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Objectives

The term receivables is defined as ‘debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business’. 1 When a firm makes an ordinary sale of goods or services and does not receive payment, the firm grants trade credit and creates accounts receivable . which could be collected in the future. Receivables management is also called trade credit management. Thus, accounts receivable represent an extension of credit to customers, allowing them a reasonable period of time. in which to pay for the goods received. The sale of goods on credit is an essential part of the modem competitive economic ‘systems. In fact, .credit sales and, therefore, receivables, are treated as a marketing tool to aid the sale. of goods. The credit sales are generally made on open account in the sense that·there are no acknowledgements of debt obligations through a financial instrument. As a marketing tool, they are intended to promote sales and thereby profits. However, extension of credit involves risk and cost. Management should weigh the benefits as well as cost to determine the goal of receivables management. The objective of receivables management is ‘to promote sales and profits until that point is reached where the return on investment in further funding receivables is less than the cost of funds raised to finance that additional credit (i.e. cost of capital)”.2 The specific costs and. benefits which are relevant to the determination of the objectives of receivables management are examined below

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