RECEIVABLES MANAGEMENT

Presented by, Shruthi.R.Nair 2nd sem

“ANY FOOL CAN LEND MONEY, BUT IT TAKES A LOT OF SKILL TO GET IT BACK”

INDEX

MEANING OF RECEIVABLES. UNDERSTANDING RECEIVABLES. WHY DO WE NEED RECEIVABLES & CHARACTERISTICS. FACTORS AFFECTING THE SIZE OF RECEIVABLES. MEANING OF RECEIVABLES MANAGEMENT. GRANTING CREDIT IN RECEIVABLES MANAGEMENT. DIFFERENT TYPE OF COSTS ASSOCIATED IN RECEIVABLE

MANAGEMENT. OBJECTIVES OF RECEIVABLES MANAGEMENT. BENEFITS OF RECEIVABLES MANAGEMENT. COLLECTION METHOD USED IN RECEIVABLES MANAGEMENT. SCOPE OF RECEIVABLES MANAGEMENT DIMENSIONS OF RECEIVABLES MANAGEMENT

MEANING OF RECEIVABLES

“Receivables are sales made on credit basis”According to Hampton, “Receivables are asset accounts

representing amount owned to the firm as a result of the sale of goods or services in the ordinary course of business”. Thus receivables are an asset and represent claims of the firms against its customers.

According to Robert N. Anthony, “Account receivables are amounts owned to the business enterprise, usually by its customers. Sometimes it is broken down into trade accounts receivables; in the former refers of amount owned by employees and others”.

UNDERSTANDING RECEIVABLES

As a part of the operating cycle. Time lag between sales and receivables

creates need for working capital.

Cash

Inventory

Operating cycle

Receivables

WHY DO WE NEED RECEIVABLES & CHARACTERISTICS

Reach Sales potential. competition.

CHARACTERISTICS

It involves Risk.Based on present economic value. It implies Futurity: The buyer makes the cash

payment for goods or services received by him in future period.

FACTORS AFFECTING THE SIZE OF RECEIVABLES

Level of sales. Nature & condition of Business. Credit policy of the firm: Credit policy means the policy

adopted to extend credit sales. The terms of credit: A firm’s investment in receivables is a

function of volume of credit sales and the collection or credit period (in terms of days).

Eg: Firm’s credit sales- Rs. 50,000 per day. Credit period for payment of dues – 40 days Average investment in accounts receivable= 50,000 * 40 =

20 lakhs.

MEANING OF RECEIVABLES MANAGEMENT

‘Credit is the soul of business.’ Receivable management is the process of making decisions

relating to investment in trade debtors. Certain investment in receivables is necessary to increase the sales and the profits of the firm. But at the same time investment in this asset involves cost consideration also.

Receivable management may be defined as collection of steps and procedure required to properly weigh the costs and benefits attached with the credit policies. The receivables management consists of matching the cost of increasing sales (particularly credit sales ) with the benefits arising out of increased sales with the objective of maximising the return on investment of the firm.

GRANTING CREDIT IN RECEIVABLES MANAGEMENT

BASIC DECISIONS 1. To give credit or not. 2. Duration of credit period (selecting the

right policy) Decisions based on cost-benefit analysis. Positive net benefit-credit granted (highest

net benefit policy chosen) Negative net benefit-credit not granted.

DIFFERENT TYPE OF COSTS ASSOCIATED IN RECEIVABLES MANAGEMENT

CARRYING COSTS/CAPITAL COST: Cost incurred for arranging additional funds to support credit.

ADMINISTRATIVE COSTS: A firm is also required to incur various costs in order to maintain the record and collection from customers. These cost includes:-

# Salary to the staff kept for keeping the records of credit sales and collection of payments.

# Cost of collecting cheques. # Cost of ph calls, reminders and follow up. # Use of office space, processing equipments etc... # Accounting, recording and processing costs of

debtors balances.

DELIQUENCY COSTS: These are the costs which are to be incurred by a firm in order to collect the amount due from customers on account of credit sales. Sometimes, additional steps may have to be taken to recover the amount due from defaulting customers. The costs of such extra steps e.g. Reminders, legal charges etc... Are known as deliquency costs.

DEFAULTING COSTS: Sometimes, the firm may not collect the overdue from the customers since they are unable to pay. These debts are treated as bad debts and are to be written of accordingly since the amounts will not be realised in future.

