Receivable management involves developing credit policies that balance costs and benefits. It includes setting credit standards, terms, and collection procedures. The costs of receivables include financing, administrative, delinquency, and default costs. The benefits include increased sales and profits. Credit evaluation assesses customer creditworthiness based on their character, capacity, and conditions. Factoring involves the sale of receivables to a factor who provides credit protection and administration in exchange for fees and interest. It offers firms financing and specialized receivables management.

1. Receivable Management

2. Learning Outcomes
• Costs and benefits of receivables,
• Credit policy,
• Credit evaluation,
• Factoring,
• Evaluation of credit policies

3. Receivables
• Almost certain and Inevitable to arise
• Firm must develop Credit Policy
• Which includes:
– Credit Standards
– Defining Credit Terms
– Methods to collect dues from customers

4. • Important element of WC
• Type of loan extended by seller to buyer
• Credit sales assume a sizeable proportion of
total sales
• RM becomes area of attention
• Credit policy has cost and benefit associated
with it

5. Receivable Management
• It is defined as “collection of steps and
procedure required to properly weigh the cost
and benefits attached with the credit policies”
• RM consists of matching the cost of increasing
sales with the benefits arising out of increased
sales with the objectives of maximizing the
return on investment of the firm.

6. Cost of Receivables
• Cost of Financing
• Administrative Cost
• Delinquency Cost
• Cost of Default by Customers

7. Benefits of Receivable Management
• Increase in Sales
• Increase in Profits
• Extra Profits

8. Credit Policy
Three decisions to be made regarding Receivables:
1. Which customer the credit be allowed to ?
2. How much credit be extended to a customer?
3. How much period the credit be allowed for?

9. Credit Policy may be defined as “the set
parameters and principles that govern the
extension of credit to customers”
It requires:
i) Credit Standard (customer meets these standard)
ii) Credit Terms (based on these credit is given to customers)
iii) Collection policy and efforts

10. 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 or loose credit standards.
Following point should consider while setting credit
standards”
i) Effect on sales volume
ii) Effect on total bad debts of firm
iii) Effect on total collection cost

11. Credit Standards
• Credit standards influence the quality of
customers. Two aspects:
i)The time taken by customers to repay credit
obligations
ii)The default rate
Three C’s to determine the probability of default-
• Character
• Capacity
• Condition

12. • Based on the information, customers may be
categorized into the following three
categories:
• Good Accounts
• Bad Accounts
• Marginal Accounts

13. Credit Terms
• Credit terms specify how credit will be offered
including
– Length of credit
– Interest rate on credit
– Cost of default
• It should neither be too stringent not too liberal

14. Credit
Term
Effect on
Sales
Invt in
Receivable
Bad Debt Cost
Liberal Increase Increase Increase Increase
Stringent Decrease Decrease Decrease Decrease
Effects of Credit Terms

15. Credit terms
• Credit period: The length of time for which
credit is extended to customers is called
Credit period.
• Cash Discount: A reduction in payment
offered to customers to induce them to repay
credit obligations
15

16. Cost of Discount
Average collection period 40 days
To reduce it firm offers cash discount of 3/10
If balance is Rs. 100 then Annual Financing Cost
is:
AFC = %Discount/(100-%Discount) x 365/(Credit Period – Discount Period)
x 100

17. ABC Ltd. Is offering a cash discount under the
term 3/15, 2/30, net 50. In order to reduce
the average collection period, it has two
alternative policies before it. These are
i) 3.5/12 , 2/30, net 50
ii) 3/15 , 2.5/25, net 50
Evaluate the alternatives and make suggestions

18. AFC =
i) = 3/97 x 365/35 x 100 = 32.25%
ii) = 2/98 x 365/20 x 100 = 37.24%
Alternative-I
AFC = 3.5/96.5 x 365/38 x 100 = 34.84 %
Alternative-II
AFC = 2.5/97.5 x 365/25 x 100 = 37.43%

19. Collection policy and procedures
– regularity of collections
– clarity of collection procedures
– responsibility for collection and follow-up
– case-by-case approach
– cash discount for prompt payment
19

20. CREDIT EVALUATION OF INDIVIDUAL
ACCOUNTS
• Credit Information
– Financial statement
– Bank references
– Trade references
– Other sources
• Credit Investigation and Analysis
– Analysis of credit file
– Analysis of financial ratios
– Analysis of business and its management
• Credit Limit
• Collection Efforts
20

21. MONITORING RECEIVABLES
• Average Collection Period
• Aging Schedule
• Collection Experience Matrix
21

22. Credit Valuation
• It involves determination of the type of
customers who are going to qualify for the
trade credit.
• Decline inn customer quality results in
increased cost of default, collection and credit
investigation.

