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Managing Receivables: An Essential Element of Working Capital

Published:Dec 2024

In my previous post, I discussed the importance of working capital for any organization. In this post, I aim to delve deeper into one of its critical components— Receivables  (or Sundry Debtors, as they may appear in company accounts).

Receivables generally include amounts owed to a company for the sale of goods or services on credit. While receivables can be both short-term and long-term, only short-term receivables form part of working capital, as they are directly tied to day-to-day operations. These typically arise from credit sales made to customers.

Understanding Receivables

In a competitive environment, offering credit to customers is often the norm. When goods or services are sold on credit, receivables are generated. Broadly, receivables can be divided into two categories:

1. Not Yet Due: Payments are pending but still within the agreed credit period (e.g., payment due 60 days after sale).

2.Overdue: Payments where the credit period has expired.

Balancing Credit Policy and Competitive Advantage

Both categories create a financial burden for the organization. Companies must manage funds to meet daily operational needs until payments are received, which incurs costs. Even for cash-positive companies (those without loans), there is still an opportunity cost: funds tied up in receivables could otherwise generate interest if deployed elsewhere. Therefore, managing and controlling receivables becomes crucial to reduce costs and improve returns.

In competitive markets, customers expect credit periods. Offering credit can attract business, but it also comes with risks. Some companies, in an attempt to boost sales or gain a competitive edge, offer longer credit periods than usual. However, this strategy often backfires—customers will start demanding the longest credit period ever offered.

To avoid this, a clear and consistent credit policy is essential. As a guideline, credit periods in most industries range between 30 to 60 days. Special exceptions can be made, such as offering a 90-day credit period backed by a Letter of Credit (LC), as it ensures guaranteed payment on the 90th day. However, such exceptions should be carefully monitored to ensure they do not become the norm.

To maintain control, any requests for credit periods exceeding the company’s policy should require approval from higher management, such as the Sales Director. This decision-making process occurs before accepting an order, which makes it fully controllable.

Streamlining Credit Management: Invoice Generation and Delivery

In the credit management process, it is important to map the entire cycle from goods shipment or service delivery to invoice generation and delivery to the customer. Speeding up and streamlining this process can significantly reduce the number of days outstanding. Delays in raising or delivering invoices often lead to payment delays, which increase the financial burden. Therefore, improving efficiency in this area goes a long way in optimizing receivables management.

Streamlining Credit Management: Invoice Generation and Delivery

Once a credit period is agreed upon, the next critical task is ensuring timely collection. Unlike setting credit terms, this process is not entirely within the company’s control. How many of us have customers who pay on time without follow-ups?

Proactive follow-ups are essential to ensure timely payments:

• Start early: Follow up before the credit period expires. Regular contact with the customer’s purchase and finance departments helps identify and resolve potential issues before the due date.


• The “early bird” approach: Early intervention creates a sense of urgency, ensuring payments are prioritized.


• Distinguish customer behavior: Some customers delay payments despite having no cash flow issues, while others face genuine financial constraints. Identifying such patterns in advance helps manage subsequent supplies and exposure to larger overdue amounts.

Tools for Effective Receivables Management

1. Credit Limits: Setting dynamic credit limits for customers—based on their payment history, outstanding amounts, and agreed credit periods—can mitigate risks. Modern ERP systems allow businesses to monitor credit limits and pause further supplies when limits are exceeded. Overriding limits should require approval from higher authorities with clear justification.

2. Legal Action: In extreme cases, legal measures may become necessary. Companies can issue legal notices or even file winding-up applications for significant unpaid receivables. Maintaining proper documentation to prove receivables is critical in such scenarios.

3. Balance Confirmation: Companies should conduct an annual confirmation of balances exercise, where both parties sign off on outstanding amounts. This helps avoid disputes and strengthens documentation for legal or audit purposes.

The Importance of Robust Systems and Processes

Efficient receivables management requires a well-structured process backed by real-time monitoring and follow-ups. Organizations with robust systems can identify delays early, escalate issues, and involve senior management when necessary. Performance metrics tied to collections—such as in variable pay structures— also incentivize teams to achieve targets.

The Outcome: Profitability and Cash Positivity

Organizations with disciplined receivables management systems benefit in multiple ways:

• Lower provisions for doubtful debts
• Higher profitability due to reduced interest costs
• Improved cash flow, enhancing overall financial stability

Such companies are process-driven, efficient, and well-positioned for growth. This is the standard that all organizations should strive to achieve.

For more discussions on consultation on this topic, please connect with verghese.oommen@camsconsulting.in / www.camsconsulting.in