Management of Debts and Obligations

Management of Debts and ObligationsTo ensure the solvency of the enterprise, it is important to be able to manage debts. Receivables and payables are always with each organization. They are the inevitable consequence of the existing settlement system, in which there are gaps in time between the moment of payment and the moment of transfer of ownership of the goods, between the time when the payment documents are presented for payment and the receipt of money on the settlement accounts of suppliers.

Virtually any company for various reasons may experience a temporary shortage of funds but suppliers believe it, agree to release the goods in debt and wait for payment. Sometimes, an intermediary in such transactions is a bank that pays bills submitted to the buyer, receiving not only the amount of the debt, but also interest on the loan provided.

What Role Does Management of Debts Play?

Of particular importance is the management of accounts receivable, since it leads to a direct diversion of monetary and other means of payment from circulation, sharply worsens solvency of the organization. You can have potentially good financial results from the sale of products, goods and services but lose all or much with a significant increase in receivables and poor management of it.

There are a number of ways to prevent unwarranted growth in accounts receivable. For this you need:

  • avoid debtors with a high risk of non-payment, for example, buyers representing organizations or industries that are constantly in financial difficulties or are in countries with unstable political regimes. In such cases, it is normal to pre-pay for delivery, a guarantee from a reputable bank or another well-known organization;
  • periodically review the maximum amount of goods and services that are fully or partially provided on credit, based on the financial position of customers and the company or organization. The conditions of financial activity are constantly changing, and this affects the possibility of lending goods, the volume and timing of the loan;
  • when granting a loan or a cash loan, require a pledge from their beneficiary for an amount not less than the amount of the receivable for the forthcoming payment.

This insures against non-repayment of loans and credits received. Timely and complete billing is important. When selling large quantities of goods to different buyers, this should be done immediately so that they receive bills no later than one day before the due date. To know the maximum amount of deliveries on credit, it is advisable to determine the term of overdue payments on accounts receivable and compare it with the industry average, with figures of previous years, with data from the nearest competitors.