Financial Management · Management of inventories, accounts receivable, accounts payable and cash

Accounts Receivable Management for ACCA FM

Updated 11 October 2026 · Fact-checked

Accounts receivable management is controlling credit sales so that extra sales are worth the cost of financing and bad debts. You assess customers, set terms, collect on time and choose tools such as early settlement discounts, factoring, invoice discounting or credit insurance. In exams you compare costs and savings, usually in a table.

Understand Accounts Receivable Management

When you sell on credit, you lend money to your customer. Until they pay, your cash is tied up in accounts receivable. That money must be financed, often by an overdraft, and some of it may never be collected. Receivables management aims to balance two things: more sales from generous terms, and the cost of carrying and losing that debt.

The process has four parts. First, credit assessment: check a new customer using bank and trade references, credit agency reports, published accounts and your own payment history with them. Second, credit policy: set the credit period, credit limits and terms. Third, collection: send invoices promptly, issue statements, chase overdue accounts, and use reminders, stopping supply or legal action as a last step. Fourth, monitoring: use an ageing analysis of receivables and receivable days to spot slow payers.

An early settlement discount pays customers to pay sooner. It looks cheap, but it is often costly when you turn it into an annual rate. A 2% discount for paying 20 days early works out at about 44.6% a year. If your overdraft costs 8%, the discount is expensive. The customer, however, will happily take it.

You can also pass the work or the risk to someone else. Factoring means a factor takes over your sales ledger. It usually collects the debts, may advance up to a set percentage of invoices (often around 80%) and may offer credit protection against bad debts. This is called non-recourse when the factor bears the bad debt loss, and recourse when you do. Invoice discounting is a finance-only facility: you borrow against invoices, you keep control of collection, and customers are usually not told. Credit insurance pays out if a customer defaults, for a premium.

In FM, you rarely decide on principle alone. You calculate the cost and the benefit of a change, then add non-financial points such as customer relations, control and confidentiality.

Key rules to remember

Receivable days: Receivable days = (Trade receivables ÷ Credit sales) × 365; Use credit sales if given, otherwise revenue. Use the days in the year the question uses (365 unless told otherwise).
Average receivables from days: Receivables = Annual credit sales × days ÷ 365; Used to find the change in receivables when a policy changes. Work out each customer group separately.
Financing cost or saving of receivables: Finance cost = Receivables × interest rate; Use the rate at which the company borrows (or earns if cash is surplus). A fall in receivables saves interest.
Annual cost of early settlement discount (compound): Annual cost = [100 ÷ (100 − d)]^(365 ÷ t) − 1, where d = discount % and t = days of credit given up; t = normal credit period − discount period. Compare with the company's cost of short-term finance.
Approximate (simple) annual cost of discount: Approx. cost = [d ÷ (100 − d)] × (365 ÷ t); Quicker but lower than the compound figure. Use compound unless the question says otherwise.
Cost of discount in money: Discount cost = Discount % × sales paid early; Only sales that take the discount count.
Factoring net benefit: Net benefit = admin savings + bad debt savings + finance saving − factor fees − extra finance charges; Finance saving comes from lower receivables and from replacing overdraft with cheaper or dearer factor finance.

How to solve Accounts Receivable Management questions

Use this approach for any receivables question, whether in an objective test case or a 20-mark written question.

1Read the current position: sales, receivable days, bad debts, collection costs and the company's borrowing rate. Note whether sales are credit sales.
2Identify the proposal: a longer credit period, a discount, factoring, invoice discounting or insurance.
3Work out the new receivables. Split customers into groups (for example discount takers and non-takers) and calculate each group's receivables as sales × days ÷ 365.
4Find the change in receivables and multiply by the finance rate to get the interest saving or extra cost.
5List every other cash effect: discounts allowed, bad debts, admin costs saved, fees, extra contribution from higher sales. Use contribution, not sales revenue, for extra sales.
6Compare total benefits with total costs. Show the net annual benefit or cost clearly and state accept or reject.
7Add short comments: customer reaction, loss of control, confidentiality, reliability of estimates, and sensitivity to the interest rate.

Quickest way: Receivables change: day-by-day shortcut

When to use it: Use when a question asks you to evaluate a discount or a new credit period under time pressure, especially in Section B objective cases.

Calculate the receivables saving or increase as sales × (old days − new days) ÷ 365. Only do this for the group that changes.
Multiply by the interest rate to get the finance benefit.
Calculate the discount or extra cost in money.
Subtract the cost from the benefit. A positive result means accept.
For a discount cost percentage, use the approximate formula d ÷ (100 − d) × 365 ÷ t as a check, and compare with the borrowing rate. If it is well above the borrowing rate, the discount is expensive.

