Accounts receivable management

Accounts receivable is an integral element of the sales activities of any enterprise. A fairly large part of it in the overall asset structure reduces the liquidity and financial stability of the enterprise and increases the risk of financial losses for the company. Modern conditions for the development of the economy of our country provide for the dynamism of the development of mutual settlements between counterparties. In such conditions, special attention must be paid to accounts receivable. Very often it is defined as a component of working capital, which represents requirements for individuals or legal entities regarding payment for goods, products, and services. There is a tendency to equate accounts receivable with trade credit. A commercial loan is provided to the buyer taking into account its cost (the company's resources are provided for use on a paid basis) and urgency (the period of use of the funds provided is limited). According to accounting standards, accounts receivable is the amount owed by debtors to an enterprise as of a certain date. Debtors can be both legal entities and individuals who owe the company cash, cash equivalents or other assets. Based on accounting data, you can determine the amount of debt as of any date, but usually this amount is determined as of the balance sheet date. Typically, the economic benefit from receivables is expressed in the fact that the company, as a result of its repayment, expects to sooner or later receive cash or cash equivalents. Accordingly, a receivable can be recognized as an asset only when it is probable that it will be repaid by the debtor. If there is no such probability, the amount of receivables should be written off. If a debt cannot be properly valued, that is, its amount cannot be determined, it cannot be recognized as an asset and should not appear on the balance sheet. Thus, accounts receivable can be defined as a current asset of an enterprise that arises in its sales activities and characterizes the relationship between counterparties in paying the cost of the goods (work, services) received. A review of statistical data for Ukraine for 2006 shows an increase: accounts receivable for all business entities (except for small enterprises and institutions that are supported by the budget) as of April 1, 2006 amounted to UAH 346.9 billion. During January-March 2006, accounts receivable increased by 8.2%. The share of overdue debt in the total amount of receivables was 20.4% versus 21.6% as of January 1, 2006. The government considers the situation in the housing and communal services sector extremely acute. Its long-term unprofitability and consumer receivables have led to the fact that local executive authorities are irresponsible in the quality and volume of provision of relevant services to the population. As a result, the housing stock and utility infrastructure are not brought into proper technical condition, and the costs of electricity, fuel, and water are not reduced. Working with accounts receivable, that is, the process of managing it, is an important point in the activities of any enterprise and requires the close attention of executives and managers. Determining approaches to accounts receivable management, stages and methods is a problem that does not have a clear solution and depends on the specifics of the enterprise’s activities and the personal qualities of management. Since accounts receivable management is a component of the enterprise management system, the process of managing it can be carried out in stages. In addition, accounts receivable management occurs over time, and it is natural that it must be presented in the form of some stage system. According to I.A. Form, the formation of algorithms for managing accounts receivable is carried out in the following stages: analysis of the enterprise's accounts receivable; choosing the type of credit policy of the enterprise in relation to product buyers; determination of the possible amount of working capital, which is aimed at receivables for commercial and consumer loans; formation of a system of credit conditions; formation of standards for assessing buyers and differentiation of loan conditions; formation of a procedure for collection of receivables; ensuring the use of modern forms of refinancing of receivables at the enterprise; building effective systems for traffic control and timely collection of receivables. G.G. came to almost the same conclusion. Kireytsev, but complementing I.A. Blanca, he identifies several more stages: monitoring the financial condition of debtors; in case of non-payment of the debt or part thereof, establishing operational communication with the debtor with a view to recognizing the debt; filing a claim with the economic court for collection of overdue debt; compensation for losses from the bad debt fund. Russian experts identify four main areas of work on managing accounts receivable: planning the size of accounts receivable for the company as a whole; management of customer credit limits; control of accounts receivable; employee motivation. To manage accounts receivable, an enterprise needs information about debtors and their payments: data on invoices issued to debtors that are not paid at the moment; time of overdue payment for each invoice; the amount of bad and doubtful accounts receivable, assessed on the basis of standards established by the company; credit history of the counterparty (average period of overdue, average loan amount). Typically, such information can be obtained by examining the accounting system. However, before starting to study the system, it is worth determining the principles of accounting and control of accounts receivable. The author of this article identifies the following stages of accounts receivable management: building a system for accounting and monitoring accounts receivable; development of credit policy; automation of accounts receivable management. In general, the above stages of accounts receivable management are based on the basic management functions. Based on the definition of management, which is given in the work of a team of authors under the leadership of V. M. Zarubinsky, management is a function of organized systems of different nature (biological, social, technical), which ensures the preservation of their specific structure, support of the mode of activity, and the implementation of their programs and goals. It is proposed to distinguish such stages in the receivables management process. First stage of management- planning the amount of accounts receivable - was, is and will be one of the most important. This is due to the fact that in the process of implementing work on planning the amount of receivables, it is necessary to take into account not only the parameters of receivables that characterize its condition, but