Why a business needs to control trade receivables
-
Why a business needs to control trade receivables
The first reason why a business needs to control trade receivables is to ensure that credit terms are not breached. This is to help identify and act on those customers or trade receivables who exceed the agreed terms. And this is to also avoid problems of non-payment and reduce the risks of trade receivables turning into bad debts or irrecoverable debts. The second reason why a business needs to control trade receivables is to improve the business cash flow. Managing or controlling trade receivables ensures that money is received on time and this can then be used for expenses that then can be paid on time. Bad management or control of trade receivables may result in; a delay in paying suppliers and also strain the relationship with them. It could also force the business to borrow which is more costly and reduces profit. And worst of all this could cause the business to fail and become bankrupt due to a lack of cash flow. The third and final reason why a business needs to control trade receivables is that it complies with the accounting standards. If the business is actively managing or controlling trade receivables this should allow them to give a more realistic value of the trade receivables and this applies to the prudence concept. Additionally managing or controlling the trade receivables will allow the business to understand whether there needs to be a provision for the doubtful debts and also whether there is an expense for bad debts. And as a result that adheres to the accruals and matching concept as an expense or provision is matched to the period of sales.
