Opportunities to improve the process of managing the receivables of the enterprise

Kateryna Fedorova
student of the 4th year of economics faculty
National University of Ostroh Academy

Scientific supervisor : Kharchuk Yuliya Yurievna
associate professor of finance, accounting and audit department

Opportunities to improve the process of managing the receivables of the enterprise

Abstract. The article deals with tasks, methods and tools of management the receivables of the enterprise. Highlighted the typical problems of process of management the receivables and developed the ways for improve.

Keywords: receivables, accounts receivable management, normative regulation, reserve of doubtful debts, bad receivables.

Анотація. У статті розкрито завдання, методи та інструменти управління дебіторською заборгованістю підприємства. Висвітлено типові проблеми процесу управління та розроблено шляхи вдосконалення.

Ключові слова: дебіторська заборгованість підприємства, управління дебіторською заборгованістю, нормативне регулювання, резерв сумнівних боргів, безнадійна дебіторська заборгованість.

Formulation of the problem. In the modern world, under the conditions of constant economic development and expansion of the activities of economic entities, accounts receivable is paid considerable attention, since it has a significant impact on the turnover of capital and on the financial position of the enterprise in general. However, the improvement of accounting alone can not solve the problem of non-payment. Enterprises, regardless of their form of ownership and the specifics of functioning, must first of all control and improve the process of management of accounts receivable, which is part of the overall management system.
The analysis of recent studies and publications. The issues both of regulating the organization of accounting and improving the management of accounts receivable were studied by the following domestic scientists: I.O. Blank, M.D. Bilyk, F.F. Butinets, A.D. Butko, S.F. Golov, L.V. Gorodanskaya, R.O. Kostyrko, V.M. Kostyuchenko and foreign scientists, namely: Zvi Bodi, D.Norton, R.Merton. R. Ka plan. However, most of them still emphasize the need for the further study of this issue. The purpose of the study is to identify possible ways on how to improve the process of managing receivables from the enterprise on the basis of the generalization of theoretical aspects as well as evaluation of the practical aspects of the outlined topic.
         Presentation of the main material. An integral part of the financial and economic activities of the enterprise is the conducting calculations with counterparties. Quite often, after shipment of manufactured products, enterprises do not immediately receive payment for it. Thus, the buyer is lending. It can be argued that from the moment of shipment of products until receipt of payment, the company’s funds are in the form of accounts receivable.

         The provision (standard) of accounting 10 “Accounts Receivable” determines the accounting methodology, the basic notions and the procedure for disclosing information about the receivables of an enterprise in the financial statements.

According to Ukrainian Accounting standards 10, receivables of an enterprise are the amount of debtors’ debts on a certain date. Debtors are legal entities and individuals who owed a company a certain amount of money, its equivalent or other assets [6].
         Enterprises need to find ways to reduce receivables, for the profit of the enterprise, payment of wages, the possibility of repayment of accounts payable, the purchase of raw materials and materials for further production, the possibility of expanding production depend on it.
         However, it can not be stated that receivables is only a negative phenomenon because there are the pros as well. Provision of goods with a installment allows you to expand the markets, since the desire to have significant volumes of sales forces executives to agree to provide commercial loans, price discounts , to create more favorable conditions for buyers and customers for the purchase of products.

         At this stage, there is a need to manage accounts receivable.
         Debt management is an integrated process of planning, organizing, coordinating, motivating and controlling the status of receivables, which is necessary to achieve the objectives of the enterprise [4]. It is also an essential element of the system of accounting and management accounting. The correct organization of the management process depends on the financial condition of the enterprise and its liquidity.
         The need to manage accounts receivable is due to:

– receipt of payments from debtors is one of the main sources of receipt of funds from the operating activities of the enterprise;

– investment of real costs or benefits from accepted credit decisions can be used as a tool for expanding sales.

         The main tasks of managing receivables are:

-Support sales growth by providing a commercial loan and thereby increasing profits;

-increasing competitiveness by means of a delay in payment; 

– Defining the level of risk of buyer insolvency;

-Calculation of the planned reserve of doubtful debts;

-Providing recommendations for dealing with actual or potentially insolvent buyers.

         The main function on which the process of managing receivables is based is strict control over the financial flows of the enterprise.

Today there are a lot of methods of managing receivables.

         Companies introduce a flexible system of discounts for debtors. They practice spontaneous financing. It means providing discounts in response to shorter payment terms. The methods of “outsourcing” are becoming increasingly popular, they involve attraction of third parties. The enterprise transfers the authority to work with indebtedness to another organization. Such organizations are factoring companies and banks [5].
         Typical problems encountered by an enterprise in managing and accounting for receivables of an enterprise:

-The evaluation of creditworthiness of buyers and the efficiency of commercial lending is not carried out;

-Insufficient professionalism of financial managers;

-Low solvency of buyers;

-Unregulated work with overdue accounts receivable;

-There is no reliable information on the maturity of obligations by the companies-debtors; -Lack of data on the growth of costs associated with an increase in the amount of receivables and the time of its turnover;
         Receivable management of the enterprise requires from each enterprise the withdrawal of the natural level of accounts receivable (in days) for each type of goods (works, services), based on their own experience and specific business conditions. The natural level of receivables is calculated on the grounds that it should not affect the normal functioning of the enterprise. To be natural in that the lower level is not possible, and the larger one is economically impractical [2]. It is also necessary to analyze the causes of deviations from the natural level, in order to avoid deviations in future periods.

