Receivables ManagementByDr.K.P.Malathi Shiri

RECEIVABLES MANAGEMENT• MEANING• It refers to the sum of all monies owed to the firm by

customers arising from the sale of goods or services in the ordinary course of business. It includes:-

• Debtors• Accounts Receivable• Book debts/ customer receivable• Trade Receivable

Features

Process of decision making regarding investment of

receivables.

High working capital implies high interest rates.

If receivables are low, sales becomes restricted.

Receivables to be managed to optimise profits.

Maximises the overall return on investment of the firm.

Purpose

Increase in Sales

Increase in Profits

Meeting the Competition

Cost of maintaining Receivables• Capital Cost Time gap between cost incurred and sales incurred. Funds to be raised for payment of wages and suppliers. Such funds to be raised from outside or from retained earnings. Liability to pay interest to creditors. Opportunity cost incurred – the money the firm could have earned if invested outside the firm.

• Administrative Costs

Costs incurred for maintenance of customers’ accounts

Costs incurred for investigating the creditworthiness of the

customers in the market.

Collection Costs

Expenses for collection of payments from credit customers.

Costs of recovery from defaulting customers

Defaulting costs

Bad debts

Aspects of Receivables Management

• I - CREDIT POLICY – CRITERIA

Whether to grant credit or not?

How much is the credit limit?

• These depend on the credit

• standards that are either tight and

• restrictive OR liberal and non- restrictive

•

Credit Standards - determinants

•Collection Costs

•Avg Collection Period

• Extent of bad debts

• Level of sales

Collection Costs – implications of relaxed credit standards Increased credit. Need to maintain a large Department to process the Accounts Receivables and related issues. Increased collection costs which are semi-variable by nature. Should be included in the semi-variable costs only.

Average Collection Period• It involves a capital cost.• Higher the average Accounts Receivable, higher is the cost.• A change in the credit standards leads to a change in the A/R• This is through a change in sales or change in the collections.• In case of a tight policy, a decrease in average A/R.• Credit extended only to credit worthy customers with a prompt payment history.

Bad Debts• They change with the change in the credit policy of a firm.• Bad debts increase with a liberal credit standard.• They tend to reduce with a tight credit policy of a firm.

Sales Volume

• Changing credit standards impact the

sales volume of a firm.

• A relaxed credit policy will tend to

increase the sales.

• A tight credit policy tends to decrease

the sales of a firm.

Credit Terms (A)CREDIT PERIOD – is the time for which the credit is extended.It is generally stated in terms of Net Date. If the policy of a company states “Net 30” , it means the payment

will be made after 30 days of credit sale. The effects of a liberal credit policy are:-

Increase in Sales Volume

Relaxed Collection Period

Increase in bad and doubtful debts

(B) Cash Discount

• Credit terms – 5/15 net 90

• 5 represents the cash discount

offered

• 15 represents the number of days

for which this discount is valid

• If payment is not made within

15 days, then the customer should

make full payment within 90 days

of sale.

Increased sales

Reduced Collection

Period

Increased cost of

discount

II –CREDIT ANALYSIS through credit ratingSources of Credit Rating

Published information

Bank Reference

Trade Reference

Salesman’s Interview and Report

Credit Bureau Reports

Reports from other Agencies

Past Experience

III. Control of Receivables

This depends on the following:-

(i) Collection Policy

(ii) Monitoring of Receivables

(iii) Ageing Schedule

(i) Collection Policy

It depends on (a) Degree of Collection Efforts

Item Direction of Change Effect on Profits

Bad Debt Losses Decrease Positive

Average Collection Period

Decrease Positive

Sales Volume Decrease Negative

Collection Cost Increase Negative

(b) Type of collection efforts

Reminder Letters to make the payment

Telephone calls for follow up

Personal Visits

Seek assistance from Collection Agencies

Legal Action

(iii) Monitoring of Receivables• Average Collection Period using Ratio Analysis• Ageing ScheduleReceivables are classified according to their ageHelps to compare the liquidity of receivables on an inter and

intra basisHelps to monitor the dues according to their maturitySupports Sales Analysis

Age in days

2014 2015

Month of Sale

Balance of Receivable

% to total

Month of Sale

Balance of Receivable

% to total

1 - 30 Dec 50,500 March 1,32,000

31 -60 Nov 86,700 Feb 3,14,000