As a business, the accounts receivables are one the company's sources of cash. Accounts receivable is like cash in the bank. It shows up as an asset on the balance sheet because it means value in the business. (Muckain, 1998)
When looking at the budgeted profit and loss statement of the company (see Table 1), the net income of the company is not stable. This means that revenues and expenses that are incurred for the month are actually revenues and expenses that should have been incurred on a different month. As mentioned, this situation happens because of the long turnover of accounts receivable while the accounts payable are settled within the month. However, the practice of the company of maintaining inventory stocks with a lead time of half of the next month's demand is commendable, since it is enough to satisfy the demand of the market while preventing over-stocking or under-stocking of inventory.
Effective credit control is one way of improving the cash flow of the company. A good credit control system increases sales, reduces bad debts and increases profits. The credit control can also increase the creditworthiness of the company and build confidence in the banks. An effective control system focuses on the accounts receivable of the company. (Brealey, Myers, & Marcus, 2001)
It is a practice of companies to allow a d ...