Accounts Receivable Management
Accounts Receivable Management Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. They are generally expected to be collected within thirty to sixty days and are the most significant type of claim held by a company. There are two costs associated with extending credit to customers: 1 .
The cost of the selling company not being able to deposit the monetary value of a completed sale in its bank that is, as a result of not collecting cash at the time of a sale, the vendor will forgo some bank account interest ( or if the vendor has a bank overdraft, it will incur additional interest expense). 2. The cost associated with lost revenue due to some accounts receivable proving to be unconvertible. Companies extend credit to customers because credit facilities trade. This means that, considerable sales would be lost if credit was not extended.
Most hotels allow customers to use their credit cards to settle their accounts. Although many individuals pay for their hotel stay with a credit card, there are others especially business groups that ask to be billed to a master account. How hospitality firms manage accounts receivable is that first, they perform credit lancing. This means that hotels have to ensure that the credit period extended to customers is neither too much nor too little because of the cost associated with extending the trade credit facilities.
Then, a hotel has to ensure that credit is only granted to creditworthy customers. The five Co’s of credit management provides a useful checklist of factors to consider when deciding whether to grant credit to a particular customer. The questions to ask with regard to the five Co’s are: 1. Character: does the customer have a predisposition towards timely payment of accounts? 2. Capacity: does the customer have the capacity to run a successful business? 3. Capital: does the customer have sufficient working and long term capital to honor the account when it is due for payment? . Conditions: are there any particular economic conditions that might affect the potential customer’s ability to pay? There might also be particular circumstances such as low occupancy in the off-season that might cause a hotel to consider extending credit to less creditworthy customers. 5. Collateral: does the customer have assets that could be liquidated relatively easily in he event of a liquidity crisis that threatened timely reimbursement of the account due?
Determining the average number of days’ credit it extends to customers is another way in which hotels manage accounts receivable. Hotels can gauge the accounts receivable turnover and average number of days’ credit advanced by a company if we can determine its level of credit sales and average accounts receivable balance. For example, if Serene Hotel made SSH. 2,736,000 in credit sales during the most recent calendar year and that its year end accounts receivable balance was SSH. 270,000:
I Norte, By dividing 365 days by the accounts receivable turnover, we can determine the average number of days that credit is extended as follows: For those working within a company, a more detailed analysis of the accounts receivable balance can be conducted by preparing an Ageing of Accounts Receivable schedule. This provides a breakdown of the hotel’s total accounts receivable balance according to the number of days that each amount owing is overdue. Once problem accounts have been identified, a series of steps designed to collect outstanding debts can be initiated.
The following account collection methods are generally used in connection with a particular account: 1 . Letters: once an account has been overdue for a number of days, a polite reminder can be mailed. 2. Telephone calls: in addition to letters, one or more telephone calls to the accounts payable officer concerned can be made. 3. Site visits: visiting the debtor can be an effective method as payment can be made on the spot. 4. Collection agency: there are an increasing number of factoring companies that specialize in credit management and debt collection.
It should only be used if none of the other methods above are successful as it can be quite an expensive service. 5. Legal action: this is the most radical step in a collection strategy. It is expensive and can trigger the debtor company’s bankruptcy. Even if successful, legal action might sour relations with the debtor firm and signify the end of a trading relationship. If an account is particularly large, several initial steps can inform what collection strategy would be most appropriate including: 1. Determine why the customer has withheld payment 2.
Determine the payment history of the customer 3. Determine whether the customer is a large client that might take their business elsewhere if a significant dispute over credit develops. 4. Determine whether we have personnel who might be able to expedite payment through their contacts in the debtor firm. References Gilding, C. (2002). Financial Management for Hospitality Decision Makers. Oxford: Elsevier Buttonholer-Henchman. Weakened, J. J. , Skies, D. E. , Kismet, P. D. , & Defiance, A. L. (2005). Hospitality Financial Accounting. Hoboken: John Wiley & Sons,