REPORT FINMAN

1. ACCOUNTS RECEIVABLE
MANAGEMENT
FINMAN230
LENDING COMPANY
August 18, 2014
“Any fool can lend money, but it
takes a lot of skill to get it back.”

2. INTRODUCTION
What are receivables?
Why do we need receivables?
Understanding Receivable?
• Reach sales potential
• Competition
• Receivables are sales made on credit
basis.
• As a part of the operating cycle
• Time lag between sales and receivables
creates need for working capital

3. GRANTING CREDIT
Basic decisions
To give credit or not
Selecting the right policy

4. OBJECTIVES AND FACTORS IN
DETERMINING A/R POLICY
• 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

5. Credit Policies
A set of rules that includes the firm’s
credit period, discounts, credit
standards, and collection procedures
offered.

6. Credit Policies

7. Credit Policies
Credit period is the length of time buyers are given to pay for their
purchases.
Collection policy refers to the procedures used to collect past due
accounts, including the toughness or laxity used in the process.
Credit standards refer to the required financial strength of acceptable
credit customers. With regard to credit standards, factors considered for
business customers include ratios such as the customer’s debt and
interest coverage ratios, the customer’s credit history (has the customer
paid on time in the past or tended to be delinquent),
Discounts are price reductions given for early payment. The discount
specifies what the percentage reduction is and how rapidly payment
must be made to be eligible for the discount.

8. Setting and Implementing the
Credit Policy
Credit policy is important for three main reasons:
1. It has a major effect on sales
2. It influences the amount of
funds tied up in receivables,
3. It affects bad debt losses.

9. COSTS ASSOCIATED WITH
ACCOUNTS RECEIVABLES
• 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.

10. TRADE-OFFS BETWEEN THE
CREDIT POLICY
Developing a credit policy is something a
business eventually has to face. One of the
basic decisions you have to make when
starting a business is whether or not you
are going to extend credit to other
businesses and consumers. This is a
decision to be taken very seriously as it will
impact your cash flow and even your profit.

11. TRADE-OFFS BETWEEN THE
CREDIT POLICY
Here are some factors that you should consider when developing a
credit policy and that should influence your decision whether or not to
extend credit to customers. You should grant credit only if the positives
of doing so outweigh the negatives. Often, this is difficult to determine.
1. The Effect on Sales Revenue
2. The Effect on Cost of Goods Sold
3. The Probability of Bad Debts
4. Offering a Cash Discount
5. Taking on Debt

12. TRADE-OFFS BETWEEN THE
CREDIT POLICY
1. The Effect on Sales
Revenue
– The reason you would grant credit in the first place is so your
customers can delay paying you. This is convenient for your
customers and will probably win customers for you, but it is not
so convenient for you and your bottom line, at least on an
immediate basis. Sales revenue from the sale you made to your
customer will be delayed for either the discount period or the
credit period, or perhaps longer if the customer is late in making
the payment. The upside is that you may be able to raise your
prices if you offer credit.
– You have a trade-off. The possibility of more customers and
higher sales prices if you offer credit in exchange for possible
delayed and late payments. Unfortunately, it's hard to quantify
this.

13. TRADE-OFFS BETWEEN THE
CREDIT POLICY
2. The Effect on Cost
of Goods Sold
– Whether you sell products or services you have to have
them available and, in the case of products, in stock, when a
sale is made. When you extend credit, that means paying for
that product or service in order to have it in stock but not
getting paid for it immediately when it is purchased. Even
though you will eventually get paid, your business has to have
enough cash flow to compensate for the delayed payment. In
addition, you lose any interest income you might have earned
on that money.
– Again, you have a trade-off. This time it is more customers
and higher sale prices in exchange for lost interest income and
temporarily lower cash flow.

14. TRADE-OFFS BETWEEN THE
CREDIT POLICY
3. The Probability
of Bad Debts
– If a company makes all its sales for cash, there is no
possibility of bad debts or debts it cannot collect. If any
percentage of the company's sales are on credit, there exists
the possibility of bad debts or debts you, as a business owner,
will never collect. When you are developing your credit policy,
you should allow for some percentage of your credit accounts
that will never be paid.
– The trade-off here is that some percentage of your credit
sales will never be paid. You have to decide if this factor is
worth more customers and higher sales prices.

15. TRADE-OFFS BETWEEN THE
CREDIT POLICY
4. Offering a Cash
Discount
– Particularly when you offer credit on a business-to-business
(B2B) basis, most companies offer other businesses a cash discount. In
other words, if the business pays the bill within the discount period, that
business gets a discount. If they don't pay within the discount period, then
they must pay within the credit period or the original period within which
the bill is due.
– Cash discounts are often stated like this example: 2/10, net 30. If
those are your credit terms, it means that you offer a 2% discount if the
bill is paid in 10 days. If you don't take the discount, the bill is due within
the 30 day credit period.
– Is getting your money in 10 days worth the 2% discount that you
offer? That's the trade-off you have regarding cash discounts and whether
you should offer them

16. TRADE-OFFS BETWEEN THE
CREDIT POLICY
5. Taking on Debt
– If you, as a business owner, decide to offer credit to your
customers, chances are you will have to take on debt to finance
your accounts receivables. As a small business, you may not be
able to afford to sell your products or services without immediate
payment unless you have a good working capital base. If you have
to take on debt, you have to factor in the cost of short-term
borrowing as part of your decision to offer credit.
– Offering credit to your customers is a big decision with wide-
reaching effects for your company. You have to consider the
factors above and more. Will offering credit result in repeat
business? Do you have the time and resources to collect late
payments? Make this decision wisely.

17. THE 5C’s of CREDIT
• Character- Reputation, Track Record
• Capacity- Ability to repay ( earning capacity)
• Capital- Financial Position of the company
• Collateral- The type and kind of assets pledged
• Conditions- Economic conditions & competitive factors
that may affect the profitability of the customer

18. SUMMARY
1. For most firms, account receivables and
inventories are the most important categories
of current assets. Management is concerned
with reaching optimal levels where the
marginal benefits of added investment just
equal incremental costs.
2. Returns from investments in accounts
receivable are realized through increased
profitable sales. Costs include the expenses of
financing and losses from bad debts.

19. SUMMARY
3. Credit information on individual accounts is
available from credit rating agencies, banks,
other suppliers, and from customers
themselves.
4. The cost of short-term bank borrowing is
usually the cost of financing receivables. The
most difficult aspect of credit analysis is the
assessment of the effects of altered credit
policies on sales and the estimation of bad
debts.

20. “Today, there are three kinds of
people: the have’s, the have-not’s,
and the have-not-paid-for-what-
they-have’s.”
-Earl Wilson