Linear Risk in Receivables Management
Introduction:
Receivables Management is an area, which requires constant attention. In simple terms, Receivables risk is associated with non collection of monies from customers. But there are areas of interests, which needs to be looked into, by businesses for efficient receivables management.
This requires specialised resources, who are trained in the nuances of collections so that, the working capital of businesses are healthy and collections cycle are efficient.
Credit Limit Review Risk:
Credit limits are financial thresholds upto which, a customer can take the goods or services on Credit. The credit limits are set ups in ERP or sales, accounting applications so that, beyond the threshold, a customer can't take the goods or services on credit unless the dues are settled.
However, many businesses do not review the credit limits regularly, and this poses a greater danger to an efficient collection process. Due to vagaries of business, a customer's ability to pay the debts on time reduces over a period of time. This poses a higher risk in the receivables management.
Customer Account Review Risk:
For regular customers as well as new ones, timely review of accounts and mutual exchange of information on outstanding overdue and sticky accounts are healthy business practices.
But, if there are laxities on the part of receivables team and the management, a sizeable part of dues may be subject to disputes over a period of time. Therefore, the accountants and collection analysts need to provide the required information to debtors as well as collect the Promise to Pay dates. This simple process of review and sharing of information eliminates disputes at a later point in time.
Customer's Solvency Risk:
This is an area of great interest for businesses to reduce their exposure to bad debts. Unlike other risks, this can't be assessed through information available at the seller's hands.
Therefore, businesses need to keep their eyes and ears open on customer's financial solvency thru, publically available information, Customer's payment pattern, Collection of information from industry bodies and competitors.
Invoicing Risk:
Businesses need to be very vigilant about their Invoicing Vs. Collections petterns. Sometimes, the lack of attention to comparative analysis ends up in bad debts. For example:
A customer may be making payments only against specific goods or services leaving out the rest of the invoices. This results in high exposure.
In a high volume business, a customer may be taking a good or service on credit over a period of time, but not making any payments. The Non-payment is identified after a long delay.
Mutual Transactions related Risk:
Businesses may have multiple relationships wherein a customer who is buying may also act as a vendor. Greater attention into payment settlements are required in the following areas,
Accuracy of Accounting adjustments between payables and receivables, more specifically in cross currency transactions.
A business may be effectively settling the dues against the payables, but the customer may not be settling the monies against receivables.
This will have a lop sided effect and will result in sizeable bad debts.
Conclusion:
For managing the Linear risks on receivables, a business need to be vigilant, give attention to details, use of ERPs effectively, train their people on a regular basis and effectively supervise the resources. This will go a long way for a healthy receivables management.