Recievable Management

1. Financial Management
Presentation on
Debtors or Receivable
Management
Under Guidance
of
Mr.Mahantesh
Kuri.
Assistant Professor
MBA
Rani Channamma
University, Belagavi.
Presented By,
Mr.Nyamat
Athani,
Mr.Siddu Jalli
MBA 2nd Semester
Rani Channamma
University, Belagavi
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2. CONTENTS
Meaning of Receivables and its Management
 Objectives of R/M
 Credit Policy
 Credit Standard
 Credit Analysis
 Credit Terms
 Credit period
 Cash Discount
 Cash Discount Period
 Collection Policies
 Degree of Collection effort
 Types of Collection effort
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Receivables Management

3. Receivables is defined as ‘Debt
owed to the firm by customers arising from
sale of Goods or Services in the ordinary
course of business’.
“When firm makes a sale of goods
or services and does not receive payment,
the firm grants trade credit and creates
accounts receivable which could be
collected before or when it becomes due,
this process is called as Receivable
Management”
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4. Objectives
 Trade off between benefits and cost of
extending the credit
 To promote the sale of goods and services
 To maximize the Profit of the firm
 To compete the competition
 To attract the Customers
 To collect the Receivables when it becomes
due.
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Receivables Management

5. Credit Policy
Credit policy is one which provides the
framework for the firm to determine
whether or not to extend credit to a
customer and how much credit to extend
1. Credit Standard
2. Credit Analysis
3. Collection Cost
4. Investments in R/M
5. Bad Debt
6. Sales Volume
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6.  Credit Standards
Credit standards are basic
criteria/minimum requirements for
extending the credit to a customer.
1. Credit ratings
2. Credit references
3. Average payment period
4. Certain financial ratios.
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7.  CREDIT ANALYSIS
Credit analysis is the procedures for
evaluating credit applicants, it includes
gathering the credit information and
analyzing it.
Information can be
•Internal
•External
Agencies
Financial statements
Bank references
Trade References
Analyses of the Information
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8. CREDIT TERMS
The stipulations under
which goods are sold on credit are
referred to as CREDIT TERMS.
These relate to repayment of the amount under the
credit sale.
1. Credit Period
2. Cash Discount
3. Cash Discount Period
2/10 net 30
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Receivables Management

9. Example:
Gokak and company is currently operating as follows
Selling products in Units ------------------- 30,000
Selling product ----------------------------Rs 10 per unit
Variable cost ----------------------------Rs 06 per unit
Fixed cost ----------------------------Rs 60,000
Total cost per unit ----------------------------Rs 8 per unit
Average collection period ------------------- 30 days
Planning to relax in credit period
Credit Period --------------------------- 45 days
Expected increase in sales ----------------- 15% increase
No change in bad debt and Collection cost is negligible.
It leads to increase in WC -----------------Rs 10,000
The required rate on investment ------- 15%
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Receivables Management

10. SOLUTION
1. Cost of incremental investment in receivable
Proposed plan
Num of days in the year /Average collection period
360/45 =8
Present plan 360/30 =12
Total cost of sales : num of unit *cost per unit
Present plan 30,000*8 =2,40,000
Proposed plan (30,000*8)+(4,500*6) =26,7000
Average investment
Present plan =2,40,000/12 =20,000
Proposed plan =2,67,000/8 =33,375
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11. CONT ….
 The cost of marginal investment in account
receivable
Average investment with proposed plan 33,375-
Less average investment with present plan 20,000
Marginal investment 13,375
15 per cent as required =13,375*15/100 =2,006.25
Cost of working capital : 10,000*0.15 =1500
(18,000 – 2,006 – 1,500 = 14,494)
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12. Cash Discount’s affect
 The sales volume will be increased
 Shorter collection period
 Negative impact on Profit
effect of increase in cash discount
Item Direction of Change Effect on profits
Sales volume Increases Increases
Average Collection Period Decreases Increases
Bad debts Decreases Increases
Profit Decreases Decreases
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Receivables Management

13. Collection policies
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Collection Policy refers to the
procedures for collecting
accounts receivables when they
are due.
These policy covers two aspects
1. Degree of collection Effort
2. Type of collection Efforts.

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Degree of collection policy refers to the
intensity of collecting process.
 Either it can be
 Strict/Tight
 Lenient/Relaxed collection policy
Effects of Tight Collection effort
Item Direction of change Effects on Profit
Bad Debts Decreases Increases
Average Collection Period Decreases Increases
Sales volume Decreases Decreases
Collection Expenditure Increases Decreases

15. This relates to the steps to be
taken to collect over dues from
the customers.
Letters
Telephone Calls
Personal visits
Help of collection agencies
Legal action
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Receivables Management

16. ENJOY Visit
Receivables Management 27-Sep-14
16 Shrikant Ratan

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18. Credit policy
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Outlet
At least two months to
one year cash
transaction
Personal relationship

19. Credit terms
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 One invoice is to be paid to execute next
invoice
 2% cash discount for cash transaction
Collection of Dues
 2 to 3% bad debts
 No legal action so far
 An extra employee is appointed to collect the
debt

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21. Item Change in Direction Effect on Profits
Sales volume Increases Increases
Average collection
Period
Increases Decreases
Bad Debts Increases Decreases
Collection cost Increases Decreases
Investments in
receivables
Increases Decreases
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