Financial Management: Accounts Receivable & Inventory Control

Posted on Aug 7, 2025 in Business Administration and Innovation Management

Accounts Receivable Management

Accounts receivable refers to the money owed to a company by its customers for goods or services delivered. These are typically documented through invoices. This financial area provides the scope for credit-based operations.

Establishing a Billing Policy

  • The company should send invoices and statements of accounts to customers the day after the period ends.
  • Sales with large amounts should be billed immediately.
  • Billing should be sent when processing the order, not delayed.
  • For service billing, payment should be upfront.
  • A special policy should be adopted for promotional credits.

Implementing a Collection Policy

  • The Accounts Receivable (AR) department should maintain an aging record to identify high-risk and non-compliant customers.
  • Payment delays should be compared with typical industry values.
  • Collection efforts should begin at the first sign of a client’s lack of financial solidity.

The 5 Cs of Credit

These five factors are crucial in assessing a borrower’s creditworthiness:

  1. Character: A commitment to meet credit obligations.
  2. Capacity: The ability to meet loan commitments from current income.
  3. Capital: The ability to meet credit obligations from existing assets.
  4. Collateral: The assets that can be recovered if payment is not made.
  5. Conditions: General economic or industry conditions affecting the borrower.

General Credit Policy Principles

  • Granting credit relates to the company’s liquidity and indebtedness.
  • Monitor debt behavior.
  • Observe trade data.
  • Consider the country’s economic conditions.

Key Considerations for Policy Implementation

Companies can implement the following rules to regulate their billing policy. After establishing a charging policy, the first step is to keep track of your clients.

Inventory Management

Inventory refers to the stock of goods a company holds.

Key Inventory Decisions

Inventory decisions are made based on the expected benefits and challenges:

  • Excess inventory ties up capital.
  • Adequate space should always be allocated for inventory.
  • Inventory is less liquid and takes longer to convert into cash.

Types of Inventories

There are three primary types of inventories:

  1. Raw Materials
  2. Work-in-Progress
  3. Finished Goods

Responsibilities of the CFO in Inventory Management

The Chief Financial Officer (CFO) plays a critical role in optimizing inventory:

  1. Assess the adequacy of raw materials, considering expected production, equipment conditions, and seasonal aspects related to the activity.
  2. Predict future price movements of raw materials to optimize purchasing costs.
  3. Discard slow-moving products to reduce inventory maintenance costs and improve cash flow.
  4. Take precautions against inventory buildup, which leads to high maintenance and opportunity costs.
  5. Minimize inventory balances when the company faces liquidity problems or inventory financing challenges.
  6. Set aside inventory provisions to protect the company against potential business loss due to material shortages.
  7. Review the quantity of goods received.
  8. Maintain careful records of outstanding orders to reduce inventory balances when possible.
  9. Evaluate procurement and inventory control functions.
  10. Closely monitor warehouse operations and staff input.
  11. Minimize lead time in procurement and distribution functions.
  12. Examine the time lag between raw material entry and finished product output.
  13. Examine the extent of inventory deterioration.
  14. Maintain adequate inventory control systems, utilizing computer and operations research methods.
  15. Assess associated risks, such as:
    • Perishable goods
    • Specialized items
    • Flammable materials
    • Chemical substances
  16. Inventory management involves finding a solution to the conflict that exists between the costs and benefits of holding inventory.

Inventory Holding and Ordering Costs

Key costs associated with inventory include:

  1. Storage costs
  2. Safe handling costs
  3. Property taxes
  4. Impairment/Depreciation costs
  5. Obsolescence costs
  6. Theft costs
  7. Opportunity costs