Factors Affecting Investment in Receivables

Factors Affecting Investment in Receivables the Size of

Eowing are some of the factors that directly or indirectly affect the size of the receivables: 1) Size of Credit Sales: The major factor affecting

the size of the receivable is the volume of the credit sales. Receivables have a direct relation to the credit sales. As the credit sales increase, the receivables will also increase and vice versa. In case of a firm which is affecting only the cash sales, there will be no receivables. For example, supermarkets, chemist’s shop, etc.

2) Credit Policies: Another significant factor is the credit policy of the company. A company which follows conservative approach will find less amounts invested in the debtors whereas the one which allows some leniency will eventually find that the receivables are much higher.

However, if collections are prompt, then despite of having the liberal policy the receivables will be under the control. If the receivables are allowed to remain uncollected, the same may result in the bad debts.

3) Terms of Trade:

The terms of trade are also factors on which the size of receivables depend. Under this, the credit period and the discounting rates are related with to while deciding the terms of trade. Once finalised, they cannot be changed frequently as the same will affect the sales further.

4) Expansion Plans: A firm enters into new territories under the expansion plan. To establish roots in the new area it is important to have a good customer base and the same is only possible if the credit period is extended. Further, when the firm settles in the new region the credit period can be reduced. So, in the initial stages of the expansion, credit may be allowed and that will increase the size of the receivables.

5) Relation with Profits:

Credit policy of the firm has a close nexus with the credit sales, and sales determine the volume of profits of the company. With the increase in sales, the marginal cost decreases and thus the profit increases. Thus, a firm always focuses on increasing the sales. So, this process will ultimately increase the size of the receivables.

6) Credit Collection Efforts: The collection of credit should be prompt and an efficient one. Time to time reminders should be sent to the customer along with the copy of their accounts so as to ensure that they clear their dues within time. However, if the matter is not properly attended, the same may leave the firm in the financial trouble. So, monitoring the credit collection will reduce the size of the receivables.

7) Habits of Customers: The size of the receivables is also affected by the habits of the customers. Even though the customers are having the adequate cash balance, they might have habit of delaying the payment. In such a situation the firm should maintain cordial relations with the customers and encourage them obligations. to timely discharge their obligations.

Stability of Sales: If the business is a seasonal establishment, the sales during the season will be higher than in the other part of the year. So, the volume of receivables during the season will be quite high as compared to other part of the year.

9) Size and Policy of Cash Discount:

It plays a significant role in deciding the quantum of the receivables. Cash discount promotes early and timely discharge of the payments from the customers. If the same is allowed to the customers, investment in the receivables reduces to a considerable limit. In the event, such practice is not followed, the customers will be only paying on the due date and some even after the due date and the size of the receivables will increase.

10) Bill Discounting and Endorsement: A firm having agreements with the banks for discounting the bills of exchange or endorsing the same to the third parties experiences low level of investments. However, if the bills are kept till the maturity the investment level will increase.

Leave a comment