INTRODUCTION Debtor management means the process of decisions relating to the investment in business debtors. In credit selling, it is certain that we have to pay the cost of getting money from debtors and to take some risk of loss due to bad debts. To minimize the loss due to not receiving money from debtors is the main aim of debtor management. Main elements or dimensions of Debtors management For effective debtor management, following elements should be analyzed 1. Credit policy Credit policy effects debtor management because it guides management about how to control debtors and how to make balance between liberal and strict credit. If company does not restrict to sell the products on credit after a given limit of sale. This liberated credit policy will increase the amount of sale and profitability. But risk will also increase with increasing of sale. If we sell the good to those debtors whose capability to pay is not good, then it is possible that some amount will become bad debts. Company can increase the time limit for paying by such debtors. On the other hand, if company’s credit policy is strict, then it will increase liquidity and security, but decrease the profitability. So, finance manager should make credit policy at optimum level where profitability and liquidity will be equal. We can show it graphically. Sub part of credit policy (a) Length of Credit period Length of credit period is also an element that affects decisions of finance manager relating to manage debtors. It is the time which allows to debtor to pay his debt for purchasing goods on credit from vendor. Finance manager can increase the length of credit period according to reputation of customers. (b) Cash discount 1 Cash discount is technique to get money fastly from debtors. It is cost of investment in credit sale. 2. Credit policy analysis It means decision relating to analysis of credit policy. Evaluation and analysis of credit policy is based on following factors. a) Collection of debtor’s information For analysis the financial position of debtors, we have to collect the information relating to debtors. This information can be obtained from customer’s financial statements of previous years, bank reports, and information given by credit rating agencies. These information will be useful for deciding where debtors will our debt or not. It will also be useful for knowing capability to pay the debt. b) Credit Decisions After collection and analysis the debtor’s information, manager has to decide whether company should facilitate to sell goods on credit or not. If company sells the goods on credit to particular debtor, then at what level it will be sold after seeing his position. For this manager can fix the standard for providing goods on credit. If a particular debtor is below than given standard, then he should not accept his proposal of buying goods on credit. 3. Formulation Collection Policy For getting fund fastly from debtor, the following steps will be taken under formulation of collection policy. a) Send reminding letter for paying debt b) Take the help of debt collection agency for getting bad debt. c) To do legal action against bad debtors. d) To request personally to debtor to pay his dues on mobile or email. 2 e) Finance manager should monitor collection position through average collection period from past sundry Debtor and their turnover ratio. f) To make ageing schedule. Sample of ageing schedule is given below. Accounts receivable is an accounting transaction which deals with the billing of customer who owes money to a person, company or organization for goods and services that has been provided to the customers. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms. An example of a common payment term is Net 30, meaning payment is due in the amount of the invoice 30 days from the date of invoice. Other common payment terms include Net 45 and Net 60 but could in reality be for any time period agreed upon by the vendor and the customer. On a company's balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified as current assets assuming that they are due within one year. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit. Accounts receivable departments use the sales ledger. Other types of accounting transactions include accounts payable, payroll, and trial balance. A debt management plan is a formal agreement between a debtor and creditor(s). Debt Management Plans help reduce outstanding, unsecured debts at a reduced level over a fixed period of time to help regain control of finances. Debt Management Plans are individually tailored based on what can be realistically afforded on a monthly basis. To achieve an accurate figure, an income and expenditure test will establish what monies are coming into the household and what is being paid out. Income and expenditure includes everything, such as rent/mortgage, secured loans, utility bills, and essential living expenses (food & TV license etc). Once the income and expenditure is 3 completed, the leftover amount is your disposable income which is divided amongst creditors through a Debt Management company. Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.Company can sell the goods on credit or cash. Cash sale is inflow of cash and it is controlled under cash flow analysis. But credit sale creates sundry debtors. Company has to receive money from them. If company starts to sell on return of cash, then it decreases the level of company’s sale and profitability. On the other side, if company promotes credit sale, it can increase the risk of bad debts. So, it is required to control and to manage debtors. Meaning of Debtor management Debtor management means the process of decisions relating to the investment in business debtors. In credit selling, it is certain that we have to pay the cost of getting money from debtors and to take some risk of loss due to bad debts. To minimize the loss due to not receiving money from debtors is the main aim of debtor management. Main elements or dimensions of Debtors management For effective debtor management, following elements should be analyzed Credit policy Credit policy effects debtor management because it guides management about how to control debtors and how to make balance between liberal and strict credit. If company does not 4 restrict to sell the products on credit after a given limit of sale. This liberated credit policy will increase the amount of sale and profitability. But risk will also increase with increasing of sale. If we sell the good to those debtors whose capability to pay is not good, then it is possible that some amount will become bad debts. Company can increase the time limit for paying by such debtors. On the other hand, if company’s credit policy is strict, then it will increase liquidity and security, but decrease the profitability. So, finance manager should make credit policy at optimum level where profitability and liquidity will be equal. We can show it graphically. BOOK KEEPING FOR ACCOUNTS RECEIVABLE Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an allowance account from the accounts receivable account. The first method is the allowance method, which establishes a liability account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable. The amount of the bad debt provision can be computed in two ways - either by reviewing each individual debt and deciding whether it is doubtful (a specific provision) or by providing for a fixed percentage, say 2%, of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement. The second method, known as the direct write-off method, is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective account receivable in the sales ledger. Receivable management – The term receivable management is defined as “debt owed to the firm by customer arising from the sale of goods/ services in the ordinary course of business.” The receivable represents an important component of the current assets of the firm.