A study of trade credit: Best practices for managing accounts receivable

Abstract

The existing body of literature related to trade credit identifies accounts receivable as a key component of working capital and the cash conversion cycle, asserting that effective receivables management is vital to profitability, cash flows, and firm value. The literature suggests a number of methods for evaluating accounts receivable but only hints at ways in which managers can improve accounts receivable management. It is evident that company profits benefit from credit sales and that effective management techniques are needed to avoid payment delays and defaults. The purpose of this study is to identify from the literature several best practices related to credit policies, billing procedures, and collections practices. The research methodology included a careful sorting of 177 articles related to accounts receivable and firm performance. I utilized my expertise as a credit manager, accounting manager, and controller to identify and expand on best practices for managing accounts receivable. The findings support the assertion that best practices for managing account receivable are scarcely mentioned in the literature. The contribution to the literature is a detailed description of several best practices for improving the management of accounts receivable that are specifically related to credit policies, billing procedures, and collections practices.