The collection receivables represent one type of accounting transaction activity involving the management of collection from consumers who owe individuals, companies, or organizations for goods or services provided to them.
For the majority of entities, this is typically done through the creation of invoices and sending them to consumers, who will then make payments according to a known timeframe, commonly referred to as payment terms or credit terms.
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The existence of these receivables is presented in the financial statements of a country since the implementation of an accrual-based accounting system for financial reporting. Consequently, its implementation also involves regulations that govern the execution of receivables transactions.
Receivables Statement Procedure
Within receivables collection, there are statements that serve as forms indicating the obligations of debtors on specific dates. Usually, for this receivables statement procedure, specific formats with detailed information are employed.
The procedures that can be carried out for providing receivables statements are as follows:
1. Individual Statements
This particular type of receivables statement naturally contains information regarding the debtor’s obligation balance at the beginning of the month. Additionally, it directly pertains to the debit-to-credit movements over the course of a month, offering detailed explanations of each transaction and the debtor’s obligation balance to be settled at the end of the month.
2. End-of-Month Balance Statements
The application of this form of receivables statement for collection only presents the debtor’s end-of-month balance for receivables. In terms of creation, these statements are quite practical and straightforward.
However, they might not provide all the necessary information that debtors require for reconciliation within their records. This is the case if the balances mentioned in the receivables collection statement differ from those listed in their records.
3. Current Balance Statements for Conventional Accounts
The content contained in this particular format of the receivables statement includes a list of invoices that have not yet been settled by the debtor as of a specific date. This list is accompanied by invoice dates and amounts in the local currency.
In its usage, this type of receivables statement is applicable when customers are required to make payments based on the amounts indicated in the invoices.
1. Credit Sales Standards
In these credit standards, the minimum quality of credit eligibility is established for credit applicants or customers that a relevant company can accept.
These standards enable companies to increase sales transactions through credit sales, while also mitigating the risk of excessive uncollected receivables.
In assessing customer quality, the 5C method – characters, capacity, capital, collateral, and conditions – can be utilized. This method can be applied to support the determination of creditworthiness when considering extending credit to the concerned customers.
2. Credit Sales Terms
These credit sales terms can be used to define the credit period to be granted and offer discounts for customers who make early payments.
Various factors can influence credit sales terms, including the economic nature of the product, credit period, conditions of both the seller and the buyer, cash discounts, and risk-free interest rates.
Typically, these credit terms are communicated by the company to its customers, especially to those who haven’t yet gained profits from the company.
3. Credit Policy and Receivables Collection
The credit policy and consumer receivables collection encompass several other decisions, including credit standards, cash discounts or rebates, credit periods, and the availability of collection policies. Having a significant number of uncollected receivables naturally results in increasing collection costs.
However, in this context, the effort to collect receivables shouldn’t be overly aggressive. This is because excessive aggressiveness could lead to reduced sales and future profits for the company due to customers migrating to other firms.
Benefits of Receivables Collection Management for Companies
1. Competitor Preparedness
If a company is prepared to implement a credit sales system, it demonstrates its commitment to enhancing its earnings and profits.
This is because the adoption of this sales method effectively expands the company’s market reach. However, it’s important to note that the credit applied also brings with it inherent risks that the company must bear.
To mitigate these risks, the company can employ various strategies for credit and receivables management, which can be executed by its customers. Accurate and organized financial transaction recording is ensured through the utilization of accounting software applications, minimizing risks during the implementation of a credit sales system.
2. Increased Company Profits
Effective credit management can also contribute to profit growth in a business or enterprise. Through proper organization, credit management makes collection easier, allowing the company to realize the earnings from credit sales and incorporate them into its cash reserves.
3. Fraud Minimization
The implementation of credit management within a company can help mitigate factors that can significantly impact the firm. One such factor is the risk of fraud or misconduct, whether initiated by employees or other parties with considerable influence over the company’s financials.
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Regarding the risk of fraud mentioned, this is typically a result of borrowers failing to make credit payments for all their invoices. In such instances, the possibility arises due to the company’s less selective approach when choosing potential customers to extend credit to.