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Receivables Management

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Rajendra Patra
Rajendra Patra
Economy & FinanceBusiness
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RECEIVABLES MANAGEMENT “ Any fool can lend money, but it takes a lot of skill to get it back ”
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],INTRODUCTION RECEIVABLES MANAGEMENT Receivables Inventory Cash Operating Cycle
[object Object],[object Object],[object Object],GRANTING CREDIT RECEIVABLES MANAGEMENT Basic decisions 1. To give credit or not 2. Duration of credit period (selecting the right policy)
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],DIFFERENT TYPES OF COSTS ASSOCIATED RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],OBJECTIVES RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],STEPS IN CREDIT ANALYSIS “ Investigating the customer” RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],STEPS IN CREDIT ANALYSIS RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],BENEFITS RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],COLLECTION METHODS RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],COLLECTION METHODS RECEIVABLES MANAGEMENT Under a lock box system, customers are advised to mail their payments to special post office boxes called lockboxes, which are attended to by local collection banks, instead of sending them to corporate headquarters. Thus the lock box system: (i) cuts down the mailing time, because Cheque are received at a nearby post office instead of at corporate headquarters, (ii) reduces the processing time because the company does not have to open the envelopes and deposit the Cheque for collection, and (iii) shortens the availability delay because the Cheque are typically drawn on local banks
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],COLLECTION METHODS RECEIVABLES MANAGEMENT Factoring is a financial service designed to help firms to arrange their receivable better. Under a typical factoring arrangement a factor collects the accounts on due dates, effects payments to the firm on these dates and also assumes the credit risks associated with the collection of the accounts.   Sometimes the factor provides an advance against the values of receivable taken over by it. In such cases factoring serves as a source of short-term finance for the firm.
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],COLLECTION METHODS RECEIVABLES MANAGEMENT an agency, factor, or broker acting as an intermediary between sellers and buyers and guaranteeing payment
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],COLLECTION METHODS RECEIVABLES MANAGEMENT A firm may open collection centres (banks) in different parts of the country to save the postal delays. This is known as concentration banking. The firm may instruct the customers to mail their payments to a regional collection centre / bank rather than to the Central Office The Cheque received by the regional collection centre are deposited for collection into a local bank account The concentration banking results in saving of time of collection
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],CONTROL OF RECEIVABLES MANAGEMENT RECEIVABLES MANAGEMENT
[object Object],[object Object],[object Object],[object Object],CONTROL OF RECEIVABLES MANAGEMENT RECEIVABLES MANAGEMENT Category % of accounts to Total Accounts % of Balance Outstanding to Total Debtors’ Balance A 15 75 B 35 20 C 50 5
PROFORMA RECEIVABLES MANAGEMENT Type A- If Fixed Costs is given Credit Policy Present Policy Option 1 Option 2 Option 3 Credit Period (days/ weeks/months) xx xx xx xx Particulars Rs. Rs. Rs. Rs. Sales xxxx xxxx xxxx xxxx Less: Variable Cost xx xx xx xx Contribution xxx xxx xxx xxx Less: Fixed Cost xx xx xx xx Profit [Benefits (A)] xxx xxx xxx xxx Total Cost= Variable Cost +Fixed Cost Average Investment in Receivables (Based on Total Costs) xxx xxx xxx xxx Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) xx xx xx xx 2) Bad debts as % of Sales xx xx xx xx 3) Credit Collection and Admin costs xx xx xx xx Total Costs [B] xxxx xxxx xxxx xxxx Net Benefits [A-B] xxx xxx xxx xxx Incremental Net Benefits --- xx xx xx
Type B: If Fixed costs is NOT given. PROFORMA RECEIVABLES MANAGEMENT Credit Policy Present Policy Option 1 Option 2 Option 3 Credit Period (days/ weeks/months) xx xx xx xx Particulars Rs. Rs. Rs. Rs. Sales xxxx xxxx xxxx xxxx Less: Variable Cost xx xx xx xx Contribution [Benefits (A)] xxx xxx xxx xxx Average Investment in Receivables (Based on Sales) xxx xxx xxx xxx Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) xx xx xx xx 2) Bad debts as % of Sales xx xx xx xx 3) Credit Collection and Admin costs xx xx xx xx Total Costs [B] xxxx xxxx xxxx xxxx Net Benefits [A-B] xxx xxx xxx xxx Incremental Net Benefits --- xx xx xx

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Receivables Management

  • 1. RECEIVABLES MANAGEMENT “ Any fool can lend money, but it takes a lot of skill to get it back ”
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  • 16. PROFORMA RECEIVABLES MANAGEMENT Type A- If Fixed Costs is given Credit Policy Present Policy Option 1 Option 2 Option 3 Credit Period (days/ weeks/months) xx xx xx xx Particulars Rs. Rs. Rs. Rs. Sales xxxx xxxx xxxx xxxx Less: Variable Cost xx xx xx xx Contribution xxx xxx xxx xxx Less: Fixed Cost xx xx xx xx Profit [Benefits (A)] xxx xxx xxx xxx Total Cost= Variable Cost +Fixed Cost Average Investment in Receivables (Based on Total Costs) xxx xxx xxx xxx Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) xx xx xx xx 2) Bad debts as % of Sales xx xx xx xx 3) Credit Collection and Admin costs xx xx xx xx Total Costs [B] xxxx xxxx xxxx xxxx Net Benefits [A-B] xxx xxx xxx xxx Incremental Net Benefits --- xx xx xx
  • 17. Type B: If Fixed costs is NOT given. PROFORMA RECEIVABLES MANAGEMENT Credit Policy Present Policy Option 1 Option 2 Option 3 Credit Period (days/ weeks/months) xx xx xx xx Particulars Rs. Rs. Rs. Rs. Sales xxxx xxxx xxxx xxxx Less: Variable Cost xx xx xx xx Contribution [Benefits (A)] xxx xxx xxx xxx Average Investment in Receivables (Based on Sales) xxx xxx xxx xxx Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) xx xx xx xx 2) Bad debts as % of Sales xx xx xx xx 3) Credit Collection and Admin costs xx xx xx xx Total Costs [B] xxxx xxxx xxxx xxxx Net Benefits [A-B] xxx xxx xxx xxx Incremental Net Benefits --- xx xx xx