For example, at the end of 2019, Sears, Roebuck, and Company’s accounts receivable totaled over $15 billion, and IBM’s totaled over $6 billion.
The ability of these firms, as well as others, to collect these amounts affects their cash liquidity and financing needs.
In a cash-tight economy, this is an essential aspect of overall cash management.
The ability of a firm to collect its credit sales depends on
(1) the initial decision about to whom to extend credit,
(3) general economic conditions.
A firm obviously has more control over the first two factors than over the third.
In large firms, the credit department is charged with the responsibility of granting credit as well as subsequently collecting unpaid accounts.
In smaller firms, this responsibility often lies with the owner-manager.
In deciding whether originally to grant credit or to extend credit limits, the firm must Obtain information about customers, such as their financial condition and past credit history.
This information can be obtained through credit applications and the services of credit rating bureaus.
If January 1, 2019, Mr. C sold goods worth $1,000, and cash is not received but postponed to Feb.1, 2019.
This will be termed credit sales.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.