3. Receivable management is the process of making decisions relating to
investment in trade debtors. Certain investment in receivables is necessary
to increase the sales and the profits of the firm. But at the same time
investment in this asset involves cost consideration also.
4. Importance of Receivable Management
• Cash flow is always considered as the bloodline of any business organization.
Badly managed Receivables can break the company.
• Most of the companies that go bankrupt have Cash flow problems. Companies
with a lack of profit can survive, but a lack of cash flow is fatal.
• A reliable and predictable Receivables will ensure steady cash flow manageme
nt of the organization. Amounts receivables with no due dates are useless.
5. Credit and Collection Policies
A credit collection policy is a document that includes “clear, written
guidelines and terms conditions for supplying goods on credit,
customer qualification criteria, procedure for making collections
and steps to be taken in case of customer delinquency”
6. Credit and Collection Policies
A sample credit policy contains a number of elements that are designed to mitigat
e the risk of loss from extending credit to customers that cannot pay. The key parts
of a credit policy are as follows:
Example: The company will extend credit to customers if they meet its threshold
criteria for the granting of credit. The basic form of credit is a maximum credit of $
10,000, with no security interest. The maximum credit can be expanded with the a
pproval of the credit manager. In situations where a customer's ability to repay is i
n question, a personal, corporate, or bank guarantee may be required. All terms ar
e net 30 days, with no exceptions if a longer payment term is requested.
7. Credit and Collection Policies: Credit policy, in turn, consists of the
following four variables.
1. Credit period. A firm might sell on terms of “net 30,” which means that the customer must pay wi
thin 30 days
2. Discounts. If the credit terms are stated as “2/10, net 30,” then buyers may deduct 2% of the purc
hase price if payment is made within 10 days; otherwise, the full amount must be paid within 30 day
s. Thus, these terms allow a discount to be taken.
3. Credit standards. How much financial strength must a customer show to qualify for credit? Lower
credit standards boost sales, but they also increase bad debts.
4. Collection policy. How tough or lax is a company in attempting to collect slow paying accounts?
A tough policy may speed up collections, but it might also anger customers and cause them to take t
heir business elsewhere.
8. CREDIT STANDARDS
Credit Standards
The minimum quality of credit worthiness of a credit applicant that is acceptable to t
he firm.
Analyzing the Credit Applicant
Credit analysis is the process of evaluating an applicant's loan request or a
corporation's debt issue to determine the likelihood that the borrower will live up to
his/her obligations. In other words, credit analysis is the method by which one
calculates the creditworthiness of an individual or organization.
9. Collection policy
A collection policy is the set of procedures a company uses to ensure payme
nt of accounts receivables. Similar to the credit policy as a whole, the collection
policy should be written and strictly followed. Like a written credit policy, a colle
ction policy serves as a window into the company philosophy as far as how cre
dit and debt are treated.
Generally, a collection policy systemizes the steps taken to recover amounts due
prior to litigation. This includes:
When customers should be contacted
How they should be contacted, how disputes are resolved
When internal or external “collectors” are used to step-up collection efforts
When and whether to turn the account over to litigation or write-off the debt
10. Collection policy: In-House vs Outsourced Collections
The first part of any collection policy is generally in-house. The question is whet
her or not the collection policy should keep the whole process in-house, or if it s
hould eventually be outsourced, and to determine when that point comes.
Steps like making a nice phone call before the payment is due in an attempt to
ensure prompt payment, and even a stern letter after the debt becomes due ca
n easily be handled in-house. However, there are certain things that an outside
collection company can do that would strain the time or resources of many busi
nesses.
11. Collection policy: In-House vs Outsourced Collections
Outside debt collection agencies can be beneficial for several reasons, including
their experience specifically in debt-collection, notifying the debtor that the comp
any has escalated the debt collection process, spending time and resources to c
ontinually contact the debtor with letters or phone calls and responding to and lo
cking down promises to pay, reporting the debtor to credit bureaus, and more.
13. Reference:
• Chapter 15 of Khan, M.Y. and Jain, P.K.,. 7th Edition. Financial Management: Text, Problems and C
ases.
• https://www.enjayworld.com/blog/definitive-guide-to-receivable-management/
• Principles Corporate Finance by Richard A. Brealey , Stewart C. Myers , Franklin Allen
