Management of Accounts Receivables on the Performance of Public Corporations

Management of Accounts Receivables on the Performance of Public Corporations

THE CONCEPT OF ACCOUNT RECEIVABLES – Accounts receivables created each time an individual of firm grants credit to its customers represent the amount owed by these regular customers of the individual firm usually from the sale of merchandise or offering of certain services.         

          It can be defined as claims usually stated in terms of a fixed amount of money arising from the sale of goods, performance of services, lending of funds of from some other types of transactions which establish a relationship whereby one party is indebted to the other.

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Put mores imply, accounts receivables is the amount of claim originating from credit sales, which a firm has against its customers.

Moyer et al (1987: 647) are of the view that accounts receivables its brought about the credit granted by a business concern to its customers and arises from the practice of allowing customers and arises from the date. They further divided into two parts namely:

Trade credit: That which the company extends to other companies on wholesale basis.

Consumer credit: That which the company extends to its ultimate consumers.

A similar definition is given by Bolten (1976: 445) who sees it as an act of extension of credit to the customers of an enterprise, allowing them to pay for the goods after they have been received.

Another author, Trace (1973:41) refers to it as the amount collectible from customers resulting from recent sales. In the accountant s dictionary, Eric (1970:14) opines that account receivable is a claim against a debtor, its application being limited to uncollected amounts of completed sales of goods and services.

An unarguable dimension to accounts receivables is that, it constitutes a substantial portion of current assets of most firms. Hence, Bass (1999: 5) in his contribution refered to receivables as one of the largest if not the largest asset in the balance sheet of most firms, especially with regard to the government owned types. Agreeing totally, omissions (1990:287) opined that account that accounts receivables are significant part of the working capital of  companies that sell on credit.

From the foregoing, certain key points can be noted in the concept of account receivables. They are as follows:

  1. There must be at least two parties, one the debtor and the other one the creditor.
  2. The good/services must have been sold on credit.
  3. The credit granted must have been in the normal course of business.
  4. Credit must have been granted to only regular and trust worthy customers.
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Summarily therefore accounts receivable can be defined as that part of the total credit to regular customers of a company not yet collected through capable of being received.


Accounts receivables management is the decision of every firm regarding its overall credit and collection policy coupled with the evaluation of the individual credit applicants. According to Aguolu (1998: 62), a good policy seeks to strike a reasonable balance between ales and bad debt losses. So, the basic goal of credit management should be maximize the value of the firm by attaining a trade off between liquidity and profitability. This is because as the level for accounts receivable is increased, sales is also increased and when sales increase, the profitability of a firm tend to increase as well, through there will be a strain on the liquidity position of the firm.

Consequently, for Pander (1987: 377), the purpose of credit management is not to maximize sales neither is it to maximize the risk of bad debt. He supported this further by stating that if the objective is to maximize sales, then the firm should grant credit to all its customers. On the other hand, if mimization of the risk of the bad debt is the goal, then the firm would not sell on credit at all.         

          Gitman (1977: 191) believed that the efficient and effective management of receivables in necessary in order to provide adequate working capital for the overall management of the firm which otherwise would become insolent and may be forced into liquidation.

Another objective of account receivable management is the need for short term financing. This arises especially where a firm is financially weak and so, cannot borrow short – term fund because of collateral. Such a firm can use its accounts receivables as collateral by either pledging them to a bank or would be financier or factoring them to obtain cash.

Looking at the balance sheet of most firms, especially the public corporation, it will be observed that receivable, in the form of debtors accounts represent a sizeable part of their current assets.

Bass (1979:6) argued that debtors accounts represent as much as 30% – 40% of the total asset figures in the balance sheet of most commercial firms. No less agreeing Osisioma (1990: 297) noted that accounts receivables are significant parts of the working capital of companies that sell on credit.

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He further said that the ideal credit management of is the collect the highest possible debt within the shortest possible time, thus minimizing bad doubtful debt finally, credit management is a positive function not only vital to the protection of assets but also contributing to profitability. It should therefore be able to optimize sales at minimum cost thereby enhancing liquidity as well as profitability. No doubt, this is necessary for the continued survival and growth of these people.


          For effective management of credit, Pandey (1987:383) suggested that the firm should lay down clear – cut guidelines and procedures for granting credit to individual customers and collecting the individual accounts. Furthermore, he said that the firm should not follow the policy of classifying customers equally for the purpose of extending credit and collecting past due accounts. Concluding his argument, he said that this is because customers differ in their payment ability, risk class and other credit characteristics.

Supporting this Onwuzuroha (1993:23) stated ‘ a new concept of dividing customers into rate classes making separate loan pricing and credit allocation for each class in line with economic price discrimination, grouped into classes according to credit period allowable, define according to customers characteristics is preferred”.

Accordingly, in some public corporation like NEPA customers are grouped into major classes according to their usage rates.

These include;

  1. Residential customers
  2. Commercial customers
  3. Industrial customers
  4. Street lights, as regard NEPA alone of which the bills are paid by the government .

Credit should be granted to only those customers with the ability and willingness to pay this can only be known by analyzing the credit information available on each customer. One way of the obtaining information on the customer is to scrutinize his financial statements. Other as suggested by Aguolu (1998:63) include; the customers bank reference, trade reference and credit breau reports which is used in advanced countries.


Since account receivables constitute a significant portion of the current assets, most of the companies balance sheets, public corporation inclusive, the quality of these assets is therefore of utmost importance to management. A credit department must as a matter of necessity be established to have over all responsibility for the management of receivables enhance inventory management. The cost that would have been incurred in carrying inventory is saved with such credit sales.

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Therefore, the higher the level of receivables, the lower the cost of holding inventory and vice versa.

A function of successful receivables management is granting the right amount of credit to the right customer. Therefore, in analyzing credit applicants, the length of time a customer has been in business is important as there is a higher incidence of bankruptcy among more recently established firms.

A good accounts receivables management should as a matter of importance ascertain that:

–        The opportunity cost of having to employ other funds in place or receivables rather than in other investment which may be more profitable is negligible.

–        The explicit cost of having to employ new capital is sufficiently compensated benefits arising from this extension of credit.

–        An optional level of receivables is determined and maintained and does not exceed so, thereby reducing the greater risk of occurrence of bad debts.


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