Accounts receivable reflects credit that has been extended to customers. The positive aspect is that it represents a sale that has been made; the negative is that it represents a sale that has not been paid for. There are a number of benefits to extending credit, but there also drawbacks. Thus, companies need to pay special attention to how they manage their accounts receivable.
Effectively management of accounts receivable can increase shareholder value; naturally the opposite is also true. By extending credit to customers, the company can gain more business. Trade credit induces more purchases from more people, by allowing the customers to better align their cash flows. The terms of the credit can also be used as a source of competitive advantage -- giving longer penalty-free terms than a competitor can help win business, for example. However, there are risks associated with accounts receivable that can lower...
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