also a number of external factors that can significantly affect the final results of management. In the process of accounting for receivables, information is collected about the financial position of debtors, on which the status of receivables depends. The main difficulty at this stage is to determine the minimum volume and nomenclature of data that allows the managing entity to have a clear idea of ​​the state of the control object. This circumstance is connected with two points. The first point is due to the fact that collecting and processing accounting information requires funds, which are always limited. The second point is due to the fact that information may be duplicated and late, and this does not contribute to making an informed decision. Second stage of management- control of the amount of accounts receivable, which involves comparing actual accounting data with planned or budgeted ones. In the era of centralized planning, it was enough to develop planned indicators, but in market conditions, planned indicators must be formed while studying the market, which requires the development of business development plans and budgets. Due to the lack of a system of planned indicators of the enterprise's activity, the control stage performs slightly different functions; in fact, control comes down to comparing accounting data only for the past and current (planned) period. Therefore, an effective management process must be based on a general enterprise management system. At the third stage- analysis of receivables - factors are examined and identified, the influence of which led to deviations of the actual parameters of the state of receivables from planned indicators. Fourth stage- the stage of developing a number of alternative solutions or determining the optimal solution. To formulate several possible solutions aimed at improving the situation in which the enterprise finds itself, information collected at the analysis stage is sufficient. Based on this information, it is possible to create a system of restrictions regarding the corresponding objective function, as well as to rank the reasons that most influence the amount of receivables. The same cause can cause several consequences, and the elimination of these causes is simulated in order to evaluate possible results. In this way, several alternative solutions are developed or even the optimal solution is determined. Fifth stage - phase of implementation of one or more alternative solutions - at this stage the implementation of the adopted optimal solution or several alternative solutions is carried out. At this stage, the necessary means are determined, as well as the procedure for implementing the decision. An important issue when managing accounts receivable is its classification. Depending on what characteristic is used as the basis for its classification, you can use a variety of methods for managing receivables. The traditional classification of receivables provides for their distribution according to legal criteria as urgent or overdue. Urgent refers to receivables, the repayment period of which has not yet arrived or is less than one month and which is associated with the normal settlement terms defined in the agreements. Overdue is a debt in violation of contractual terms. Next, it is important to understand the concept of doubtful debt, which is understood as a current receivable, regarding which there is uncertainty about its repayment by the debtor. It is clear that debts of this type continue to appear on the creditor’s balance sheet as long as there is at least a slight certainty of their repayment. They will be written off from the balance sheet only when they become hopeless. Therefore, we will separately highlight bad receivables, to which we include current receivables, in relation to which there is confidence that the debtor will not return them or for which the statute of limitations has expired. According to P(S)BU 10, accounts receivable are divided into long-term and short-term. Long-term receivables are debts that do not arise during the normal operating cycle and will be repaid after 12 months from the balance sheet date. P(S)BU 2 “Balance” defines the operating cycle - this is the period of time between the acquisition of inventories for carrying out activities and the receipt of funds from the sale of products or goods and services made from them. There is no definition of a normal operating cycle in the standards, however, using the previously given definition of an operating cycle, we can conclude that this is an operating cycle under normal operating conditions. Usually the operating cycle does not exceed 12 months, but for some types of activities it can last more than one year. Despite this, debt incurred during such an operating cycle is usually considered current rather than long-term. Therefore, long-term debt is mainly non-operating debt. Current receivables (short-term) are debts that arose during the normal operating cycle or were repaid within 12 months from the balance sheet date. Thus, if the debt that has arisen is not related to the operating cycle, but it is envisaged that it will be repaid in less than 12 months, then such debt is recognized as current. The balance sheet date is usually the last day of the reporting period. From the previously given definitions of long-term and current receivables, one can conclude: since the classification of debt as current or long-term is tied to the balance sheet date, as of that date, long-term debt for individual debtors should be reviewed according to their maturity dates. If it turns out that there are less than 12 months left until the debt is due, the previous long-term debt should be displayed as current on the balance sheet date. B.O. Zhnyakin and V.V. Krasnov offer the most complete classification of receivables on an urgent basis, namely: current, urgent, overdue, long-term and hopeless. The classification of receivables can be based on the distribution of receivables depending on the target groups of debtors. In this case, marketing approaches are used that are based on the study of consumer behavior. Accounting for various reasons for non-payments and the real possibilities of citizens to pay their debts is decided on the basis of accounting data on payments and debts. One such method is the ABC analysis method. Due to the fact that this term came from abroad, confusion often arises between the “ABC method” (from the English Activity Based Costing) and the “ABC-analysis” from ABC-Analysis. Their essence is completely different. The ABC (Activity Based Costing) method is a method of determining and accounting for expenses by type of activity of an organization, a method of operationally determining and accounting for expenses. ABC analysis (ABC-Analysis) is associated with the name of the Italian economist and sociologist