Receivable Management : Receivable Management “Any fool can lend money,
but it takes lot of skills to get it back”
Presented By-Rahamat Ali Sardar INTRODUCTION : INTRODUCTION WHAT IS RECEIVABLES?
Receivables is defined as the debt owed to the firm by customers arising from
Sales of goods and services in the ordinary course of business. When a firm
makes an ordinary sale of goods or services and does not receive payment ,the firm grants trade credits and creates accounts receivable which could be collected in future. Receivables Management is also called Trade Credit Management.
WHY DO WE NEED RECEIVABLES?
Reach Sales potential
Compete with Competitors
Optimize the return on investments on the assets
As a part of Operating Cycle
A time lag between sales and receivables creates need for Working Capital Slide 3: Operating
Cycle OBJECTIVES : OBJECTIVES Achieving growth in sales and profit.
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. COSTS OF MAINTAINING DEBTORS : COSTS OF MAINTAINING DEBTORS CAPITAL COST: It is the cost on the use of additional capital to
support credit sales which alternatively could have been employed
COLLECTION COSTS: Administrative costs incurred in collecting the accounts receivable. Costs of additional steps to increase the chances for eventful payment.
DELINQUENCY COSTS: Cost of financing the debtors for extended period, and cost of additional steps to collect over-due debtors.
DEFAULT COSTS: Amounts which are to be written off as Bad-debts, which cannot be collected in spite of serious efforts. CREDIT POLICIES : CREDIT POLICIES It is the determination of credit statandard and credit
analysis.The credit policy of a firm provides the framework
to determine whether or not to extend credit to a customer
and how much credit to extend.The credit policy decision of
a firm has two dimensions.
A)CREDIT STANDARD-It is the minimum requirement for
extending credit to a customer.
B)CREDIT ANALYSIS-This involves obtaining credit information
and evolution of credit applicant. CREDIT STANDARDS : CREDIT STANDARDS Following factors should be considered while deciding whether to relax credit
credit standards or not.
COLLECTION COST-The implications of relaxed credit standards
are more credit,a large credit departments to service accounts receivable and
increase in collection cost while opposite in case of strict credit standards.
AVERAGE COLLECTION PERIOD-The extension of trade
credit to slow paying customers would results in a higher level of accounts
receivable and vice versa.
BAD DEBT EXPENSES-Bad debt can be expected to increase with
relaxation in credit standards and vice versa.
SALES VOLUME-Sales volume is expected to increase as standards are
relaxed,conversely tightening decreases sales. EFFECT OF RELAXATION OF STANDARDS : EFFECT OF RELAXATION OF STANDARDS CREDIT ANALYSIS : CREDIT ANALYSIS Two basic steps are involved in the credit investigation Process.
A)OBTAINING CREDIT INFORMATION-The first step in credit analysis is obtaining the information which form the basis for the evaluation of customers.The sources of information may be internal such as the historical payment pattern of a customers,or may be external such as :
I)FINANCIAL STATEMENTS-The published financial statements such as
balance sheet and profit and loss account.
II)BANK REFERENCES-The firm’s banker collects the necessary information
from the applicant’s Bank.
III)TRADE REFERENCES-Reputed Credit organization are approached about
the credit worthiness of proposed customers.
IV)CREDIT BUREAU REPORTS-Credit Bureau reports from organization
which specializes in supplying credit information can also be utilized. CREDIT ANALYSIS(CONTD) : CREDIT ANALYSIS(CONTD) B)ANALYSIS OF CREDIT INFORMATION-The
information collected from different sources are analyzed to determine
the credit worthiness of the applicant.The analysis should cover two
I)QUANTITATIVE-The quantitative aspects is based on the
factual information available from the financial statements,the past
records of the firm’s and so on.
II)QUALITATIVE-The qualitative judgement would cover
aspects relating to the quality of management.
. STEPS IN CREDIT ANALYSIS “Investing The Customers” : STEPS IN CREDIT ANALYSIS “Investing The Customers” Customers Evaluation-The 5 C’s-
CHARACTER- Reputation, Track Record
CAPACITY- Ability to repay( earning capacity)
CAPITAL- Financial Position of the co.
COLLATERAL- The type and kind of assets pledged
CONDITIONS- Economic conditions & competitive factors that may affect the profitability of the customers FACTORS AFFECTING SIZE OF DEBTORS : FACTORS AFFECTING SIZE OF DEBTORS LEVEL OF SALES: The most important factors in determining the volume of Debtors is the level of credit sales. Others being constant ,more credit sales mean more Debtors and vice versa.
CREDIT TERMS: A change in credit terms will have a direct effects on Debtors.When credit terms are relaxed in leads to a n increase in Debtors balance and vice versa.
COLLECTION POLICY:Collection policy of a firm also has some influences on the actual Debtors balance.Due to a relatively lax collection policy,customers do not meet their commitments on time. CREDIT TERMS : CREDIT TERMS Credit terms specify the repayments terms required of credit customers.It
has three components:
CREDIT PERIODS-It is the time for which trade credit is extended to customers in the case of credit sales.
CASH DISCOUNTS-It is the incentive to customers to make early payments of sum due.
CASH DISCOUNTS PERIOD-The duration of the period
during which discount can be availed off. EFFECT OF INCREASE IN CASH DISCOUNT : EFFECT OF INCREASE IN CASH DISCOUNT TYPE OF COLLECTION EFFORTS : TYPE OF COLLECTION EFFORTS Steps usually taken are
Letters, including reminders
Telephone call for personal contact
Help of collection agencies
Legal action BENEFITS : BENEFITS INCREASED SALES-The impact of liberal trade policy result
in increased in sales volume.
STREAMLINE REVENUE ALLOCATION-To fit
business needs calculations are managed.
ENHANCE PRODUCTIVITY-The decrease in administrative
cost enhances productivity.
HELPS IMPROVE CUSTOMER SATISFACTION-Enhances service level and increase retention with customized information. PROFORMAType A-if fixed Cost Is Given : PROFORMAType A-if fixed Cost Is Given PROFORMAType B- fixed cost is not given : PROFORMAType B- fixed cost is not given CONCLUSION : CONCLUSION The framework of analysis of all decisions area in receivables management is to secure a trade-off between the costs and benefits off the measurable effects on the sales volume, capital costs due to change in investment in debtors ,collection costs, bad debts and so on. The firm should select the alternative which has potentials of more benefits than the costs. THANK YOU : THANK YOU