Accounts receivable analysis

Accounts receivable analysis requires the financial manager to balance the cost of increasing accounts receivable with the benefit received from allowing people a more flexible account.

Accounts receivable analysis is a difficult art, and requires the use of other analysis techniques like SWOT analysis, Porter's five forces assessment and Pestle analysis. Accounts receivable analysis varies considerably between firms because of the unique operating characteristics of each of them. There is no universal optimization model determining the best accounts receivable policy for all firms. And there are many accounts receivable analysis tools that analysts need to master, from advanced statistical techniques to the customer satisfaction survey. To maximise the usefulness of this technique you need to take account of every accounts receivable factor.

Accounts receivable analysis for retailers

The decision of whether or not to incur an accounts receivable cost is dictated by industry conditions. For retailers like Tesco, offering customers flexible accounts is usually taken for granted. This can be achieved through deals with banks and also, like Tesco, through in-house plans.

The Tesco Buy Now Pay Later scheme is one of the most comprehensive plans in the marketplace. Trainers should note that it is a useful model to point to in account receivable presentations.

Tesco Buy Now Pay Later

The Tesco Buy Now Pay Later scheme allows selected customers to purchase selected items from Tesco Direct interest free for a number of months. During this time customers do not have to make payments on these items. Tesco Buy Now Pay Later is a special offering from issued by Tesco Personal Finance, the in-house personal finance arm of Tesco PLC. The customer musty have sufficient finances to cover the cost of bought items to use this scheme.

The "five Cs" of accounts receivable analysis

In deciding whether or not to incur accounts receivable risks from a customer, accounts receivable managers use the "five Cs" of accounts receivable analysis. The five Cs are: character, capacity, capital, collateral, and conditions. The manager has to answer a question for each of the five Cs:

• Character: Is the the borrower is likely to keep his or her financial obligations?  
• Capacity. Does the the borrower have the financial capacity to meet payments?
• Capital: Is the customer's general financial condition in a good state?
• Collateral: Are there assets, such as a house, that can act as security. 
• Conditions: Is the operating financial condition of customer in a good condition? is he or she receiving a steady wage from a stable company?

Judging the character, capacity, and collateral of a customer is usually the job of commercial financial services.

Increasing accounts receivable usually entails three kinds of costs: 

• The cost of financing accounts receivable
• The cost of offering discounts
• The cost of bad-debt losses. 

The relationship of these costs to financial situation of the customer must be established. The marginal cost of extending accounts receivable must be compared to the expected marginal profit. 

As well as deciding which customers to include, and under what terms, the accounts receivable manager is responsible for accounts receivable analysis and the supervision of money collection. For instance, agreement to collect accounts receivable can be set up with customers at risk. Valuation of uncollectible accounts receivable should be made to make sure profits are not affected.

The importance of accounts receivable collection cannot be stressed too highly. Every possible source of information on leveraging accounts receivable must be consulted. There are many sources of tips on accounts receivable collection procedures that can be found on the internet. Accounts receivable managers should also seek out accountancy courses to help their career path.

Accounts receivable trade insurance can be sought to achieve protection against bad customer debt.

Past due accounts are usually the best candidates for bad-debt losses, and the manager must follow them up. This requires some skills in diplomacy. A balance between the need to collect the account and the need to maintain customer goodwill must be struck. But if the customer cannot pay, goodwill is soon withdrawn. A consistently delinquent accounts customer is likely to have cash on delivery and advance payment processes instituted for future sales to his or her account.