ABSTRACT
This chapter discusses the importance of managing the various components of working capital that play a vital role in the liquidity and profitability of a company. It also discusses the major element is the management of a company’s accounts receivable, which involves maintaining an effective credit and collection policy. Managing accounts receivable begins with an effective credit and collection policy. To establish an effective credit and collection policy, an analysis needs to be developed that measures the impact of economic gains at varying levels of credit. The cost of the incremental investment in accounts receivable at 18% return on investment indicates that Proposal III has the highest cost, since it represents an amount that could have been earned on another risk-free investment, or referred to as the opportunity cost. Cash discounts are given by creditors to encourage customers to pay early.
