RECEIVABLES MANAGEMENT “Any fool can lend money, but it takes a lot of skill to get it back” 1

Meaning of Accounts Receivables “Debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business”. When the firm sells its products or services on credit, and it does not receive cash for it immediately, but would be collected in near future. Till collection they form as a current assets. It also in the form of Sundry Debtors, Accounts receivables and Bills receivables 2

Characteristics of Receivables Risk Involvement Based on Economic Value – Equivalent value Implies futurity – generally after credit 3

4  What are receivables? Receivables are sales made on credit basis.  Why do we need receivables? Reach sales potential Competition  Understanding Receivables As a part of the operating cycle Time lag b/w sales and receivables creates need for working capital Receivables Inventory Cash Operating Cycle Receivables

Receivables Management It making decisions relating to the investment in these current assets as an integral part of process, the objective being maximization of return on investment in receivables. It involves maintenance of receivables of optimum level, the degree of credit sales to be made, and the debtors collection. Management of receivables, therefore, should be based on sound credit policies and practices. 5

 COLLECTION COST : Administrative costs incurred in collecting the accounts receivable.  CAPITAL COST : Cost incurred for arranging additional funds to support credit sales.  DELINQUENCY COST : Cost which arises if customers fail to meet their obligations.  DEFAULT COST : Amounts which have to written off as bad debts. 6 DIFFERENT TYPES OF COSTS ASSOCIATED

Creating, presenting and collecting accounting receivables 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 7 Objectives of Receivables Management

Benefits of Receivables Management Increased Sales Market Share Increases Increase in Profits Optimizing investments in Sundry Debtors Maximizing the Value of the Firm Control over Trade Credit Cost 8

Size/Volume of credit sales Credit Policy of the firm Terms of Trade Expansion plans Relation with profit Credit Collection Efforts Habits of Customers 9 Factors influencing the Size of Investment in Receivables

Centralized / Decentralized collection system Post – dated cheques Pay Orders / Bank drafts Bills of Exchange Lock – box System Drop – box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking 10 COLLECTION METHODS