Credit terms to debtors can be relaxed so long as additional cost of investment does not exceed additional contribution.

Receivables mean debt owed to the firm by customers arising from the sale of goods and services in the ordinary course of business. A concern allows credit sales in order to push up its sales volume as it is not always possible to sell goods only on cash basis. Debtors form a substantial part of current assets. Since credit sales assume a significant portion of total sales in several enterprises, the receivable management becomes an area of attention. Goods are sold on credit under specific terms and policies and each of these policies has its own cost and benefits associated with it. The costs which are associated with maintaining debtors are: (1) cost of financing receivables, (2) cost of collection, (3) cost of delinquency/default. Benefits associated with the receivables are growth in sales and the resultant growth in contribution which leads to increase in profits. Hence for managing debtors one should look carefully both at the costs and benefits and make a proper match between them. The firm should carefully evaluate the incremental/additional benefits and costs that result from a change in the receivables or trade credit policy. If Benefits from the change in policy are higher than the cost involved in debtors only then the credit policy can be relaxed.