A Stochastic Model of Credit Sales Debt

Abstract

Abstract This paper develops a stochastic model of accounts receivable, the debt arising from credit sales; and expresses the expectations and variances of (1) credit sales, (2) collections, (3) bad debts, (4) collections plus bad debts; and, (5) accounts receivable outstanding, in terms of parameters of the stochastic variables: (a) the number of credit sales made, (b) the size of sales; and, (c) the collection period or the effective term of loans. The paper discusses some interesting features of the results of the model and provides an empirical example to illustrate the model in context of actual credit sales made by a small wholesale food company during the years 1963 and 1964.