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Credit management

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Credit management

  1. 1. CREDITMANAGEMENTPrepared By: Ketan Vagh Saurabh Raval Nidhi Shah Kushal Shah Chirag Parekh
  2. 2. TABLE OF CONTENTS Terms of payment Credit policy variables Credit evaluation Credit granting decision Control of accounts receivable Credit management in India
  3. 3. TERMS OF PAYMENTS Cash Terms Open Account  Credit Period  Cash Discount  Billing
  4. 4. TERMS OF PAYMENTS Consignment Bill of Exchange Letter of Credit
  5. 5. CREDIT POLICYVARIABLES Credit Standards Credit Period Cash Discount Collection Effort
  6. 6. CREDIT STANDARDS ∆RI = [∆S (1 – V) - ∆S bn] (1 – t) -k ∆I Where  ∆RI = Change in residual income  ∆S = increase in sales  V = ratio of variables costs to sales  bn = bad debt loss ratio on new sales  t = corporate tax rate  k = post tax cost of capital  ∆t = increase in receivables investment.
  7. 7. CREDIT PERIOD∆S *ACP * V360 ∆S/360 = average daily change (increase) in sales. The divisor here can with equal justification be 365, rather than 360 ACP = average collection perid
  8. 8. CASH DISCOUNT ∆RI = [∆S (1 – V) - ∆DIS] (1 – t) + k∆I Where ∆S = Increase in sales V = ratio of variable cost to sales k = cost of capital ∆I = savings in receivables investment ∆DIS = increase in discount cost
  9. 9. COLLECTION EFFORT ∆RI = [∆S (1 – V) - ∆BD] (1 – t) + k∆I Where ∆RI = Change in residual income ∆S = Increase in sales V = ratio of variable cost to sales ∆BD = increase in bad debt cost t = tax rate k = cost of capital ∆I = savings in investment in receivables
  10. 10. Credit Evaluation Type I Error : A good customer misclassified as a poor credit risk. Type II Error: A bad customer misclassified as a good credit risk.
  11. 11. TRADITIONAL CREDITANALYSIS “Five C’s of credit”CharcterCapacityCapitalCollateralCondition Sources of informations about five cFinancial statementBank referencesExperiences of firm
  12. 12. Numerical Credit Scoring Identify factors relevant for credit evaluation Assign weights to these factors Rate the customer on various factors using suitable rating scale. Multiply weights with the rating scale. Add all score to get consumer rating index Based rating index classify customer Factor Facto Rating Factor r Score Past Payment Weigh 4 0.30 1.20 Net Profit t 0.20 4 0.80 Margin Rating 2.00 Index
  13. 13. Discriminant Analysis This technique is employed to construct better risk index. e.g. ABC company manufacture some product for industrial customer, they take two financial ratio into consideration, namely return on Equity and Current ratio. Current Ratio + + + + + + O O+ + O O O + O O O Return on Equity
  14. 14. CREDIT GRANTING DECISION P=Probability that customer pays his dues 1-P=The Probability that Customer can not Pays his dues. Revenue=Revenue from sale Cost =Cost of good sold
  15. 15.  Formula P(Rev-cost)-(1-P)Cost Example ABC company is considering offering credit to a customer.the probability that customer would pay is 0.8 and the probability that customer would default is 0.2.The revenue from sale would be Rs 1200 and cost would be Rs.800Sol:- 0.8(1200-800)-0.2(800) = 160
  16. 16. REPEAT ORDER FORMULA{ P1(Rev1-cost1)-(1-P1)Cost1 }+P1{ P2(Rev2-cost2)-(1-P2)Cost2 } SOLUTION{0.9(2000-1500)-0.1(1500)}+0.9{0.95(2000-1500)-0.05(1500)= 660
  17. 17. CONTROL OF ACCOUNTS RECEIVABLES Two methods for that Days’ sales outstanding Ageing schedule
  18. 18. Days’ sales OutstandingMonth Sales ReceivablesJanuary 150 400February 156 360March 158 320April 190 310May 170 300June 180 320
  19. 19.  DSO= Account receivable Average daily salesQuarter First 320 = 62 days (150+156+158)/90Second 320 = 54 days (190+170+180)/91
  20. 20. Ageing ScheduleIn days Receivables0-30 35%31-60 40%61-90 20%>90 5%
  21. 21. Collection of Matrix Whether the Collection is improving stable or reduced . January February MarchCollection 13 20 24 Ofpayment
  22. 22. CREDIT MANAGEMENT ININDIA Credit Policy Credit Analysis Control of Receivables Room for Improvement

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