1. Working Capital Management
Lecture-3 By
Imran Khan

2. Accounts Receivable Management
Most competitive firms sell for credit than for cash.
As a result, goods are dispatched, inventories are lowered and receivable is created.
Customer pays which provides cash to the firm and receivables decline
Carrying receivables provide a firm with increased sales

3. Policy for credit
Some of the manageable determinants of demand are product quality, sales prices, advertising and the firm’s credit policy.
Credit policy can be divided into the following factors:
Credit period: Time period given to the buyers for payment of their purchases.
Discounts: Refers to how quickly the payment must be made thus discounts are given for early payment. Attracts new customers and reduces DSO.
2. The credit terms allow buyers to take a 2% discount if they pay within 10 days otherwise they must pay the full amount within 30 days.

4. Policy for credit
3. Credit standards: Tighter standards tend to reduce sales, but reduce bad debt expense. Fewer bad debts reduce DSO. 4. Collection policy: How tough? Tougher policy will reduce DSO but may damage customer relationships, causing them to take their business elsewhere.

5. Collection of receivables
Total accounts receivable outstanding is
determined by two factors:
Average time period between sales and collections
Volume of credit sales

6. Collection of receivables
An XYZ company opens a warehouse on 1st January and makes sales of $500 from this first day. Assuming all sales on credit and customers are allowed to pay within 10 days. By the first day-end, accounts receivable will be $500, rise to $1000 by the end of second day and by 10th January, they will be $10(500)= $5000 Accounts receivable= credit sales per day * length of collection period = $500*10= 5000

7. Accounts Receivable Management
Accounts receivable management requires balance between cost of extending credit and benefit received from extending credit.
No universal optimization model to determine credit policy for all firms since each firm has unique operating characteristics that affect its credit policy.
However, there are numerous general techniques for credit management.

8. Accounts Receivable Management
Three types of cost:
Financing accounts receivable
Offering discounts
Bad-debt losses
Must analyze relationship of these costs to profitability
Marginal cost of credit must be compared to expected marginal profit resulting from credit terms

9. Accounts Receivable Management
Supervising collection of accounts receivable
Requires close monitoring of average collection period and aging schedule
Aging schedule groups accounts by age and then identified quantity of past due accounts
Credit manager must develop some skills of diplomacy: balance need to collect account with need to maintain customer goodwill (unless all efforts fail and account cannot pay)