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Management of receivables


Published on

by sahilb

Published in: Economy & Finance, Business

Management of receivables

  2. 2. AFTER PRESENTATION  Definition of Receivables  Objective  Reasons to offer credit  Cost associated with credit polices  5 c’s  Optimum credit policy  Factors of credit policy  Factors determine credit standard  Credit policy decision  Steps in credit policy decision  Collection policy  Aspect of collection policy  Collection period
  3. 3. RECEIVABLES  Receivables is known as when firm makes an ordinary sale of goods or service and does not receive payment , it grant trade credit and creates accounts receivables which would be collected in future.  “ In simple terms it known as sales of good and service in credit and make an promissory note to receive payment later.”
  4. 4. Objectives of Receivables  Creating, preserving, and collecting A/R.  Establishing and communicating credit policies.  Evaluation of customers and setting credit lines.  Ensuring prompt and accurate billing.  Maintaining up-to-date records of accounts receivables.  Initiating collection procedures on overdue accounts.
  5. 5. Reasons to Offer Credit Competition Market Share Promotion Credit Availability to Customers Customer Convenience Profit
  6. 6. Cost Associated With a Credit policy Credit Department Costs  Credit Evaluation Costs  A/R Carrying Cost  Discounted Payments  Selling and Production Cost  Collection Expenses  Bad Debts
  7. 7. The Five C’s of Credit or Receivable control  Character  Capacity  Capital  Collateral - security  Conditions – Terms of asset sale
  8. 8. Optimumcredit policy  Credit policy mean those decision variables that influence the amount of trade credit. i.e. investment in receivables.  A firm’s credit policy provides the guide lines for determining whether to extend credit to customer and how much credit to extend.  A credit policy may be lenient or tight .
  9. 9. Factors of Credit Policy  Cost of credit extension  Collection cost  Capital cost  Delinquency cost  Default cost  Benefits of credit extension  Oriented to sales expansion  Protect from competition
  10. 10. Factor determine credit standard Collection cost  Average collection period  Level of bad debt  Level of sales
  11. 11. Days’ Sales Outstanding (DSO) Assume that a company has outstanding receivables of $350,000 at the end of the first quarter and credit sales of $425,000 for the quarter. Using a 90-day averaging period, the DSO for this company can be computed as follows: Sales During Period $425,000 Avg.Daily Credit Sales = = = $4,722.22 Number of Days in Period 90 Outstanding A/R $350,000 DSO = = = 74.11Days Avg.Daily Credit Sales $4,722.22 Average Past Due =DSO - Avg.Days of Credit Terms = 74.11Days - 60 Days =14.11Days If the company’s credit terms are net 60, the average past due is computed as follows:
  12. 12. Credit policy decision  Credit standard  Credit policy Besides credit standard the second aspect of credit policy is the credit analysis and investigation which involves the evaluation of credit worthiness of the individual’s desirous to obtain credit from the firm. • Character • Capacity • Capital • Collateral • Conditions
  13. 13. Steps in Credit policy  Obtaining credit information  Internal  External  Financial statements  Bank reference  Trade reference  Credit bureau reports  Analysis of credit information  Quantitative aspects  Qualitative aspects
  14. 14. Credit terms  Credit terms the repayment of the amount under the credit sale.  Three components are:  Credit period  Sales volume of the firm would increase  Average collection period would increase  Bad debt expensive would increase. Thus the net effect of increase period may be negative.
  15. 15. Cont.… Cash discount  This is the rate of discount offered to customer in which the overdue amount will be reduced by this amount. The changes in the discount rate would have both positive and negative effects. Item Direction of change Effect on profit Sales volume Increase Positive Average collection period Decrease Positive Bad debt expenses Decrease Positive Profit per unit Decrease negative
  16. 16. Cont.….  Cash discount period  It also affects the firm’s collection period and profit. An increase in it and it will have a positive effect on profit because many customer who did not take advantage of discount in the past may now avail it. It reduces the average collection period. However, when the discount period is increased there is also a negative effect on profit because it would make average collection period slow.
  17. 17. Collection policies  Collection policies are the last area involved in accounts receivables management. These refers to the procedures followed to collect accounts receivable when they become due after the expiry of the credit period.  Their purpose should be to speed up the collection of dues.  Various steps to collect dues from customer by firm are: letter, telephone calls etc.
  18. 18. Aspect of collection policies  Degree of efforts to collect the over dues  Tight : the collection policy would be tight if very vigorous procedure are followed. A tight collection policy has both types of implication benefits as well as cost. The management has to consider the trade- off between them. The bad debt expenses would decline and average collection period will be reduced. There fore the profit of the firm will increase. There may be decline in sales volume because some consumer may not like the pressure and switch to another one.
  19. 19. Cont.…  Lenient : a lenient collection effort also affect the cost benefits trade off. The effect of lenient policy will be just the opposite of the tight policy. Item Direction of change Effect on profit Bad debt expenses Decrease Positive Average collection period Decrease Positive Sales volume Decrease Negative Collection cost Increase Negative Tight
  20. 20. Types of collection period  This relates to the steps that should be taken to collect over dues from the customers. The collection policy should have clear cut guide-lines about the sequences of collection efforts.  After the collection period is over and payment remain due, the firm should take measures to collect them.
  21. 21. Cont.…  Following steps may be taken in this connection.  Letter to expedite payment  Telephone visit  Personal visit  Help to collection agencies  Legal action