         For companies that have a large volume of receivables turnover, a special financial management policy should be developed. Financial policy is a set of financial instruments the successful use of which ensures financial stability. An important tool in the management of accounts receivable is to provide discounts to customers. Discounts are provided in the following cases:

  1. prepayment or quick payment for products (used by the enterprise with a lack of funds);
  2. the purchase of large volumes of products;
  3. 3) purchase of products of lower quality;

4) in order to maintain business relations with old customers or with those that are “valuable” for the enterprise [3].

         Fast payment for products frees up money that can be re-invested in production, that is, increasing and profitability of the enterprise. However, the size of discounts should not exceed the benefits of fast or prepayment. In this regard, in the process of forming a credit policy, it is advisable to develop a scale of discounts in accordance with the terms of the fast payment and the scale of fines for late payments [2].
         In Ukraine, the necessity of adapting the requirements of international accounting standards to domestic ones in order to improve the accounting system is determined. The experience of other countries is also advisable to use in managing the receivables of the enterprise. In foreign countries there is no separate standard for adjusting receivables. Some aspects are defined in: 

–  IASB “Presentation of Financial Statements”; 

–  IASB “Financial Instruments: Disclosure and Presentation”; 

–  IASB “Financial Instruments: Recognition and Measurement”.
         In particular, IASB 32 accounts receivable is treated as a financial asset, but the specific definition of this concept is not given by international standards [7].

The issue is that today many enterprises in Ukraine do not create a reserve of doubtful debts, arguing that part of the funds accumulated in the form of a reserve does not turn.

         The reserve of doubtful debts is, as a rule, a percentage of the amount of sales on a loan or receivable at the end of the reporting period and is created at the enterprise, first, for the accurate presentation of receivables in the balance, because current receivables are reflected in the balance in the amount of the difference between the outstanding debt and the reserve of doubtful debts. Secondly, at the expense of the reserve bad debts are written off.
         Bad receivables are current receivables that are sure not to be returned by the debtor or which is beyond the limitation period [6]. It is worth pointing out that in foreign literature, a receivable that is likely to never be paid is hopeless. The two most commonly used methods for accounting for bad debts in most countries are the direct write-off method and the provisioning method.
         The direct debit method has certain disadvantages and applies only in cases where the bad debt is insignificant in size. The method of accrual of reserves allows a calculation of bad debts in each reporting period, even if it is not known at the relevant time, which particular accounts will not be paid and it is impossible to determine the specific size of bad debt.
         In the United States, in case at the date of the financial statements, the entity does not see the ability to collect the full amount of accounts prior to receipt, there is a contingency under the “Contingency Account”.

         In accordance with the General Principles of Accounting in the United States, two methods are used in calculating the questionable receivables of an enterprise:
-Method of the percentage of net realizations (estimate on the basis of total sales), based on the assumption that the share of proceeds of this year will not be received;

-Method of accounting for accounts on terms of payment (approach in terms of balance sheet), which assumes that part of the balance of accounts receivable will not be paid.
         In Italy it is allowed to annually assign to the reserve of doubtful debts 0.5% of the total amount of accounts receivable, and when the amount of the reserve is equal to 5%, its further increase is prohibited.

In Estonia, the amount of doubtful debt is written off for costs, irrespective of whether the collection measures applied to it or not. The difference in Estonian accounting from Ukrainian is that bad debts that were previously not transferred to expenses are written off from the balance sheet without displaying the amount of bad debt on the off-balance sheet account.
         In most countries of the Anglo-American system, besides the reserve for doubtful debts, companies can create other types of reserves, in particular, a provision for covering returns of goods and discounts. When managing receivables, it is advisable for an enterprise to use an irrevocable letter of credit, which is an effective mechanism and is often used in the United States and European countries. Debt write-offs can be carried out not only in the event that it is recognized as hopeless [1].

         The main recommendations for improving the process of managing receivables of the enterprise may be as follows:

1) determination of the natural level of accounts receivable and analysis of the causes of deviations;

2) providing discounts to customers;

3) creating a reserve of doubtful debts;

4) control over the ratio of accounts receivable and payable;

5) finding ways to increase the number of customers in order to reduce the risk of non-payment;

6) control over the state of settlement of overdue debts. In the context of inflation, any deferral of payment leads to the fact that the company actually receives only a fraction of the cost of the work performed. It is therefore necessary to extend the system of advance payments;

7) development of a special financial policy for the management of accounts receivable;

8) timely detection of inadmissible types of accounts receivable, which include, in particular, overdue debts of buyers over three months.
         Conclusions. In order to make timely and rational decisions on enterprise management it is necessary to have up-to-date and qualitative information on the state of settlements with debtors, which is formed on the basis of accounting data and registers of the corresponding entity. Debt management is an important process that is needed to achieve the goals of the enterprise and needs constant improvement.

A well-organized process of managing receivables will ensure that a shortage of funds and, as a result, a delay in payables, a lack of inventories, an increase in the need for loan capital, a decrease in the real amount of receivables due to inflationary processes, which in turn negatively affects solvency, liquidity and business activity of the enterprise are avoided.


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