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 Control of Accounts Receivable Credit Management in India

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

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

CREDIT STANDARDS Liberal Stiff Sales Higher Lower Bad debt loss Higher Lower Investment Larger Smaller in receivables Collection costs Higher Lower

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

Q.PSD Ltd. is considering relaxing its credit standards.  S = Rs.15 million, b n = 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 = Rs.766,667

CREDIT PERIOD Longer Shorter SalesHigher Lower Investment in Larger Smaller receivables Bad debtsHigher Lower

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

INCREASE IN RECEIVABLES INVESTMENT S 0  S  I = (ACP n – ACP 0 ) + V (ACP n ) where:  I = increase in receivables investment ACP n = new average collection period (after lengthening the credit period) ACP 0 = old average collection period V = ratio of variable cost to sales  S = increase in sales

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, b n = 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 x 60 x = [750,000 – 400,000] (0.6) – 0.10 [4,166, ,333] = – 277,500 50,000, ,000,

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

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

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 :

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

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

 Time (no. of Days)  the Credit Sales  are converted  In to Cash ACP= 365/ Receivables Turnover

 Statement showing  AGE WISE GROUPING OF DEBTORS OR  Breaking up of Debtors  according to the LENGTH OF TIME  for which they have been OUTSTANDING

Age Group (in Days) Amount Outstanding (Rs.) Percentage of Debtors to Total Debtors Less Than Above 60 40,00,000 20,00,000 30,00,000 10,00, Total1,00,00,000100

 Shows  the collection pattern ( in months )  for the CREDIT SALES  made in a month