As with any asset, managers should attempt to maximize the return on accounts receivable. One way to do this is to reduce the firm’s investment in accounts receivable. Managers can employ several strategies to do this. Sales terms can be set so that the customer is obligated to make payment in a relatively short period of time. Managers should closely monitor accounts receivable collections to ensure that customers are paying within the agreed period.
Discounts for early payment can also induce customers to pay quickly. However, discounts large enough to prompt early payment may prove to be quite expensive for the seller.
Also keep in mind that sales terms may be constrained by industry practices. That is, a firm must provide terms that are competitive with those offered by its rivals. In general, sales terms are just one product attribute in a firm’s overall promotional strategy. Managers must also decide which customers will be granted credit. As mentioned previously, a trade-off exists between the amount of sales that can be generated and the level of uncollectible accounts expense incurred. Managers should set minimum credit ratings for its customers so that profitability is maximized.