Vilfredo Pareto (in statistics, the well-known “Pareto diagram”). This method is based on the law discovered by the Italian economist V. Pareto, which says that most possible results are responsible a relatively small number of reasons, at the moment this law is better known as the “20 to 80 rule”. This method is used in domestic practice and more widely abroad both for selecting objects from the general range of products that are produced by the enterprise, and within one type. products. The ABC analysis method is based on the distribution of a set of potential objects into groups based on the specific weight of a particular indicator. The literature provides examples of ABC analysis in terms of turnover, profit, labor intensity, material costs, and even such parameters as speed and consumer power. Regarding accounts receivable, it can be formulated this way: 80% of the amount of accounts receivable can be attributed to 20% of the debtors. The number of groups when conducting ABC analysis can be any, but the most widespread is the division of the considered population into three groups (75:20:5), which, obviously, determines the name of the method, known abroad as ABC-Analysis. Group A - a small number of objects with a high level of specific gravity for the selected indicator. Group B - the average number of objects with an average level of specific gravity for the selected indicator. Group C - a high number of objects with an insignificant share of the selected indicator. GG. Kireytsev proposes a ratio (75:20:5) to determine the degree of importance of buyers: A - buyers are those with whom the company makes approximately 75% of its turnover. This turnover accounts for about 5% of buyers. B - buyers (20%) give, as a rule, 20% of the turnover. C - buyers (75%), turnover is approximately 5%. This interpretation of the Pareto rule regarding accounts receivable is also possible. Debtors of group A are the most important debtors, those 20% that account for 80% of receivables, which deserve increased control, since this is where the effort will be justified. Group B - debtors of medium importance, those who in total account for 15% of receivables and require attention only occasionally. Group C - unimportant debtors are those who account for 5% of the enterprise's total receivables. You should not devote too much effort and time to managing debtors of this group. The sequence of analysis: firstly, calculate the total amount of debt of all clients on the list; secondly, calculate 80% of this amount; thirdly, by summing up the debts on the list, starting with the part where the debts are the largest, that part of consumers who owe 80% of the total amount. Their number is significantly less than the number of debtors. The selected group of citizens is the first and main target audience, given its relative smallness and the bulk of the debt (80%). Work with this category of debtors should be based on a personal approach. These efforts are justified by the amount of debt that will be repaid. In a similar way, two more groups are distinguished: the smallest will be the first, the most numerous - the third. This method makes it possible to form target audiences of debtors, to whom the applied methods of debt collection will differ, which will make it possible to choose the most effective methods of collection for this category. In addition, it is an advantage to select a group of debtors who accumulate the largest amount and who need to be given attention first. When applying the ABC analysis method, certain difficulties arise, especially for utility companies. They lie in the need to automate and computerize all relationships with debtors. At the same time, in utility companies, computerized accounting of payments should be kept not by houses or areas in general, as is always done, but by end consumers. The result of the analysis is lists of debtors with whom you need to work. The ABC analysis method is used mainly when managing receivables that already exist. To prevent the occurrence of unpredictable debt, you can use management with the establishment of credit limits. It represents the maximum allowable amount of accounts receivable both for the enterprise as a whole and for each counterparty, or is established for each of the company’s commercial departments, allocated according to the industry principle in proportion to the share of revenue for the previous period in the total sales volume of the enterprise and is approved by order of the General Director. The same scheme is used to distribute limits among managers who work with customers. Each manager, in turn, must distribute the credit limit he received among clients. As a rule, for new buyers who have been working with the company for no more than six months, the credit limit is set in an amount that does not exceed the average monthly sales volume. For counterparties who have been working with the company for more than six months, the credit limit is set by the manager and must be approved by management. When calculating these indicators, the company primarily focuses on its strategy; increasing market share requires a larger credit limit than maintaining its market share and accumulating free cash. At the same time, it is necessary to maintain sufficient liquidity of the enterprise and take into account credit risk (the risk of complete or partial loss of issued funds). In most cases, work with a new client begins on an advance payment basis. After statistics on payments and deliveries for the counterparty have been accumulated, he may be provided with a credit limit. The use of credit limits provides advantages when working primarily with new clients - it helps prevent the occurrence of uncontrolled receivables. Difficulties that arise in this case: mandatory automation of the process, knowledge of the counterparty, study of its credit capabilities and solvency, which requires close contact. The presence of significant amounts of receivables from Ukrainian enterprises, as evidenced by the analysis of statistical data, requires attention to the development of both a methodology for effectively managing existing receivables and preventing their occurrence. Managing receivables of any enterprise, including public utilities, in order to increase its efficiency, requires diversification of approaches. The ABC analysis method is one of many that is advisable to use in enterprises to determine the target audience. Since, the use of ABC analysis will allow for segmentation, which will make it possible to apply certain methods of influencing debtors. The use of credit limits will allow you to control the process of debt occurrence and make it controllable. The combination of the two methods discussed will allow you to effectively control the enterprise’s accounts receivable and develop effective measures to reduce it.

