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Controlling Risk in Accounts Receivable Management
Author(s) -
MAO JAMES C. T.,
SARNDAL CARL ERIK
Publication year - 1974
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1974.tb00871.x
Subject(s) - accounts receivable , business , trade credit , credit risk , variance (accounting) , default risk , debt , control (management) , profit (economics) , actuarial science , finance , economics , accounting , microeconomics , management
In granting trade credit, the credit manager must weigh the expected profit from a sale against the risk of customer default. A common procedure is to sell on credit only to those customers whose risk of default is below some critical level. This procedure does not effectively control a firm's ratio of bad debt to sales. In this paper, formulas are derived for the variance of this ratio under various assumptions regarding the number and size distribution of customers. Knowledge of this variance enables the credit manager to more accurately control his credit losses.