the practice of managing Accounts Receivables significant?
Much of the commercial world revolves around credit -- trade credit or accounts receivable and accounts payable. The management of accounts receivables encompasses a variety of substantive activities essential to the fiscal solvency of a company. Firms that offer sales on credit must establish policies, procedures, and practices that guide their transactions and comply with official regulations. Managing accounts receivables includes the establishment of terms and conditions for sales and the granting of credit, including processes for evaluating credit worthiness of potential customers and the associated risk assessment and any resulting receivables collections.
The importance of accounts receivable to the fiscal status of a company is reflected in the inclusion of accounts receivable on a firm's balance sheet as a short-term asset (Cotell, 2010). The value of accounts receivable is the potential for converting the credit accounts into cash flow (Cotell, 2010). Indeed, the liquidity of a company can be impacted by the conversion of accounts receivable into cash, an activity that is pivotal to maintaining a reasonable corpus of working capital, and avoiding operational constraints due to an absence of a comfortable cash margin (Cotell, 2010). But there is a flip side to accounts receivable in that trade credit activity will increase bad debt costs, management costs and opportunity costs (Song, 2013). It is apparent that successful management of trade credit is necessary if the investment income of accounts receivable is to be maximized (Song, 2013). Song refers to this dynamic as the unity of opposites, or the unity of production and marketing (2013).
The benefits of trade credit extend to both the company and the consumers who purchase goods or services from the company. Access to credit can enable...
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