Question

DB Post:

Most of receivables are expected to be received in sometime later dates. Then, what is the problem a company may encounter if it cannot collect the money from the receivable? What measures does a firm can take to reduce possible losses?

Answer 1

Followings problem a company may encounter if it cannot collect the money from the receivable;

1. Working capital condition in future time may be affected negatively because due to fall in current assets net working capital will be negatively affected.

2. Company’s short-term debt paying capacity will be negatively affected due to shortage of funds.

3. Company can loose chances of getting more short-term financial assistance from banks because banks checks short-term assets.

4. If company does not collect money from receivables then this company can not take advantage of available opportunities in the market due to shortage of funds.

5. It will make negative impact on the income statement because bad debt expenses need to be debited in the income statement. Ultimately it will reduce net income of the company.

6. Overall financial position of the company will not show good image for the external users hence investors may be demotivated for making investment etc.

Followings measures a firm can take to reduce possible losses;

1. Firm can revise its’ payment terms so that receivables can make proper adjustments in making payment. It is quite possible that due to bad financial position receivables are not in position to make payment hence revision of payment terms will improve this condition.

2. Proper checking of credit worthiness of future receivable should be made so that chances of loss can be minimized.

3. A firm can make proper provision for undoubtful debts on the basis of past records and conditions of the receivables so that proper funds can be kept for emergencies.

4. Firm can take help of third parties for collecting amount from receivables so that atleast some funds can be realized immediately.

5. A firm can improve its’ system of sending invoice & sending notice, so that these can be done in timely manner.

6. A firm may offer substantial discount to the receivables so that quick amount can be realized from them etc.