23. Creditworthiness of Customer
• Three basic factor of creditworthiness
– Character (willingness and practice of customer to honour obligations )
– Capacity (financial ability of customer )
– Collateral (security against credit)

24. Q. Which of the following is not a factor of
customer creditworthiness?
A. Collateral
B. Capacity
C. Character
D. None of these

25. Evaluation of Creditworthiness of
Customer
• It is a two step procedure
i) Collection of Information
i) Bank Reference
ii) Credit Agency Report
iii) Published Information
iv) Credit Scoring
ii) Analysis of Information (5 C’s of Credit- Character,
Capacity, Capital, Collateral, Conditions)

26. Q. Which of the following is not an element of
credit policy?
A. Credit terms
B. Collection policy
C. Cash discount terms
D. None of these

28. Q. 5 Cs of the credit does include:
A. Collateral
B. Character
C. Conditions
D. All

30. Q. Which of the following is not a part of credit
policy?
A. Collection effort
B. Cash discount
C. Credit standard
D. Paying practices of debtors

31. Control of Receivables
• Merely setting of standards and framing a
credit policy is not sufficient; equally
important is their effective implementation to
control the receivables.
• In this reference efforts required in two
directions
– The collection procedure (strict / lenient collection policy)
– Monitoring of receivables

32. • Monitoring of Receivables
– Average collection period
– Credit Period and Collection Period
– Ageing Schedule
credit period of 30 days
Age Group (Days) 5% of total o/s Receivables
Less than 30 days 60 %
31-45 days 20 %
46-60 days 10 %
61 and above 10 %

33. • Line of Credit

34. • Accounting Ratios
– Receivable Turnover Ratio
– Average Collection Period

35. Credit-granting Decision
35

36. CREDIT EVALUATION OF INDIVIDUAL
ACCOUNTS
• Credit Information
– Financial statement
– Bank references
– Trade references
– Other sources
• Credit Investigation and Analysis
– Analysis of credit file
– Analysis of financial ratios
– Analysis of business and its management
• Credit Limit
• Collection Efforts
36

37. FACTORING
• Factoring may be defined as ‘a contract between the
suppliers of goods/services and the factor under which
37

38. Factoring Services
• Credit administration
• Credit collection and protection
• Financial assistance
• Other services
38

39. Factoring and Short-term Financing
• Factoring involves ‘sale’ of book debts.
• Factoring provides flexibility as regards credit
facility to the client.
• Factoring is a unique mechanism which not
only provides credit to the client but also
undertakes the total management of client’s
book debts.
39

40. Factoring and Bills Discounting
1. Bills discounting is a sort of borrowing while factoring is the
efficient and specialized management of book debts along with
enhancement of the client’s liquidity.
2. The client has to undertake the collection of book debt. Bill
discounting is always ‘with recourse’, and as such, the client is not
protected from bad-debts.
3. Bills discounting is not a convenient method for companies having
large number of buyers with small amounts since it is quite
inconvenient to draw a large number of bills.
40

41. Types of Factoring
• Full service non-recourse
• Full service recourse factoring
• Bulk/agency factoring
• Non-notification factoring
41
Advance factoring
Maturity factoring

42. Costs of Factoring
• the factoring commission or service fee
• the interest on advance granted by the factor
to the firm.
42

43. Benefits of Factoring
• Factoring provides specialized service in credit
management, and thus, helps the firm’s
management to concentrate on manufacturing and
marketing.
• Factoring helps the firm to save cost of credit
administration due to the scale of economics and
specialization.
43