Significance of Accounts Receivable Practice
The most primary element for the success of a business is the way in which the systems of accounts receivable management, collections and billing are maintained. Often, this type of management collectively is known as the system of collections management. The main key to the success of this system is to manage it diligently. It is because having large amount of customers is not enough to run a successful business; revenue needs to be collected from these customers (Clarke, 2016).
There are a number of reasons for a business setting up the accounts receivable in a given organization. When services and goods are made available on credit, a business makes the record of receivable, which is returned as increased revenues. The main objective of doing this is surviving in the market or it may also be increase in sales. There are also times when a business organization, on the basis of client goodwill, offers help and by providing credit services and goods, there is establishment and maintenance of receivables as per the existing policies. To put it in a nutshell, establishment and management of accounts receivable is taken as a general practice.
A business requires day-to-day budget for meeting the routine payments. There may be certain amount set aside for contingent events. It may also need to buy materials or pay for the wages. In such situations, one of the components of working capital, account receivable may be valuable as it is easily convertible to cash. The significance of accounts receivable maintenance is mainly because of its effect on cash flow. It manages the inflow and outflow of an organization’s cash. If there are accounts receivable for a business, it means that the business is earning revenue and may be taken as a good indication towards the growth and expansion of the business. However, collection is one step that cannot be ignored.
Accounts receivables from the company side may be compared to mini level loans to the customers. The credit that is being extended since the payment of inventory has been made along with the delivery and performance of service, but the party is still to pay the business. It means that the business is fronting for its clients. The higher the turnaround of accounts receivable, the better it is for the company.
Influence of Accounts Receivable Management on shareholder value, credit policy decisions, credit rating sources for potential clients, credit scoring models and credit terms with analysis.
IMPACT ON SHARE HOLDER VALUE:
The main owners of any corporation are the shareholders. There is selling of stocks from a Company or leverage of right of being a part owner, in compensation of equity investment for the operation of the business. Shareholders have the ability to directly create effect on the operations of the Company and the decisions, unlike the other stakeholders, which are only concerned with the nature of business (Hill, Kelly, & Lockhart, 2016).
-Objectives of Profit Generation:
The companies that have shareholders have had a sole major objective of profit maximization. Although there are many companies, which try to create a balance between shareholder and stakeholder interests, the focus of project objectives will be typically associated with the shareholders (Selecting Strategies That Create Shareholder Value, 1981). The partners of a business firm or a sole proprietor have higher flexibility in goal setting, besides the profit earning part. Profitability is also a crucial part for stockholder attraction and retention and for holding a robust value of stock (INCEIF, 2016).
Orientation in the Short-Term
Short-term orientation is another factor that is in close relation with profit objectives in any business that involves shareholders. Generally, stockholders have a quite limited memory and there is also desire for prompt gratification. The public company leaders typically feel higher pressure for generation of revenue and thus there is quick creation of profit. This proves to be a major warning for those entrepreneurs who carry a long-term vision and do not have the intention to feel pressure for long term development sacrifice for the creation of quick cash.
IMPACT ON CREDIT POLICY DECISIONS
The development of credit policy is one of the factors that each business has to face ultimately. Out of many, one major decision that an individual needs to make at the start of a business is the decision of credit extension to other consumers and businesses. This is a quite serious decision that should be noted as it has high impacts on cash flow and profit creation.
IMPACT ON CREDIT RATING SOUCES FOR POTENTIAL CLIENTS
Credit scores may potentially be used for this.
A credit score means a mathematical expression on the basis of analysis of the credit files for a person, so as to reflect the credibility of the person. It is based on the information of on-credit report, which generally has a source from bureaus of credit.
Credit lenders like the credit card companies and banks, make the use of credit scores for the evaluation of possible risks involved in money lending to customers and foe the mitigation of losses that are incurred because of bad debts (Hamilton, 2014). Lenders make use of the credit score for the determination of loan-qualified clients, the applicable interest rate and the limits of credit. They also use these scores for determining which of the consumers have higher probability of brining in the highest revenue. The use of identity scoring or credit before access authorization or credit grant could be a credible system implementation.
IMPACT ON CREDIT SCORING MODELS
The use of credit scoring is not just limited to banking institutions. Additional entities like cell phone companies, insurance entities, departments of government and landlords too use similar type of techniques. Credit scoring also possesses high overlap with the concept of data mining, which makes use of almost same techniques. The techniques use combination of thousands of features; however are identical at many levels.
One of the most sought-after techniques in statistics is the use of logistic regression for the prediction of a binary outcome, either complete bad debt or a no bad debt situation. There are some banks, which also build models of regression, which predict the bad debt amounts that a customer may need to incur. Generally, this is highly difficult to predict and the focus of most of the banks is only on the binary outcome.
The regulation of credit scoring is primarily in the hands of Financial Services Authority, when it is used for advanced approach purposes for capital adequacy, given the regulations of Basel II.
In the UK, credit scoring has a minute regulation, with the Information Commissioner’s office being the regulator of industry. There is also a provision where the consumers are able to file complaints to Service of Financial Ombudsman in case there is experience of problem related to credit reference agency.
For a certain lender, it is cumbersome for a customer to identify if they have adequate credit score to get accepted for the credit provision. The situation arises because of the structure and complexity involved in credit scoring, which is different for different lenders.
There is no need for the lenders to publicize the head of their credit score. Neither do they have to publicize the lowest credit core essential for an applicant to get selected. Because of this limitation of information lag, it is not possible for a consumer to know beforehand if they have the credentials required to pass the requirements of lender’s credit scoring.
In case the applicant is rejected for credit, there is no obligation on the side of the lender to disclose the reasons whatsoever. Nevertheless, the industry associations inclusive of the Leasing and Finance association create a provision for their members to give a valid reason for rejection (Denčić-Mihajlov, 2016).
The agreements of data sharing by the credit bureau also reveal that an applicant who is declined on the basis of credit-bureau data is liable to get the reason for his or her rejection along with the related credit bureau address.
IMPACT ON CREDIT TERMS
Credit or account is the basis on which the terms of maturity of payment period are based. For instance, the terms of credit may be presented as 2/10, net 30. It means that the period of amount being due is 30 days. Nevertheless, in case the amount is paid within 10 days, 2% will be discounted on the payable amount. There may also be other terms such as 10 days, which is due when received in net 60 days, among others.
References
Clarke, D. (2016). What Is Accounts Receivable and Why Does it Matter?. Kashoo.com. Retrieved 7 July 2016, from https://www.kashoo.com/blog/what-is-accounts-receivable
Denčić-Mihajlov, K. (2016). IMPACT OF ACCOUNTS RECEIVABLE MANAGEMENT ON THE PROFITABILITY DURING THE FINANCIAL CRISIS: EVIDENCE FROM SERBIA (1st ed.).
Hamilton, B. (2014). Why Managing Accounts Receivable Could Save Your Business. Entrepreneur. Retrieved 7 July 2016, from https://www.entrepreneur.com/article/237523
Hill, M., Kelly, G., & Lockhart, G. (2016). Shareholder from Supplying Trade Credit (1st ed.).
INCEIF. (2016). Inceif.org. Retrieved 7 July 2016, from http://www.inceif.org/research-bulletin/impact-account-receivable-management-profitability-shariah-non-shariah-compliant-firms-malaysian-market/
Selecting Strategies That Create Shareholder Value. (1981). Harvard Business Review. Retrieved 7 July 2016, from https://hbr.org/1981/05/selecting-strategies-that-create-shareholder-value
