Working Capital Management Term Paper

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chief financial officer must pay close attention to receivables is no surprise to anyone. Receivables are an important potential source of money that can easily be converted into profit, just as easy as it can be lost forever. Management or recovery costs are also to be considered, since they can have a significant impact on the cash-flow creation process.

Beside well-known financial aspects, there are also other effects inefficient accounts payable/receivable management policies may produce on a company: Excessive receivables can both highlight and mask an insidious series of conditions that affect the health and growth of the business. (Sklar, 1998)

In every company there is some sort of conflict between the credit and the sales department. The credit department is responsible for collecting receivables in a swift manner and for not allowing sales that would later cause the company to have collection difficulties. On the other hand, the sales department is pushing for attractive compensation to sales people, wining out over competitors or meeting desired quotas. Questionable sales are often an issue, since the prudent credit personnel is not willing to face any risks, while sales people take a different approach.

Consequently, a company has to have clear policies regarding payments from customers and clients. Authors indicate that such policy should be in writing, strongly upheld by top management, consistently communicated to all clients and to all people in the business with relevant responsibilities. Otherwise, the results are irritation by customers and confusion within the company. This has an impact on profits and the general health of the business. Correction of these problems should be sought in two different places: preventing future potential payment problems and recovering the majority of current receivables at the lowest possible cost. First of all, the company should prepare a draft of payment policy, spelled out clearly in writing and as unambiguous as possible.

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Top management must approve it and must be involved as closely as possible, since they have the authority required to put out conflicts between the credit and the sales department. The contents of the policy should include the level of given credit and the circumstances the company is able to grant it. Variations in the policy depend on the structure of the industry or the general economic environment. The policy should not be rigid. Possible exceptions should be mentioned right from the beginning, rather than making them on the way. The customers should be made aware of the general rules, while the sales personnel should know how much they are allowed to deviate form the firm's basic policy.

Another aspect involves the signing of the policy by customers, in addition to properly discussing with them on the matter. Misinterpretation of the policy and non-paying habits are more easily deterred by a signed policy, a copy of which must remain at the customer.

Other collection techniques have been identified. For instance, role-playing is indicated as being a very effective way both for trainees and seasoned professionals. Its purpose is learning how to confront and handle debtor resistance to payment. The objective does not involve devising up a comeback for every debtor excuse, but active listening (Sklar, 1993).

The aforementioned author also indicates a Gallup Organization pole, which found that "Americans value honesty above performance in a financial adviser. Of the 1,000 adults surveyed, 53% said that "trust" and "ethical behavior" were the most important elements in their relationship with a financial adviser. Twenty-four percent listed "good advice" or "makes money….....

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