Receivables management

1. 
Jagran Lakecity
University
SUBMITTED TO:- SUBMITTED BY:-
Dr. Rajesh Yadav Sir AAKASH TIWARI
(2014BCHO033)
ISSHAN NIGAM
(2014BCHO005)

2. 
RECEIVABLES
MANAGEMENT

3. 
Receivables, also termed as trade credit or debtors are
component of current assets. When a firm sells its product in
credit, account receivables are created.
Account receivable are the money receivable in some future
date for the credit sale of goods and services at present. These
days, most business transactions are in credit. Most companies,
when they face competition, use credit sales as an important tool
for sales promotion.
What is Receivables ?

4. 
As a sales promotion tool, credit sale enhances firm's sales
revenue and ultimately pushes up the profitability. But after the
credit sale has been made, the actual collection of cash may be
delayed for months. As these late payments stretch out over time,
they may cause substantial drop in a company's profit margin.
Since the extension of credit involves both cost and benefits,
the firm's manager must be able to measure them to determine the
ultimate effect of credits sales.
Introduction of Receivable
Management

5. 
In this prospective, we define the Receivable Management as
the aspect of a firm's current assets management, which is
concerned with determining optimum credit policy associated to a
firm, such that the benefit from extension of credit is greater than
the cost of maintaining investment in accounts receivables.

6. 
Receivables management refers to the decision
a business makes regarding to the overall credit,
collection policies and the evaluation of individual
credit applicants.
Receivables Management is also called trade
credit management.
Receivables management

7. 
The basic purpose of firm's Receivable management is to
determine effective credit policy that increases the efficiency
of firm's credit and collection department and contributes to the
maximization of value of the firm.
The specific purposes of receivable management are as
follows:
1. To evaluate the creditworthiness of customers before granting or
extending the credit.
2. To minimize the cost of investment in receivables.
Significance And Purpose Of
Receivable Management

8. 
3. To minimize the possible bad debt losses.
4. To formulate the credit terms in such a way that results into
maximization of sales revenue and still maintaining minimum
investment in receivables.
5. To minimize the cost of running credit and collection
department.
6. To maintain a trade off between costs and benefits associated
to credit policy.

9. 
 Competition
 Market Share
 Promotion
 Credit Availability to Customers
 Customer Convenience
 Profit
Reasons to Offer Credit :

10. 
 Trade Credit:
It occurs when one business sells goods to another business.
 Consumer Credit:
It occurs when a business sells goods to an individual.
Trade credit terms are more liberal than consumer credit
terms. A company may offer credit on open account or trade bill as
documentation of the debt.
 Bank Credit:
It is in forms of cash credits/overdrafts, loans,
Purchase/discount bills, letter credit, working capital term loans.
Trade, Consumer & Bank
Credits:

11. 
1. Capital
 Aggregate Liquidity position
 Total Dept. position
2. Character
 Willingness to pay the debts
3. Collateral- securities
4. Capacity
 Management capacity to run the business
 Physical Capacity
5. Condition
 Economic condition of applicant
 Industry condition in general
The 5 c’s of credit analysis

12. 
 Financial Motive
Seller charge a higher price when selling on credit.
 Operating Motive
Here suppliers respond to variable demand by the way
in which they extend trade credit instead of using more costly
response such as installing extra capacity building or depleting
inventories of forcing customers to wait in line.
 Contracting Cost Motive
Buyers can inspect the quantity as well as quality prior
to payment.
 Pricing Motive
If change in selling price is not possible due to oligopoly
or govt. norms then by extending credit seller can charge varying
amounts to their customers.
Motives for Extension of Trade
Credits

13. 
Cost of Receivables
 Collection Costs :
 i.e. for maintenance of credit & collection department, expenses incurred
for obtaining information about credit-worthiness of potential customers.
 Capital Cost/ Cost of Financing:
 Delinquency Costs:
 i.e. cost of financing for an extended period, cost of extra steps to be taken
to collect overdue e.g. reminders, legal charges etc.
 Default Costs
 E.g. Bad debts etc.
Cost & benefits of maintaining
Receivables

14. 
Benefits of Receivables
 Increased Sales
 Anticipated Profits
A liberal policy can take two forms:
 Sales Extension
 Sales Retention

15. 
Our aim is to derive a techniques which the company
can apply in order to determine an optimum credit
policy. We can gain a greater appreciation for the
credit granting process if we know the sequence of
events initiated when a business makes a credit sales.
While determining the credit policy the firm has
to decide the following two things:
 Whether or not to extend credit to a customer.
 How much credit to extend.
Determination the appropriate
Receivables Policy

16. 