OBJECTIVES OF RECEIVABLES MANAGEMENT

Maximise the return on investment in receivables.

Maximise the sales to the extent the risk involved remains within the acceptable limit.

Maintaining up-to-date record. Accurate billing. Establish the credit policies.

BENEFITS OF RECEIVABLES MANAGEMENT

Growth in sales. Increase in Profits. Capability to Face competition. Helps to increase customer satisfaction. Takes control of sales processes.

COLLECTION METHODS USED IN RECEIVABLES MANAGEMENT

Post-dated cheques. Bank drafts. Debt Collector. Bills of exchange. Pay orders. Collection through staffs or agents. Lock-box system. Factoring. Concentration banking.

SCOPE OF RECEIVABLES MANAGEMENT

SCOPE OF MANAGEMENT OF RECEIVABLES

Formulati

on of Credit Policy.

Credit Evaluatio

n

Credit Control.

Credit Limits

Credit Standar

ds

Collection Policy Collection Of

Information

Credit Analysis

Credit Decisions

Formulation Of

Collection Procedure

Monitoring &

Controlling

DIMENSIONS OF RECEIVABLES MANAGEMENT

(1) CREDIT POLICIES:- Credit policy refers to the application of those factors which influence the amount of trade credit, i.e. Investment in receivables. TWO TYPES:-

(a) Liberal or lenient credit policy. (b) Stringent or light credit policy.(a) Where in credit sales are made liberally to those customers

whose credit –worthiness is either doubtful or even is not known at all.

(b) Wherein credit sales are made only to those customers whose credit-worthiness has been tested and is proved good.

profitability

cost &

Profitability Liquidity optimum

Stringent credit Liberal

policy

(2) CREDIT ANALYSIS : { Investigating the customer} “Credit analysis is the evaluation of the borrowing capacity of the applicant and the promptness and repaying ability of a customer according to the terms of contract.

# The 5 C’s- Customer evaluation. Character:- It is to be judged whether the customer is honest and is

prompt in paying the dues that he had undertaken to pay. Capacity:- The ability of the customer to pay back the purchase price. Capital:- Financial position of the customer. Collateral:- Express the additional ability of the customer. Condition:- Economic conditions & competitive factors that may

affect the profitability of the customer.

(3) CONTROL OF ACCOUNT RECEIVABLES:- DAILY SALES OUTSTANDING (DSO) : The no:

of business days that a company takes to collect payment after the completion of a sale.

DSO= Account Receivables

Average Daily Sales

DSO= (Average Net Account Receivable/ Net Credit Sales) x 365

Average Net Account Receivable= (opening+ closed net account receivable)/ 2

Net Credit Sales= Total Credit Sales- Sales Discount- Sales Returns & Allowances

AGEING SCHEDULE OF RECEIVABLES:- It is a statement in which the total outstanding receivables on a particular day are classified into different age groups together with percentage of total receivables that fall in each group.

Ageing schedule of receivables as on 31st March, 2006No. of days outstanding

Amount(Rs.) % to Total Debtors

No. Of Accounts

% of Total Accounts

Less than 30

36,00,000 60 750 62.5

31 - 60 9,00,000 15 240 20.061 -90 7,60,000 12.7 110 9.1791 - 120 4,40,000 7.3 60 5.00121 and above

3,00,000 5 40 3.33

Total 60,00,000 100 1200 100

ABC ANALYSIS OF RECEIVABLES:- A- Represents a small proportion of accounts of debtors

representing a large value.

B- Represents moderate value.

C- Represents a large number of accounts of debtors but representing a small value.

Category of Debtors % to Total Accounts % to Total Debtors Balance

A 20 70B 30 20C 50 10Total 100 100

IMPORTANCE OF RECEIVABLES MANAGEMENT

Credit policy helps to meet the competition. Credit sales help to attract not only existing customers but

also the new customers but also the new customers. It helps to minimize bad debts. Liberalised credit policy helps to increase the growth of

sales. Helps to increase the operating profits because of more

credit sales. It ensures higher investment in trade debtors, which will

produce larger sales. It gives guidance to the management for effective financial

planning and control. It helps to make effective coordination between finance,

production, sales, profit and cost.

THANK YOU