The document discusses receivables management, defining receivables as amounts owed to a company for credit sales and outlining the importance of managing these debts effectively to maximize returns and minimize risks. It covers key elements like credit policy, credit analysis, collection methods, and the variable aspects of credit management, emphasizing the different types of customers and evaluation techniques like credit scoring and monitoring through average collection periods and aging schedules. The conclusion highlights the significance of a sound credit policy in enhancing sales growth and effective financial planning within companies.

1. Receivables Management
By
Madhuri 18MBMB03
Vinodh 18MBMB09
K.Priya Bharathi 18MBMB15
Isaac Livingston 18MBMB21
Bhargav 18MBMB29

2. “Any fool can lend
money but it takes a lot
of skill to get it back”

3. Learning Objectives
● Receivables Management
● Sound Credit Policy
● Variables of Credit Policy
● Control and Monitoring of Receivables
● Factoring
● Receivables Management in India
● Summary

5. Receivables means...
➔ Able to be received.
➔ Receivables are the sales made on credit basis.
➔ The debt owed to a company by its customers for goods
or services that have been delivered or used but not yet
paid for.

6. Receivables Management means...
It is the process of making decisions relating to investment in
trade debtors. Certainly 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.

7. Objectives of Receivables Management
● Maximise the return on investment in receivables.
● Maximise the sales to the extent the risk involved remains
within the acceptable limit.
● Maintaining up-to-date record.
● Accurate billing.
● Establish the credit policies.

8. Benefits of Receivables Managements
● Growth in sales.
● Increase in Profits.
● Capability to Face competition.
● Helps to increase customer satisfaction.
● Takes control of sales processes

9. Why do companies grant credit ???
● Competition
● Buyer’s status
● Buyer’s requirement
● Relationship with Dealers
● Marketing tool
● Industrial practice
● Company’s Bargaining power

10. ➢ Accounts receivable are usually current assets that arise
from selling merchandise or providing services to
customers on credit. Accounts receivable are also known
as trade receivables. Receivables is the term that refers to
both trade receivables and non trade receivables.
Accounts Receivables and Trade Receivables:
Account Receivables and Debtors
➢ A debtor is someone who owes you money, normally
because you have invoiced them for goods or services
supplied. The invoice details what they owe and why. The
process of managing debtors is often referred to as
Accounts Receivable.

11. Credit Policy
➔ Guidelines that spell out how to decide which customers are
sold on open account, the exact payment terms, the limits
set on outstanding balances and how to deal with
delinquent accounts.
➔ Credit policy refers to the application of those factors which
influence the amount of trade credit, i.e. Investment in
receivables
➔ TWO TYPES:-
1. Liberal or lenient
credit policy.
2. Stringent or light
credit policy.

12. Optimum Credit Policy

13. Credit Policy Variables
The major controllable decision variables include the
following:
1. Credit Standards
2. Credit analysis
3. Collection policy and procedures
4. Credit granting Decisions
5. Credit Terms

14. 1. Credit Standards
● Credit Standards are the criteria which a firm follows in
selecting customers for the purpose of credit extension.
● The firm may have tight credit standards or loose credit
standards.

15. 2. Credit Analysis
A. Credit standards influence the quality of the firm’s
customers.
B. The two aspects of the quality of customers:
1. Time taken by customers to repay credit obligation-
Average collection period(ACP)
2. Default rate – Bad-debt ratio

16. 2. Credit Analysis (cont)
C. To estimate the probability of default, the financial or credit
manager should consider three C’s:
1. Character: refers to the customer’s willingness to pay.
2. Capacity: refers to the customer’s ability to pay.
3. Condition: refers to the prevailing economic and other
conditions which may affect the customer’s ability to
pay.

17. Categories of customers
❖ Good accounts: that is, financially strong customers.
❖ Bad accounts: that is, financially very weak, high risk
customers.
❖ Marginal accounts: that is, customers with moderate
financial health and risk.

