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Accounts receivables are the amounts of money that a firm is owed from customers given credit for purchases of goods and or services.

The terms of the credit are agreed in writing, or through the customers dealings with the supplier. I would suspect that all of the terms regarding credit are obtained mostly in writing so that both parties are clear of their position.

The way in which the cost of accounts receivables are calculated are in terms of the bad debts incurred in having a high amount of debtors owing the company money, some customers will not pay, or who are no longer in a financial position to pay the supplier. This is usually if managed well a relatively small percentage of total accounts receivables.

Secondly the cost of collecting the debts is another area where the company has to collect via their own in-house credit control and sales ledger collection department. The salaries and bonuses that are associated with an accounts department also add a cost to the company.

Thirdly the length of time taken to collect the money from the credit customers is perhaps the most important area that a credit control team should understand. The longer the time taken in days the greater the cost to the company. This delay is a crucial part of working capital management cycle.

An alternative method of managing accounts receivable finance is by using a factoring company.

This involves the factor lending the company typically 80% of the total accounts receivable. The factor agent is then placed in charge to collect the outstanding balances from the customers. The remaining 20% of the amounts are paid when the total amounts are collected successfully. The factor will take a fixed percentage of the outstanding balances. Typically factoring companies will only deal with high level of business amounts. The cost of this service is dependant upon how fast the factor can collect the amounts in comparison to the companies in-house credit collection staff. If the factor can collect the money within 30 days, in comparison to the companies in-house staff which say takes 60 days, then the factor will be considered as worthwhile. The use of the factoring services also reduces the need to employ in-house staff along with the avoidance of bad debts, as the factor is responsible for every aspect relating to credit control collections.

I hope this review, helps. Thanks

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