For the normal operation of an enterprise, working capital (assets) must be located at all stages of the production (operating) cycle and in all forms (commodity, production and monetary). The absence of any element of current assets at one of the stages leads to a stop in production. If goods are sold on credit, then the company needs working capital to cover accounts receivable until buyers pay for the products.

The full cycle of turnover of current assets is measured by the time from the moment of purchasing raw materials from suppliers to payment for products by consumers. An enterprise does not always receive funds from customers at the time of payment to suppliers for raw materials. Therefore, the problem of managing current assets arises.

Production cycle The organization is characterized by the period of full turnover of working capital used to service the production process, starting from the moment of receipt of raw materials, materials and semi-finished products at the enterprise and ending with the release of finished products.

The duration of the production cycle of an enterprise is determined by the formula:

PPV = PO + WIP + GP

PO PP - period of turnover of stocks of raw materials, materials and semi-finished products, days;

PO WIP - work in progress turnover period, days;

PO GP - period of turnover of finished goods inventories, days.

Financial cycle- this is the period of time between the deadline for payment of its obligations to suppliers and the receipt of money from customers. In other words, this is the period during which funds invested in current assets will complete one full turnover.

The duration of the financial cycle in an organization is determined by the formula:

PFC = PPC + PO DZ - PO KZ

PO DZ - average receivables turnover period, days;

PO KZ - average period of turnover of accounts payable, days.

Operating cycle characterizes the total time during which cash is stored in inventories and receivables. Since the organization pays supplier bills with a time lag, the financial cycle is less than the operating cycle for the period of time of circulation of accounts payable. The operating cycle characterizes the turnover period of the organization's total working capital and is calculated using the following formula:

POC = PCP + PO DZ

PO DZ - duration of receivables turnover, days.

Financial cycle management is the main content of managing the finances of an enterprise and its cash flows. Optimization of the financial cycle is one of the main goals of the financial services of an enterprise.

Obviously, ways to shorten the financial cycle are associated with shortening the production cycle, reducing the turnover time of accounts receivable, and increasing the time of turnover of accounts payable.

Shortening operating and financial cycles is a positive wealth management trend that can occur as a result of:

Reducing the time of the production process (storage period of inventories);

Rational reduction in the duration of production of the finished product and the period of its storage in the warehouse;

Use of progressive forms of logistics;

Accelerating accounts receivable turnover;

Slowdown in accounts payable turnover.

