1.1 BACKGROUND OF THE STUDY
Going by the advent of time, civilization, economic conditions, and business world, the world had known only a cash or barter economy. However, with development in business world, business is being transacted on credit basis. In recent years, many business organization in Nigeria have experienced liquidity problems largely because of the effects of high rate of inflation. This has been necessitated by he various economic measures in 1982 to the structural adjustment programme (SAP). In 1991 and the present economic crisis inspired by the 419 syndrome. Because of this, if they becomes more imperative than ever to get money promptly from the debtors for the day today operations because of;
– The uncertainty in the fluctuations of prices:
– The subjective preference for present consumption over future consumption; and
– The need to take advantage of the available investment opportunities.
However, if all these transactions were to be made on cash basis, various firms in terms of sales turnover. Consumers and middlemen could equally be affected of all purchases made from companies are always on cash basis. Truly individuals or firms have preference for possession of a given amount of cash now, rather than having the same among some time in the future-time preference for many. Yet, money (cash) is a scarce commodity which has wide range of application in the area of both human and material needs. Thus, this brings about the problem of effective management of the available cash resources through efficient receivable collection management. Receivable represent claims, usually stated in definite financial terms, arising from the sale of goods, performance of services lending of money or other type of transaction which establishes a relationship whereby one party is indebted to another in an agreed term. This column which result from the sale of goods or services or property and which may or may not be supported by a written note but which are not secured by specific collaterals right of specific claims or the assets of the debtor should the debtor fail to pay, are categorized as accounts receivables. Accounts receivables are sometimes of short term nature which can be defined as claims held against other for money, goods or services which are collectible within a year or an operating cycle, which ever is longer. For financial statement purpose, receivable could be classified into sections. Receivable clarrificable as trade and receivable clarrificable as Non trader Trade receivables are amount of owed by customers for goods sold as part of the normal operation by business. They are usually a written commitment of other and are normally collectible within one years and sometimes as long as five years 95 years). Neither non-trade nor special receivable which arise from a variety of transactions are written promises to pay at a later date. Example of non-trade receivables are advance to officer, advance to subsidiaries and deposits to cover potential damages or loses etc. A firm grants credit in order to protect its sales from competitions and to attract the potential customers to its goods and services at favourable terms and to cultivate an atmosphere of mutual relationship between itself and its customers. Trade credit creates accounts receivables or what is called book debts, which the firm is expected to retrieve in the forceable future. These book debts or accounts receivables arising out of granting credit facilities have three major elements.
1) RISKNESS OF THE AGREEMENT
This might result in bad debt to the sellers. Cash sales are without risk out not credit sales as cash is yet to be received.
2) ECONOMIC VALUE
This is another element associated in granting credit in that account receivable is based on economic value. To the buyer of goods and services, economic value passes immediately at the time of sale be. There is change of ownership while the seller accepts an equivalent value to be received at a later late.
This means that payment will be made in the future. The customers from whom receivable have to be collected in future are called trade debtors or receivables which represent forms claim on assets. In view of these characteristics the adoption of an efficient accounts receivable policy becomes necessary towards achieving the overall organizational goals or objectives.