2. 2
What are receivables?
•Receivables are sales made on credit basis.
Why do we need receivables?
•Reach sales potential
•Competition
Understanding Receivables
•As a part of the operating cycle
•Time lag b/w sales and receivables creates
need for working capital
Receivables
Inventory
Cash
Operating
Cycle
INTRODUCTIONRECEIVABLESMANAGEMENT
3. 3
Basic decisions
1. To give credit or not
2. Duration of credit period
(selecting the right policy)
• Decision based on cost-benefit analysis
•Positive net benefit-Credit granted (Highest Net benefit policy chosen)
•Negative net benefit- Credit not granted
GRANTING CREDITRECEIVABLESMANAGEMENT
4. 4
COLLECTION COST:
Administrative costs incurred in collecting the accounts
receivable.
CAPITAL COST:
Cost incurred for arranging additional funds to support credit
sales.
DELINQUENCY COST:
Cost which arises if customers fail to meet their obligations.
DEFAULT COST:
Amounts which have to written off as bad debts.
DIFFERENT TYPES OF COSTS ASSOCIATEDRECEIVABLESMANAGEMENT
5. 5
• Creating, presenting and collecting accounting receivables
• Establish and communicate the credit policies
• Evaluation of customers and setting credit limits
• Ensure prompt and accurate billing
• Maintaining up-to-date records
• Initiate collection procedures on overdue accounts
OBJECTIVESRECEIVABLESMANAGEMENT
6. 6
Customer Evaluation- The 5 C’s
Character- Reputation, Track Record
Capacity- Ability to repay( earning capacity)
Capital- Financial Position of the co.
Collateral- The type and kind of assets pledged
Conditions- Economic conditions & competitive factors that
may affect the profitability of the customer
STEPS IN CREDIT ANALYSIS
“Investigating the customer”
RECEIVABLESMANAGEMENT
7. 7
• Financial statements: long term, short term solvency etc can be judged
• Bank references: information about the customer from another bank
• Trade references: information about customer obtained from firms based
on their experiences
• Credit bureaus: to check the financial viability of the business
• Third party guarantees
• Field visit: to get information of the existence and general condition of the
customer’s business
STEPS IN CREDIT ANALYSISRECEIVABLESMANAGEMENT
8. 8
• Helps improve customer satisfaction:
enhance service level and increase retention with customized
information.
• Takes control of sales processes:
manage your sales process more effectively by measuring trends
and analyzing performance.
• Enhance your productivity:
help reduce administrative costs and enhance office productivity
• Streamline revenue allocation:
managed calculations to fit your business needs
• Providing access to vital information
BENEFITSRECEIVABLESMANAGEMENT
9. 9
• Centralised / Decentralised collection system
• Post – dated cheques
• Pay Orders / Bank drafts
• Bills of Exchange
• Lock – box System
• Drop – box System
• Factoring
• Collection staff/ agents
• Debt collector
• Del Credere agent
• Concentration banking
COLLECTION METHODSRECEIVABLESMANAGEMENT
10. 10
• Centralised / Decentralised collection system
• Post – dated cheques
• Pay Orders / Bank drafts
• Bills of Exchange
• Lock – box System
• Drop – box System
• Factoring
• Collection staff/ agents
• Debt collector
• Del Credere agent
• Concentration banking
COLLECTION METHODSRECEIVABLESMANAGEMENT
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
11. 11
• Centralised / Decentralised collection system
• Post – dated cheques
• Pay Orders / Bank drafts
• Bills of Exchange
• Lock – box System
• Drop – box System
• Factoring
• Collection staff/ agents
• Debt collector
• Del Credere agent
• Concentration banking
COLLECTION METHODSRECEIVABLESMANAGEMENT
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.
12. 12
• Centralised / Decentralised collection system
• Post – dated cheques
• Pay Orders / Bank drafts
• Bills of Exchange
• Lock – box System
• Drop – box System
• Factoring
• Collection staff/ agents
• Debt collector
• Del Credere agent
• Concentration banking
COLLECTION METHODSRECEIVABLESMANAGEMENT
an agency, factor, or broker acting
as an intermediary between sellers
and buyers and guaranteeing
payment
13. 13
• Centralised / Decentralised collection system
• Post – dated cheques
• Pay Orders / Bank drafts
• Bills of Exchange
• Lock – box System
• Drop – box System
• Factoring
• Collection staff/ agents
• Debt collector
• Del Credere agent
• Concentration banking
COLLECTION METHODSRECEIVABLESMANAGEMENT
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
14. 14
• DAILY SALES OUTSTANDING (DSO)
DSO = Accounts Receivable
Avg. Daily Sales
• AGEING SCHEDULE
Classifies the outstanding accounts receivables at a given
point of time into different age brackets. Ex.
Age Group (days) % of receivables
0-30 30
31-60 40
61-90 25
>=90 5
CONTROL OF RECEIVABLES MANAGEMENTRECEIVABLESMANAGEMENT
15. 15
• ABC Analysis of Receivables
A – Represents a small proportion of accounts of debtors
representing a large value
B – Represents moderate value
C – Represents a large number of accounts of debtors but
representing a small amount
CONTROL OF RECEIVABLES MANAGEMENTRECEIVABLESMANAGEMENT
Category % of accounts to
Total Accounts
% of Balance
Outstanding to Total
Debtors’ Balance
A 15 75
B 35 20
C 50 5
16. 16
PROFORMARECEIVABLESMANAGEMENT
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 A- If Fixed Costs is given
17. 17
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
Type B: If Fixed costs is NOT given.
PROFORMARECEIVABLESMANAGEMENT