How many days does it take for a company to pay suppliers and receive cash from selling goods to customers?

This is exactly what the financial cycle (or money cycle, in English: Cash Conversion Cycle) shows. It gives an idea of ​​how long it takes a company to collect cash from selling inventory. Companies often finance the purchase of inventory from suppliers through accounts payable. Corporations also sell products on credit, without receiving all the funds from customers at the time of sale. Thus, accounts receivable are formed.

Formula

To calculate the duration of the financial cycle, you need to know several figures from the financial statements:

Revenue and cost of goods sold (COGS) from the income statement

Inventory level at the beginning and end of the period

Accounts receivable at the beginning and end of the period

Accounts payable at the beginning and end of the period

Number of days in a period (year = 365 days).

Let's look at each component separately.

1 . Inventory turnover(in days) (in English. Days Inventory Outstanding: This addresses the question of how many days it takes to sell all inventory. The fewer days the better.

DIO = (Average Inventory Level / Cost of Sales) * 365

Average Inventory Level = (Beginning Inventory + Closing Inventory) / 2

2. Accounts receivable turnover(in English. Days Sales Outstanding): the number of days required to collect funds from the sale. When selling goods for cash only, the DSO is 0, but often buyers take advantage of the deferment provided by the company. Again, the shorter the collection period, so much the better.

DSO = (Average level of DZ / Revenue)* 365

Average level of DS = (DZ at the beginning + DS at the end) / 2

3. Accounts payable turnover(in English. Days Payable Outstanding)in days: includes payments by the company to suppliers. If a company can hold funds longer, it will maximize its investment potential. Therefore, a longer DPO is better.

DPO = (Average short circuit value / Cost of goods sold)* 365

Operating cycle

The first two components of CCC, namely inventory turnover DIO and accounts receivable DSO, are the so-called operating cycle. It shows how many days it takes a company to sell products and collect funds from customers after the sale.

Operating cycle = DIO + DSO

Example 1

Below are the financial statements of ABC Company. All numbers are in millions of dollars.

Using the formulas above, let's calculate the duration of the financial cycle:

Inventory Turnover (in days) = ($95 / $300)* 365 days = 115.6 days

Accounts receivable turnover = ($35 / $560)* 365 days = 22.8 days

Accounts payable turnover = ($26 / $300)* 365 days = 31.6 days

Financial cycle = 115.6 + 22.8 – 31.6 = 106.8 days

Operating cycle = 115.6 + 22.8 = 138.4 days

Example 2

Apple has a negative financial cycle (minus 76 days). This means that the Company receives payment from customers long before Apple settles accounts payable with suppliers. Essentially, it is an interest-free way to finance your operations by borrowing from your suppliers.

Walmart customers take as little as 4 days to pay for their in-store purchases, mainly because people pay with cash or use Visa or Mastercard. The big difference between Apple and Walmart is inventory management. It's no surprise that Walmart keeps product on its shelves longer than Apple. Of course, the nature of Walmart's business is very different from Apple's. Therefore, it is unfair to compare these corporations. At the same time, Apple’s negative financial cycle is still a rarity among the largest conglomerates.

The daily activities of a company involve the transformation of assets from one form to another: materials are transformed into work in progress, which becomes finished goods; finished products are shipped and converted into accounts receivable, which are eventually returned in the form of cash from customers.

This requires money. Today I will tell you how to calculate how much cash is needed to support processes and estimate how much working capital you may have to additionally contribute to the business.

What is an operating cycle

The number of days that pass from the moment the material arrives at the warehouse until the moment it is shipped to the buyer in the form of finished products is called operating cycle.

The shorter the operating cycle, the more times we can turn over our assets, and the more profit we can earn. After all, each turnover of assets brings results in the form of profit for the reporting period.

Let me remind you of Dupont's formula:

How to calculate the duration of the operating cycle

Assets consist of materials, finished products, and accounts receivable. For each of these assets, it is necessary to determine the duration of the period.

Important: When we calculate turnover indicators, we take into account comparable indicators.

For example:

If we calculate turnover for 2016: then we take revenue and cost of goods sold from the income and expense report for 2016, and calculate the average balances, for example, of materials from:

Average balance of materials = (Balance of Materials at the beginning of 2016 + Balance of Materials at the end of 2016)/2

Turnover period in days = 365 / Turnover

Operating Cycle = Inventory Turnover Period + WIP Turnover Period + GP Turnover Period + Accounts Receivable Turnover Period

The Operational Cycle shows how many days are required from the time inventory is purchased until payment is received for shipped products. An equally important indicator is the duration of the financial cycle.

