DEBTORS MANAGEMENT DEBTORS: IMPORTANT CONSTITUENT OF ASSET. FIRMS GIVE CREDIT :- a)To increase Sales –leading to increased profits. b)To survive in the.

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

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.

DEBTORS MANAGEMENT Choosing a debtor – the 5 C’s Character Capacity Capital Collateral Conditions(economic)

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

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.

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

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

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

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

DEBTORS MANAGEMENT CREDIT POLICY: LENIENT POLICY: a)More clients b)Increase in sales c)Higher bad-debts d)High cost of carrying the debtors. e)Higher prospects for profits

DEBTORS MANAGEMENT CREDIT POLICY: STRINGENT POLICY a)Decrease in sales b)Lesser clients c)Lesser bad debts d)Low costs e)Low profits

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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