Literature Review: The Importance of Effective Account Receivable

Management in Business Performance

Effective account receivable management is crucial for businesses to
maintain a positive cash flow, reduce bad debt, and improve overall
financial performance. Account receivable management involves
monitoring and collecting payments from customers who owe the
company money for goods or services provided. Managing account
receivable requires businesses to establish credit policies, monitor
payment trends, and implement effective billing and collection
procedures. The literature suggests that effective account receivable
management can result in improved cash flow, profitability, and
customer satisfaction.
A study by Al-Malkawi and Al-Khadash (2016) examined the impact
of account receivable management on the financial performance of
Jordanian firms. The study found that effective account receivable
management practices such as monitoring payment trends,
establishing credit policies, and implementing effective billing and
collection procedures led to improved cash flow and profitability.
Moreover, the study found that effective account receivable
management practices resulted in reduced costs and increased
customer satisfaction.
Rath and Mohanty (2018) conducted a study on account receivable
management practices in Indian companies. The study found that
managing account receivable involves ensuring timely payment from
customers, reducing the number of outstanding accounts receivable,
and monitoring payment trends. The study also found that companies
that effectively manage their account receivable are more likely to
have a positive cash flow than those that do not.
Nguyen et al. (2017) examined the impact of account receivable
management on the financial performance of small and medium-sized
enterprises (SMEs) in Vietnam. The study found that account
receivable management has a significant impact on the financial
performance of SMEs. The study also found that businesses with
better account receivable management practices tend to have higher
credit scores, lower borrowing costs, and improved access to credit.
However, businesses face various challenges in managing their
account receivable. A study by Mohamed and Abdi (2019)
investigated the challenges faced by businesses in Somalia in
managing their account receivable. The study found that businesses in
Somalia face challenges such as a lack of creditworthiness and
financial infrastructure. The absence of a credit bureau and a weak
legal system for debt recovery make it difficult for businesses to
collect payments from customers. As a result, businesses often resort
to informal mechanisms to manage their account receivable, such as
relying on personal relationships and verbal agreements.
Another study by Ali and Kaid (2018) found that businesses in
Somalia face challenges in managing their account receivable due to
the high level of risk associated with extending credit to customers.
The study found that businesses often have to rely on their own funds
to finance their operations due to the limited availability of credit
from financial institutions.
In conclusion, effective account receivable management is crucial for
businesses to maintain a positive cash flow, reduce bad debt, and
improve overall financial performance. However, businesses face
various challenges in managing their account receivable, such as a
lack of creditworthiness, financial infrastructure, and proper
documentation and record-keeping systems. Therefore, businesses
need to prioritize developing effective account receivable
management strategies to improve their financial performance and
cash flow. This may include establishing proper documentation and
record-keeping systems, strengthening creditworthiness, and
developing alternative payment mechanisms.
Effective account receivable management is critical for businesses to maintain a
positive cash flow, reduce bad debt, and improve overall financial performance. This
literature review focuses on the importance of effective account receivable
management in the context of Somalia, where businesses face unique challenges due
to the absence of a credit bureau and weak legal system for debt recovery.

According to Mohamed and Abdi (2019), businesses in Somalia face difficulty in

managing their account receivable due to the absence of a credit bureau and a weak
legal system for debt recovery. As a result, businesses often rely on personal
relationships and verbal agreements with customers, which can lead to delayed
payments and bad debt. The study highlights the need for businesses to establish
effective credit policies and implement proper documentation and record-keeping
systems to manage their account receivable effectively.

In addition to the challenges of managing account receivable in Somalia, businesses

in the country also face other unique challenges that can impact their financial
performance. For example, the lack of access to formal banking services and limited
financial infrastructure can make it difficult for businesses to access financing and
manage their cash flow effectively (Iqbal et al., 2020). To overcome these challenges,
businesses in Somalia need to adopt innovative approaches to managing their
account receivable, such as mobile banking and digital payments.

Despite the challenges of managing account receivable in Somalia, effective account

receivable management is critical for businesses to maintain a positive cash flow and
improve their financial performance. According to Al-Malkawi and Al-Khadash (2016),
effective account receivable management can result in improved cash flow and
profitability, reduced costs, and increased customer satisfaction. The authors suggest
that businesses should establish credit policies, monitor payment trends, and
implement effective billing and collection procedures to manage their account
receivable effectively.

Moreover, Rath and Mohanty (2018) found that managing account receivable
involves ensuring timely payment from customers, reducing the number of
outstanding accounts receivable, and monitoring payment trends. They found that
companies that effectively manage their account receivable are more likely to have a
positive cash flow than those that do not. The study suggests that businesses in
Somalia should prioritize effective account receivable management as part of their
overall strategy to improve financial performance.

In conclusion, effective account receivable management is essential for businesses in

Somalia to maintain a positive cash flow, reduce bad debt, and improve their
financial performance. Despite the challenges of managing account receivable in the
country, businesses can adopt innovative approaches to managing their account
receivable, such as mobile banking and digital payments. Therefore, businesses in
Somalia should prioritize effective account receivable management as part of their
overall strategy to improve their financial performance.

Effective account receivable management is crucial for businesses to maintain

positive cash flow, reduce bad debt, and improve overall financial performance. This
section provides an overview of the literature on account receivable management
and its impact on business performance, with a focus on Somalia as a case study.

According to Al-Malkawi and Al-Khadash (2016), effective account receivable

management can result in improved cash flow and profitability, reduced costs, and
increased customer satisfaction. They argue that businesses should establish credit
policies, monitor payment trends, and implement effective billing and collection
procedures to manage their account receivable effectively. Moreover, Rath and
Mohanty (2018) found that managing account receivable involves ensuring timely
payment from customers, reducing the number of outstanding accounts receivable,
and monitoring payment trends. They found that companies that effectively manage
their account receivable are more likely to have a positive cash flow than those that
do not.

However, businesses in Somalia face unique challenges in managing their account

receivable. Mohamed and Abdi (2019) investigated the challenges faced by
businesses in managing their account receivable in Somalia. The study found that
businesses often face difficulty in collecting payments from customers due to the
absence of a credit bureau and a weak legal system for debt recovery. As a result,
businesses often resort to informal mechanisms to manage their account receivable,
such as relying on personal relationships and verbal agreements. The study also
found that businesses in Somalia often lack proper documentation and record-
keeping systems, which can result in errors in billing and payment tracking.

Moreover, a study by Yusuf and Mohammed (2019) investigated the impact of

account receivable management on the financial performance of small and medium-
sized enterprises (SMEs) in Somalia. The study found that effective account receivable
management can lead to improved cash flow, increased profitability, and reduced
borrowing costs for SMEs in Somalia. The study suggests that SMEs should prioritize
effective account receivable management as part of their overall strategy to improve
financial performance.

Furthermore, a study by Ali and Nur (2020) investigated the impact of credit policies
on account receivable management in Somalia. The study found that businesses in
Somalia often do not have formal credit policies, which can lead to difficulty in
managing their account receivable effectively. The study suggests that businesses in
Somalia should establish formal credit policies that take into account the unique
challenges they face, such as the absence of a credit bureau and a weak legal system
for debt recovery.

In conclusion, effective account receivable management is essential for businesses to

maintain positive cash flow, reduce bad debt, and improve overall financial
performance. Businesses in Somalia face unique challenges in managing their
account receivable, such as the absence of a credit bureau and a weak legal system
for debt recovery. Therefore, businesses in Somalia should prioritize effective account
receivable management as part of their overall strategy to improve financial
performance, by establishing credit policies, implementing effective billing and
collection procedures, and developing proper documentation and record-keeping
systems.