Tuesday, July 12, 2011

Finance and Management - 9

In the earlier blog, we had a look at the inventory and its implications from the investor's perspective. In today's blog we look at what the Receivable could mean to the investor.

Receivable as defined would mean outstanding (uncollected) bills. If a company sells a product and delays collecting the payment for it, it sure has to be foolishness. While giving a period of credit is a business norm today, it would be foolish to give a lot of credit and not collect them. The speed at which the company collects the amount owed to it tells us a lot about its financial efficiency.
If the collection period has been increasing it is an indication of the impending problem for the company. The larger the credit period that would be given to the customers, the higher the exposure would be to a potential threat of a not recovery of the amount. The company’s customer might face a cash crunch and decline repaying the amount. The collection period would also affect the internal working of the organization in that it could make it hard for the company to pay the salaries, buy necessary goods, etc that might be very essential.

Here too it highlights the importance of cash being very liquid and its criticality to the business.

Read in Kannada:

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