What is a financial cycle

The financial (cash cycle) shows how many days of the operating cycle must be financed with equity capital.

The average deferment that our suppliers provide us, that is, after what period of time we pay invoices, is shown to us by the accounts payable turnover period:

Let's calculate the number of days that must be financed using Equity Capital, or by attracting additional Borrowed Capital (in fact, this is the financial cycle):

The longer the Financial Cycle, the more funds are required to finance the activities of the enterprise.

An increase in the Financial Cycle indicates that the company is having problems with the turnover of goods, or with the return of receivables.

How to calculate the Financial Cycle in money

So, the financial cycle is the difference in days between how long it takes us to get money from customers and how long our suppliers are willing to endure waiting for payments. The difference between these periods is the period of time that requires additional funding.

Additional financing - can be in the form of attracting funds from the owner or obtaining bank (borrowed) financing. Attracting funds from the owner also means profit, which remains at the disposal of the enterprise. When attracting debt financing, you should monitor and not allow the amount of borrowed capital to exceed your own capital by more than 2 times.

To convert the Financial Cycle into money, you need to take , which you used when calculating turnover indicators. From it we take the sum of all expenses for the period. It includes, among other things, the cost of goods sold, the amount of labor costs, and the amount of administrative and commercial expenses - in general, all the expenses that you deduct from Revenue.

And then the amount of working capital (except for suppliers’ accounts payable) that needs to be contributed to the business is calculated as follows:

Let's sum it up

Any company activity requires funds and the owner must understand whether he will have enough equity capital or whether there will be a need to attract borrowed capital. And if so, in what quantity and for what period.

• The duration of the operating cycle directly affects profit - the shorter it is, the better, the higher the profit.
• The financial cycle should be as short as possible - this way you will have to attract less additional funds.
• When attracting borrowed capital, I monitored financial stability indicators.

The financial cycle is the period that is concluded between the date of repayment of accounts payable (payment by buyers for materials received and raw materials from suppliers) and the date of repayment of receivables (receipt of funds from buyers for the products they received). The second name of this concept is the cash flow cycle.

The financial cycle has a duration determined by the following formula:

PFC = POPZ + PODZ - POCZ,

where POPP is the period of circulation of inventories;

POZ - indicator of the circulation period;

POKZ is an indicator of the period of circulation of accounts payable.

Based on the above, the duration of the cash flow cycle is characterized by the average duration associated with the outflow of funds during the implementation of the main production activities, and the inflow as a result of their production and financial activities.

In other words, the financial cycle is the time during which turnover is diverted. This indicator is necessary when determining the effectiveness of the economic activity of the entity.

The company always has a reserve at its disposal, which it can use if necessary. We are talking about monetary resources represented by accounts payable. Indeed, money invested in production cannot simply be withdrawn from there in order to cover their short-term shortfall. Therefore, we are not talking about sales of inventories at reduced prices. The situation is similar with accounts receivable. To obtain additional funds, the business entity seeks certain changes in relations with debtors.

The financial cycle of an enterprise shows the effective regulation of those same accounts payable. Thus, the moment of payment can be successfully managed, and if a critical situation arises, the repayment of such debt can be delayed. In other words, it indirectly regulates the volume of current cash and should be taken into account when assessing the financial performance of the company.

When analyzing the activities of an entity, specialists note the relationship between the operating and financial cycles, but at the same time they describe various aspects of the functioning of the enterprise. Thus, with the help of the operating cycle, the technological aspects of the company’s activities are also given. It shows the time during which financial resources are frozen in the form of inventories and receivables.

The financial cycle shows precisely the financial aspect of activity. Due to the payment of bills, the enterprise experiences a certain time lag - the time for which monetary resources are withdrawn from circulation is less than the average accounts payable turnover.

With a dynamic reduction in operating and financial cycles, experts regard this fact as a positive trend. The reduction in size is achieved mainly by increasing the speed of the production process and accelerating the turnover of receivables. And the financial cycle can be reduced due to some reduction in the turnover of accounts payable.