18. 3. Numerical Credit Scoring
● A firm can use numerical credit scoring to appraise credit
applications when it is dealing with a large number of
small customers.
● The numerical credit scoring models may include:
○ Ad hoc approach.
○ Simple discriminant analysis.
○ Multiple discriminant analysis.

19. Ad hoc Approach
● To determine the credit worthiness of customers.
● The attributes identified by the firm may be assigned
weights depending on their importance and be combined
to create an overall score or index.

21. Simple Discrimination analysis
● The firm may use two factors to distinguish between good
and bad customers.
● Two ratios:
1. EBDIT to Sales
2. operating cash flows to Sales

22. The discriminating index is:
Z = 1.88 EBDIT/S ratio + 1 OCF/S ratio

23. Multiple Discriminant Analysis
● The technique of multiple discriminant analysis combines
many factors according to the importance (weight) to be
given to each factor and determines a composite score to
differentiate good customers from bad customers.
● Z= 0.012(NWC/TA) + 0.014(RE/TA) +0.033(EBIT/TA) +
0.06 (MV/D) + 0.010(S/TA)

24. 4. Credit Granting Decisions
● The firm’s decision whether or not to grant credit to a
customer is the Credit Granting Decision.
● The firms should use NPV Rule to make the decision
➔ If NPV is positive, grant credit
➔ If NPV is negative, do not grant credit

25. Credit Granting Decision (contd.)
● If credit is granted - The firm will benefit if customer pays
● If credit is not granted
- The firm avoids the probability of any loss.
- The firm loses the opportunity of increasing its
profitability
● Expected Net Payoff is the difference between the present
value of Net benefit and the present value of expected
loss.

26. Decision Tree Approach

27. An example
Suppose a customer wants to purchase goods of Rs.20,000
on four month credit from a wholesale company. There is 90%
probability that the customer will pay in four months and 10%
probability that he will not pay anything. The firm’s investment
(equal to cost of goods sold) is Rs14,000. The firm’s required
rate of return is 18%. Should credit be granted?

28. 5. Credit Terms
The stipulations under which the firm sells on credit to
customers are called Credit Terms.
These stipulations include:
● The Credit Period
● The Cash Discount

29. Credit Period
● The length of time for which credit is extended to
customers is called the Credit Period.
● Two factors cause increase in investment of receivables if
credit period is extended:
(a) Incremental sales result in incremental receivables
(b) Existing customers will take more time to repay credit
obligation, thus increasing the level of receivables.

30. Change in credit policy
Sudarsan Trading Limited is considering to increase it’s credit
period from ‘net 35’ to ‘net 50’. The firm’s expected sales to
increase from Rs.120 Lakhs to Rs.180 Lakhs and average
collection period to increase from 35 days to 50 days. The
bad-debt loss ratio and collection cost ratio are expected to
remain at 5% and 6% respectively. The firm’s variable costs
ratio is 85%, corporate tax rate is 35% and the after tax
required rate of return is 20%. The change of credit policy has
to be evaluated.

31. Cash Discount
● Cash discount is a reduction in payment offered to
customers to induce them to repay credit obligations within
a specified period of time, which will be less than the
normal credit period.
● In practice, credit term would include
(a) Rate of cash discount
(b) Cash discount period
(c) Net credit period

32. Monitoring Receivables
1. Average Collection Period
2. Ageing Schedule
A firm needs to continuously monitor and control it’s
receivables to ensure the success of collection efforts
Two traditional methods of evaluating the management of
receivables are:
These methods have certain limitations to be useful
in monitoring receivables
A better approach is the Collection Experience
Matrix

33. Average Collection Period
● The average collection period is compared with the firm’s
stated credit policy to judge the collection efficiency.
● An extended collection period delays cash inflows, impairs
the firm’s liquidity position and increases the chances of
bad debt losses.
● The average collection period measures the quality of
receivables.

34. Limitations
There are two limitation with this method.
● It provides an aggregate picture of collection experience
and is based on aggregate data
● It is susceptible to sales variations and period over which
sales and receivables have been aggregated.
Thus average collection period cannot provide a very
meaningful information about the quality of outstanding
receivables.

