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RECEIVABLES MANAGEMENT

RECEIVABLES MANAGEMENT. COSTS OF RECEIVABLES MANAGEMENT. OPPORTUNITY COST COLLECTION COST BAD DEBTS INCREASED SALES INCREASE IN MARKET SHARE INCREASE IN PROFITS. COVERAGE Terms of Payment Credit Policy Variables Credit Evaluation Credit Granting Decision

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RECEIVABLES MANAGEMENT

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  1. RECEIVABLES MANAGEMENT

  2. COSTS OF RECEIVABLES MANAGEMENT • OPPORTUNITY COST • COLLECTION COST • BAD DEBTS • INCREASED SALES • INCREASE IN MARKET SHARE • INCREASE IN PROFITS

  3. COVERAGE • Terms of Payment • Credit Policy Variables • Credit Evaluation • Credit Granting Decision • Control of Accounts Receivable • Credit Management in India

  4. TERMS OF PAYMENT • Cash Mode • Open Account • Bill of Exchange • Letter of Credit • Consignment

  5. CREDIT POLICY VARIABLES • The important dimensions of a firm’s credit policy are: • Credit standards • Credit period • Cash discount • Collection effort

  6. CREDIT STANDARDS • LiberalStiff • Sales Higher Lower • Bad debt loss Higher Lower • Investment Larger Smaller • in receivables • Collection costs Higher Lower

  7. IMPACT ON RESIDUAL INCOME OF RELAXATION P = [S(1 – V) - Sbn] (1 – t ) – k  I where P = change in Profit S = increase in sales V = ratio if variable costs to sales bn = bad debt loss ratio on new sales t = corporate tax rate I = increase in receivables investment

  8. Q.PSD Ltd. is considering relaxing its credit standards. S = Rs.15 million, bn = 0.10, V = 0.80, ACP = 40 days, k = 0.10, t = 0.4 P = [15,000,000 (1 – 0.80) – 15,000,000 x 0.10] (1 – 0.4) 15,000,000 – 0.10 x x 40 x 0.80 360 = Rs.766,667

  9. CREDIT PERIOD • LongerShorter • Sales Higher Lower • Investment in Larger Smaller • receivables • Bad debts Higher Lower

  10. IMPACT ON RESIDUAL INCOME OF LONGER CREDIT PERIOD P = [S(1 – V) - Sbn] (1 – t ) – k  I

  11. INCREASE IN RECEIVABLES INVESTMENT S0 S I = (ACPn – ACP0) + V (ACPn) 360 360 where: I = increase in receivables investment ACPn = new average collection period (after lengthening the credit period) ACP0 = old average collection period V = ratio of variable cost to sales S = increase in sales

  12. Q. X Limited is considering extending its credit period from 30 to 60 days. S = Rs.50 million, S = Rs.5 million, V = 0.85, bn = 0.08, k = 0.10, t = 0.40 P = [5,000,000 x 0.15 – 5,000,000 x 0.08] (0.6) – 0.10 (60 – 30) x + 0.85 x 60 x = [750,000 – 400,000] (0.6) – 0.10 [4,166,667 + 708,333] = – 277,500 5,000,000 360 50,000,000 360

  13. LIBERALISING THE CASH DISCOUNT POLICY P = [S(1 – V) - DIS] (1 – t ) + k  I

  14. DECREASING THE RIGOUR OF COLLECTION PROGRAMME RI = [S(1 – V) - BD] (1 – t ) – k  I

  15. TRADITIONAL CREDIT ANALYSIS Five Cs of Credit Character : The willingness of the customer to honour his obligations Capacity : The operating cash flows of the customer Capital : The financial reserves of the customer Collateral : The security offered by the customer Conditions : The general economic conditions that affect the customer Case History : Checking customers past transaction to extend credit to the customer :

  16. MONITORING OF ACCOUNTS RECEIVABLES • RECEIVABLES TURNOVER • AVERAGE COLLECTION PERIOD (ACP) • AGEING SCHEDULE • COLLECTION MATRIX

  17. RECEIVABLES TURNOVER • How quickly RECEIVABLES are CONVERTED in to CASH Receivables Turnover Rate = Total Net Sales Avg. Debtors* (*including Bills Receivables)

  18. AVERAGE COLLECTION PERIOD (ACP) • Time (no. of Days) • the Credit Sales • are converted • In to Cash ACP= 365/ Receivables Turnover

  19. AGEING SCHEDULE • Statement showing • AGE WISE GROUPING OF DEBTORS OR • Breaking up of Debtors • according to the LENGTH OF TIME • for which they have been OUTSTANDING

  20. COLLECTION MATRIX • Shows • the collection pattern (in months) • for the CREDIT SALES • made in a month

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