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DEBTORS MANAGEMENT

DEBTORS MANAGEMENT. DEBTORS: IMPORTANT CONSTITUENT OF ASSET. FIRMS GIVE CREDIT :- To increase Sales –leading to increased profits. To survive in the competitive market. DEBTORS MANAGEMENT. WHY DEBTORS SHOULD BE MANAGED: To optimise the return on investment of this asset.

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DEBTORS MANAGEMENT

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  1. DEBTORS MANAGEMENT DEBTORS: IMPORTANT CONSTITUENT OF ASSET. FIRMS GIVE CREDIT :- • To increase Sales –leading to increased profits. • To survive in the competitive market

  2. DEBTORS MANAGEMENT WHY DEBTORS SHOULD BE MANAGED: • To optimise the return on investment of this asset. • Larger the receivables, larger the working capital requirement-leading to higher interest costs. • Larger debtors-lead to difficulty in recovery-leading to bad debt/losses. • If debtors are low/restricted- sales may be reduced-leading to reduced profits-threat of survival.

  3. DEBTORS MANAGEMENTChoosing a debtor – the 5 C’s • Character • Capacity • Capital • Collateral • Conditions(economic)

  4. DEBTORS MANAGEMENT EVALUATION OF CREDIT:- • Rating Agencies • Traditional approaches • Trade references • Bank references • Credit Bureau report • Published financial statements • Past experience • Salesman’s reports

  5. DEBTORS MANAGEMENT COLLECTION EFFORT:- This involves a trade-off between the level of expenditure on one hand and reduction in bad debt losses & investments in debtors on the other.

  6. DEBTORS MANAGEMENT PROCEDURE FOR CREDIT COLLECTION:- • Length of credit to be allowed. • Procedure for follow-up of defaulters. • Procedure for reminders • Procedure for dealing with doubtful debts • Extent of legal action • Handling of the acccount • Collection machinery

  7. DEBTORS MANAGEMENT CONTROL OF DEBTORS:- TRADITIONAL APPROACH: AGEING SCHEDULE TECHNIQUE:- ( amount - % amount – No. of a/cs - % no. of a/cs) OUTSTANDING DAYS’ SALES TECHNIQUE RATIO ANALYSIS MODERN APPROACH:- PATTERN OF COLLECTIONS SCHEDULES FACTORING

  8. DEBTORS MANAGEMENT DISCRIMINANT ANALYSIS TO EVALUATE CREDIT RISK: RETURN ON NET WORTH CURRENT RATIO ACID TEST / QUICK RATIO (multiplied by a discriminant function) Say- 0.50 for RONW, 2 FOR C/RATIO, 1.5 FOR ATR Say= if D is greater than 20 , quality of Debtors is GOOD

  9. Debtors Management DIMENSIONS IN DETERMINATION OF CREDIT POLICY CREDIT PERIOD: INELASTIC DEMAND ELASTIC DEMAND CUSTOMS & PRACTICE COMPETITORS’ POLICY AVAILABILITY OF FUND CREDIT RISK CUSTOMER-CLASSIFICATION CASH DISCOUNTS CREDIT STANDARDS

  10. DEBTORS MANAGEMENT CREDIT POLICY: LENIENT POLICY: • More clients • Increase in sales • Higher bad-debts • High cost of carrying the debtors. • Higher prospects for profits

  11. DEBTORS MANAGEMENT CREDIT POLICY: STRINGENT POLICY • Decrease in sales • Lesser clients • Lesser bad debts • Low costs • Low profits

  12. DEBTORS MANAGEMENT IN CONCLUSION, DEBTORS MANAGEMENT INVOLVES A TRADE OFF BETWEEN PROFITS ON ADDITIONAL SALES THAT ARISE DUE TO EXTENDED CREDIT ON ONE HAND AND COST OF CARRYING THE DEBTORS ON THE OTHER.

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