Financial Management and Strategic Management · Management of Receivables

Receivables Management: Meaning, Objectives and Costs for CA Inter

Updated 4 October 2026 · Fact-checked

Receivables management is the process of deciding how much credit to give customers, to whom, and for how long, and then collecting the dues. Its objective is to balance higher sales and profit against the costs of funds blocked, collection effort and bad debts. Solve questions by comparing benefits with these costs.

Understand Receivables Management: Meaning, Objectives and Costs

Trade receivables (also called debtors or accounts receivable) are amounts customers owe the firm for goods or services sold on credit. They are a current asset. When you sell on credit, you give the customer goods now and collect cash later.

Firms extend credit for three main reasons. First, competition: if rivals give credit, you must too or lose customers. Second, growth: credit attracts new buyers and increases sales volume. Third, relationship: regular credit builds loyalty. Credit sales therefore work like a marketing tool, and receivables are the price of using it.

Credit is not free. Money tied up in debtors cannot be used elsewhere, so there is a cost of funds. You also spend on administration and collection, and some customers never pay. The aim of receivables management is not to minimise debtors. It is to find the level where the extra profit from credit sales is more than the extra cost of carrying them.

The objectives are to: (a) obtain optimum value of sales, (b) control the cost of credit, including collection and bad debts, and (c) maintain the receivables investment at a level that maximises return on investment and keeps liquidity. This is a trade-off. A tight policy lowers cost and risk but may lose sales. A loose policy raises sales but also costs and risk.

The aspects of receivables management are: credit policy (credit standards, credit period, cash discount, collection policy), credit evaluation of individual customers, and monitoring and control of receivables. The costs of carrying receivables are: capital (financing) cost, administrative cost, collection cost, delinquency cost and default cost. The benefit is the additional contribution from increased sales.

Key rules to remember

Receivables (average debtors): Average receivables = Credit sales per day × Average collection period; Use sales per day on a 365-day or 360-day year as the question states. Use only credit sales.
Investment in receivables: Investment in receivables = Average receivables × (Variable cost ÷ Sales); Use cost-based investment when the question asks for funds actually blocked. Use selling price only if told to.
Cost of carrying receivables: Carrying cost = Investment in receivables × Required rate of return; This is the capital or opportunity cost. Add administration and collection costs separately.
Bad debt cost: Bad debts = Credit sales × Bad debt %; Apply the percentage to the sales figure the question gives, usually credit sales.
Net benefit of credit: Net benefit = Additional contribution − (Carrying cost + Bad debts + Other credit costs); Contribution = Sales − Variable cost. Fixed cost is ignored if it does not change.

How to solve Receivables Management: Meaning, Objectives and Costs questions

For theory questions, structure the answer. For numerical questions, compare benefit with cost of credit.

1Read whether the question asks for theory (meaning, objectives, costs) or a calculation.
2For theory, define receivables first, then list objectives, aspects or costs as headed points with one line each.
3For numbers, find credit sales per day and multiply by the collection period to get average receivables.
4Convert receivables to investment using variable cost ratio, unless told to use sales value.
5Compute carrying cost at the required rate of return.
6Add bad debts, collection and administration costs.
7Find the contribution on credit sales and subtract total credit costs to get net benefit.
8State a conclusion: credit is worthwhile if net benefit is positive.

Quickest way: Contribution minus credit costs in four lines

When to use it: Use for any numerical question on the cost or benefit of carrying receivables, and as a template for theory points.

MCQs: spot the cost type. Interest on funds blocked is capital cost. Bad debts are default cost. Late payment follow-up is delinquency cost. Credit checks and records are administration cost.
MCQs: if asked what rises with a longer credit period, the answer is usually receivables, carrying cost and bad debts, along with sales.
Written numbers: write four lines: Receivables, Investment, Carrying cost, Net benefit. Each line earns step marks.
Written theory: give a one-line definition, then three to five bold headings with one sentence each, then a one-line conclusion on the trade-off.

Common mistakes in Receivables Management: Meaning, Objectives and Costs

Using total sales instead of credit sales to find receivables.
Students see one sales figure and use it without checking.
Fix: Underline the credit sales figure or percentage. Cash sales never create debtors.
Charging the required return on sales value of receivables instead of cost.
Receivables are shown at sales value, so students stop there.
Fix: Multiply by variable cost ÷ sales when the question asks for investment, unless it says to use sales value.
Including fixed cost in the cost of extra credit.
Students treat all costs as relevant.
Fix: Only variable cost changes with extra sales. Use contribution and ignore unchanged fixed cost.
Saying the objective is to minimise receivables.
Students link low debtors with low risk.
Fix: Write that the objective is to maximise return on investment in receivables, balancing profit against cost and risk.
Mixing up delinquency cost and default cost.
Both relate to non-payment.
Fix: Delinquency is delay in payment, costing extra follow-up and interest. Default is non-payment, which is a bad debt.

Worked examples

Example 1

A firm has annual credit sales of ₹36,00,000 and an average collection period of 60 days. Variable cost is 75% of sales. The required return on investment is 15%. Take a 360-day year. Find the investment in receivables and the carrying cost.

Show the solution

Credit sales per day = ₹36,00,000 ÷ 360 = ₹10,000.
Average receivables = ₹10,000 × 60 = ₹6,00,000.
Investment in receivables = ₹6,00,000 × 75% = ₹4,50,000.
Carrying cost = ₹4,50,000 × 15% = ₹67,500.

Answer: Investment in receivables is ₹4,50,000 and the annual carrying cost is ₹67,500.

Example 2

A firm sells on credit and now has sales of ₹20,00,000 with no bad debts. It plans to extend the credit period, which will raise sales by ₹4,00,000. Variable cost is 60% of sales. Extra bad debts will be 5% of the additional sales. Extra investment in receivables at cost is ₹1,00,000, and the required return is 20%. Should it extend credit?

Show the solution

Additional contribution = ₹4,00,000 × (100% − 60%) = ₹1,60,000.
Extra bad debts = ₹4,00,000 × 5% = ₹20,000.
Extra carrying cost = ₹1,00,000 × 20% = ₹20,000.
Total extra credit costs = ₹20,000 + ₹20,000 = ₹40,000.
Net benefit = ₹1,60,000 − ₹40,000 = ₹1,20,000.

Answer: Net benefit is ₹1,20,000, which is positive, so the firm should extend the credit period.

Exam tips

Learn the five costs (capital, administration, collection, delinquency, default) as a list. Questions often ask you to name or explain them.
In theory answers, always mention the trade-off between profitability and liquidity or risk.
In numerical questions, state your assumption on the 360 or 365-day year if the question is silent.
Read for words like 'investment at cost' versus 'at sales value' before you start.
MCQs carry no negative marking, so always attempt every one.

Practice questions from Management of Receivables

Receivables Management: Meaning, Objectives and Costs in other exams

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

Receivables Management: Meaning, Objectives and Costs: frequently asked questions

What is receivables management in simple words?

It is deciding who gets credit, how much and for how long, and then collecting the money on time. The goal is to earn more profit from credit sales than the cost of carrying the debtors.

What are the costs of maintaining receivables?

They are the capital cost of funds blocked, administration cost, collection cost, delinquency cost and default cost. Each has its own meaning, so explain them separately in the answer.

What are the aspects of receivables management?

They are credit policy, credit evaluation of customers, and monitoring and control of receivables. Credit policy covers credit standards, credit period, cash discount and collection policy.

Why do firms sell on credit if it is costly?

Credit helps meet competition, raises sales and builds customer loyalty. The extra contribution is expected to be more than the cost of carrying the receivables.