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Operational Risk of the Purchasers - Portfolio Management Approach in Accounts Receivable Management

EUROPEAN FINANCIAL SYSTEMS, J. Krajicek, ed., Masaryk University, Faculty of Economics and Administration, Department of Finance, pp. 255-263, Brno 2007

10 Pages Posted: 28 Jun 2007  

Grzegorz Michalski

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics

Abstract

The basic financial purpose of an enterprise is maximization of its value. Trade credit management should also contribute to realization of this fundamental aim. Many of the current asset management models that are found in financial management literature assume book profit maximization as the basic financial purpose. These book profit-based models could be lacking in what relates to another aim (i.e., maximization of enterprise value). The enterprise value maximization strategy is executed with a focus on risk and uncertainty. This article presents the consequences that can result from operating risk that is related to purchasers using payment postponement for goods and/or services. The present article offers a method that uses portfolio management theory to determine the level of accounts receivable in a firm. An increase in the level of accounts receivables in a firm increases both net working capital and the costs of holding and managing accounts receivables. Both of these decrease the value of the firm, but a liberal policy in accounts receivable coupled with the portfolio management approach could increase the value. Efforts to assign ways to manage these risks were also undertaken; among them, special attention was paid to adapting assumptions from portfolio theory as well as gauging the potential effect on the firm value.

Keywords: accounts receivable, trade credit management, incremental analysis, value based management, portfolio analysis

JEL Classification: G32, G11, M11, D81, O16, P33, P34

Suggested Citation

Michalski, Grzegorz, Operational Risk of the Purchasers - Portfolio Management Approach in Accounts Receivable Management. EUROPEAN FINANCIAL SYSTEMS, J. Krajicek, ed., Masaryk University, Faculty of Economics and Administration, Department of Finance, pp. 255-263, Brno 2007. Available at SSRN: https://ssrn.com/abstract=997027

Grzegorz Michalski (Contact Author)

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics ( email )

ul. Komandorska 118-120
Wroclaw, 53-345
Poland

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