35. Ageing Schedule
● It breaks down receivables according to the length of time
for which they have been outstanding.
● Ageing schedule provides more information about the
collection experience.
● It helps to spot out the slow-paying debtors.
Limitations:
● It also suffers from the problem of aggregation
● It does not relate receivables to sales of the
same period.

36. Ageing Schedule Problem
Outstanding Period (Days) Outstanding Amount of
Receivables (Rs)
Percentage of total
Receivables (%)
0-25 2,00,000 50
26-35 1,00,000 25
36-45 50,000 12.5
46-60 30,000 7.5
Over 60 20,000 5
4,00,000 100

37. Collection Experience Matrix
● The key is to relate receivables to the sales of the same
period, when sales over a period of time are shown
horizontally and associated receivables shown vertically in
a tabular form, a matrix is constructed.
● This method of evaluating receivables is called Collection
Experience Matrix.

38. Collection Experience Matrix
Suppose that the financial manager of a firm is analysing it’s
receivables from credit sales of past six months starting from
July to December. The credit sales of the firm are as follows:
Rs Lakh Rs Lakh
July 400 October 220
August 410 November 205
September 370 December 350

39. From the sales ledger, the financial manager gathered
outstanding receivables data for each month’s sales. The
information is as follows:
Month July August September October November December
Sales 400 410 370 220 205 350
Receivables
July 330
August 242 320
September 80 245 320
October 0 76 210 162
November 0 0 72 120 160
December 0 0 0 40 130 285
If the percentages increase as we move down any
diagonal, it implies that the firm is unable to collect
it’s receivables faster.

53. Collection Methods of Receivables
● Post-dated cheques
● Debt Collector
● Bills of Exchange
● Bank Drafts
● Pay orders
● Lock-box system
● Concentration banking
● Factoring

54. Management of Trade Credit in India
Observations of management of trade credit in India is
divided into three broad areas:
1.Credit Policy
2.Credit Analysis
3.Control of Receivables

55. 1. Credit Policy
● Very few companies in India have attempted a
systematic circulation and formalization of their
credit policy.
● Credit period offered by firms to customers varies
from 0 to 60 days.
● The practice of offering cash discount for prompt
payment is very common.

56. 2. Credit Analysis
● Prospective customers are generally required to furnish
two or three trade references to creditors.
● Experian, Highmark, Equifax, CIBIL are the credit rating
agencies in India. Creditors obtain reliable information
about the credit standings of prospective customers from
these agencies.
● Sometimes customers are requested to advise their
bankers to provide credit information.

57. The larger business firms usually classify their customers
into several credit categories.
One large pharmaceutical concern, for example, uses the
following classifications.
● A - Completely reliable customers.
● B - Highly reliable customers.
● C - Slightly risky customers.
● D - Doubtful customers.
2. Credit Analysis(cont)

58. 3. Control of Receivables
● Monitoring and controlling of accounts receivable is often
neither very thorough nor systematic. Very few firms In
India have well-defined systems for monitoring and
controlling accounts receivables.
● The measures commonly employed for judging whether
accounts receivable are ‘in control’ are:
1. Bad debt losses
2. Average collection period
3. Aging schedule

60. Conclusion
● Liberalised credit policy helps to increase the growth of
sales.
● Credit ensures higher investment in trade debtors, which
will produce larger sales.
● Credit gives guidance to the management for effective
financial planning and control.
● Trade Credit helps to make effective coordination between
finance, production, sales, profit and cost.

61. Role of Business Analytics and
Data Scientists in
Receivables Management

62. References
● Journal paper on “A STUDY ON RECEIVABLES MANAGEMENT OF INDIAN
PHARMACEUTICAL INDUSTRY AND ITS IMPACT ON PROFITABILITY”
http://shodhganga.inflibnet.ac.in/bitstream/10603/113353/17/paper-2.pdf
● Bank credit card Terms and Conditions
https://www.hdfcbank.com/Infinia/terms_conditions.aspx
● Financial Management book by IM Pandey
● Financial Management book by Prasanna Chandra