Common mistakes in Accounts Receivable Management

Calculating the discount cost as d ÷ 100 without annualising.
2% looks small, so students compare it directly with an annual interest rate.
Fix: Divide by (100 − d), then scale by 365 ÷ t. Always compare annual with annual.
Using the wrong number of days saved, for example using the full credit period instead of the credit period minus the discount period.
Students forget that the discount is earned by paying early, not by paying at day zero.
Fix: Write t = normal days − discount days before you start. For 2/10 net 30, t = 20.
Applying the discount to all sales when only some customers take it.
The question states a take-up percentage that is easy to overlook.
Fix: Apply the discount only to the share that takes it, and calculate receivables for takers and non-takers separately.
Using sales revenue instead of contribution when a policy increases sales.
Revenue seems like the gain, but variable costs must still be paid.
Fix: Use extra contribution for added sales, and finance the extra receivables on the cost (or, if told, on the sales value as the question directs). State your assumption.
Ignoring the difference between recourse and non-recourse factoring.
Students treat all factors as removing bad debt risk.
Fix: With recourse, the company still bears bad debts. Only non-recourse (or credit protection) removes that risk, and it usually costs more.
Mixing up factoring and invoice discounting.
Both involve advances against invoices.
Fix: Factoring takes over the sales ledger and collection. Invoice discounting is only finance: you keep the ledger and usually the customer is not told.

Worked examples

Example 1

Mara Ltd has annual credit sales of $6,000,000. Customers currently pay on average after 60 days. Mara proposes a 1.5% discount for payment within 10 days. It expects 30% of sales to be paid in 10 days. The other 70% will still pay after 60 days. Mara's short-term borrowing rate is 7%. Use 365 days. Should Mara offer the discount?

Show the solution

Current receivables = 6,000,000 × 60 ÷ 365 = $986,301.
New receivables from discount takers: 30% × 6,000,000 = 1,800,000. Receivables = 1,800,000 × 10 ÷ 365 = $49,315.
New receivables from others: 4,200,000 × 60 ÷ 365 = $690,411.
Total new receivables = 49,315 + 690,411 = $739,726.
Reduction in receivables = 986,301 − 739,726 = $246,575.
Interest saving = 246,575 × 7% = $17,260.
Cost of discount = 1.5% × 1,800,000 = $27,000.
Net effect = 17,260 − 27,000 = $9,740 net cost per year.

Answer: Mara should not offer the discount. It costs about $9,740 a year more than it saves, ignoring any bad debt or administration savings.

Example 2

Tavi Ltd has annual credit sales of $8,000,000 and receivable days of 60. It uses an overdraft at 7%. A factor offers a service fee of 1.5% of turnover, reducing receivable days to 30. The factor will advance 80% of receivables at an interest rate of 9%. Tavi would save administration costs of $60,000 and bad debts of $40,000 a year. Use 365 days. Evaluate the offer financially.

Show the solution

Current receivables = 8,000,000 × 60 ÷ 365 = $1,315,068. Overdraft interest = 1,315,068 × 7% = $92,055.
New receivables = 8,000,000 × 30 ÷ 365 = $657,534.
Factor advance = 80% × 657,534 = $526,027. Interest at 9% = $47,342.
Remaining receivables = 657,534 − 526,027 = $131,507, financed by overdraft at 7% = $9,205.
Total new finance cost = 47,342 + 9,205 = $56,547.
Finance saving = 92,055 − 56,547 = $35,508 (about $35,507 without rounding differences).
Benefits = 60,000 + 40,000 + 35,507 = $135,507.
Factor fee = 1.5% × 8,000,000 = $120,000.
Net benefit = 135,507 − 120,000 = $15,507 a year.

Answer: The factor offer gives a net financial benefit of about $15,507 a year, so it is worth accepting on these figures. Also consider loss of control over customer relations, the reliability of the savings estimates and how sensitive the result is to the 9% rate.

Exam tips

In objective test questions, keep the numbers tidy: work in whole dollars and apply the 365-day year unless told otherwise. An answer that differs slightly may match another option, so round only at the end.
Always annualise a discount before comparing it with a borrowing rate. Examiners expect the compound formula unless the question points to a simple approach.
In the written question, present a clear table: current position, proposed position, change in each item, net result. Then give a recommendation and two or three qualitative points.
Name the type of factoring or discounting facility described and say who bears the bad debt risk and who handles collection. These are common easy marks.
State your assumptions, such as whether bad debts are saved or whether interest is on sales value or cost. Marks are given for sensible, stated assumptions.

Practice questions from Management of inventories, accounts receivable, accounts payable and cash

Accounts Receivable Management in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediateMeaning and Scope of Management Accounting

Accounts Receivable Management: frequently asked questions

How do you calculate the cost of an early settlement discount in ACCA FM?

Use [100 ÷ (100 − d)]^(365 ÷ t) − 1, where d is the discount percentage and t is the number of days saved. For 2% for payment in 10 days instead of 30, t = 20 and the annual cost is about 44.6%. Compare this with the company's cost of borrowing.

What is the difference between factoring and invoice discounting?

Factoring means the factor takes over your sales ledger, collects the debts and may provide finance and bad debt protection. Invoice discounting is finance only: you borrow against invoices but keep control of collection, and customers are normally not told.

What is recourse versus non-recourse factoring?

With recourse, you must repay the factor if the customer does not pay, so you keep the bad debt risk. With non-recourse, the factor bears the loss from approved debts. Non-recourse usually costs more.

How do you evaluate a change in credit policy?

Calculate the change in receivables and the interest cost or saving, then add extra contribution from higher sales, discounts allowed, bad debts and administration costs. If total benefits exceed total costs, the change is financially worthwhile. Then comment on non-financial factors.