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Feb 24 2013

How to manage accounts receivable (debts receivable)

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   Everyone knows that any business activity requires the use of funds. The company receives the funds from the sales activity and spends them to ensure its operational activities. If funds are not sufficient for the operation of the enterprise, it will sooner or later cease to operate. That is why financial managers need to constantly monitor the cash flow of the company. If the company does not use the principle of pre-payment it will always have accounts receivable. In this article will be considered features of the formation, registration, turnover and collection of accounts receivable.

Accounts receivable (Debts receivable) is a client’s debts for the goods, performance of work or services provided.

Conditions of payment must be stipulated in all contracts for the supply. Customer may be granted deferment of payment for a certain period under these conditions. Sales department or financial manager must control maturities of debts identified in the contract.

When planning the company revenue necessary to consider that the sales of goods and services are recorded in accounting in the debit of debts receivables and in the credit of company revenues accounts. This means that revenue is recognized in the amount of debts.

Debts receivable is divided by:

  • current debts (the term of a debt turnover up to 30 days),
  • short debts (term from 30 to 60 days),
  • long-term debts (for more than 60 days).

Current and short accounts are the good debts. Long-term debts may become doubtful debts.

Doubtful debts definition: if the maturity of debts comes and debt not repaid, the debt is transferred to the category of doubtful debts.

In case of doubtful debts legal department must send the debtor a claim with the requirement to recover the debt. If the debtor does not satisfy directed claim legal department must send a claim for repayment to the court.

If the debtor is declared bankrupt, the statute of limitations has expired or the court rejected the claim for the recovery of debts such debt is considered as uncollectible debts and deducted from the balance sheet of the company.

To predict the cash flow proceeds from repayment of debts finance manager should group all debts in terms of its appearance and define doubtful debts (reserve for doubtful debts).

Reserve for doubtful debts is calculated by determining the percentage of doubtful debts (bad debt percentage) and debts amounts available for each period incurred.

Percentage of doubtful debts is determined on the basis of analysis of doubtful debts of previous periods as follows:

PDD = DDpp / DR x 100%,

DDpp is average amount of doubtful debts of the previous period,
DR is the total amount of accounts receivables on the date of analysis.

Forecast of the revenues from repayment of the accounts receivable can be done by using the following table:Reserve for doubtful debts definition

Instance.

Total accounts receivables of company on 01/01/2013 is 250.0 thousand of dollars, from it debts to 30 days – 180.0 thousand dollars, debts from 30 to 60 days – 60 thousand of dollars, debts more than 60 days – 10 thousand of dollars.

Total accounts receivables of company on 01/01/2012 was 300.0 thousand of dollars, from it debts to 30 days – 250.0 thousand dollars, debts from 30 to 60 days – 40 thousand of dollars, debts more than 60 days – 10 thousand of dollars.

An average doubtful debt in year 2012 for a period of 30 days was 2.0 thousand of dollars, for a period of 30 to 60 days – 5.0 thousand of dollars, for a period longer than 60 days – 7.0 thousand of dollars.

Calculation of the bad debt percentage for each period:

Period of debts

Total accounts receivable

Doubtful debts

Bad debt percentage (сolumn 4/5*100%)

1

2

3

4

5

1

to 30 days

250.0

2.0

0,8 %

2

from 30 to 60 days

40.0

5.0

12,5 %

3

more than 60 days

10.0

7.0

70,0%

Total

300.0

14.0

4,7%

Now lets calculate the forecast cash flows of the company:

Period of debts

Total accounts receivable

Bad debt percentage

Reserve for doubtful debts (сolumn

3 x 4)

Expected total cash receipts from the repayment of receivables
(
сolumn 3 – 5)

1

2

3

4

5

6

1

to 30 days

180,0

0,8 %

1,4

178,6

2

from 30 to 60 days

60,0

12,5 %

7,5

52,5

3

more than 60 days

10,0

70,0%

7,0

3,0

Total

250,0

 

15,9

234,1

So, predictably company will get 178.6 thousand dollars over 30 days, 231.1 thousand dollars (52.5 + 178.6) within sixty days and 234.1 thousand dollars when repaying the total accounts receivables.

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