RECEIVABLES MANAGEMENT AND FACTORING CHAPTER 28. LEARNING OBJECTIVES Emphasize the need and goals...
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Transcript of RECEIVABLES MANAGEMENT AND FACTORING CHAPTER 28. LEARNING OBJECTIVES Emphasize the need and goals...
LEARNING OBJECTIVES Emphasize the need and goals of establishing a sound
credit policy Show how an optimum credit policy can be established Explain the credit policy variables Indicate the credit procedure for and control of individual
accounts Suggest methods of monitoring receivables Discuss the nature and costs and benefits of factoring
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INTRODUCTION
Trade credit happens when a firm sells its products or services on credit and does not receive cash immediately.
A credit sale has three characteristics: First, it involves an element of risk that should be carefully
analyzed. Second, it is based on economic value. Third, it implies futurity.
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Nature of Credit Policy
Investment in receivable volume of credit sales collection period
Credit policy credit standards credit terms collection efforts
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Goals of Credit Policy
Marketing tool Maximisation of
sales Vs. incremental profit production and selling
costs administration costs bad-debt losses
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Optimum Credit Policy
Estimation of incremental profit
Estimation of incremental investment in receivable
Estimation of incremental rate of return (IRR)
Comparison of incre-mental rate of return with required rate of return (RRR)
Optimum credit policy: IRR = RRR
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Costs of Credit Policy
Credit Standards
Credit standards are the criteria which a firm follows in selecting customers for the purpose of credit extension.
The firm may have tight or loose credit standards.
Credit analysis Average collection period (ACP) Default rate
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Cont…9
Customer categories• good accounts• bad accounts• marginal accounts
Numerical credit scoring• ad hoc approach• simple discriminant approach• multiple discriminant approach
Collection policy and procedures
regularity of collections clarity of collection procedures responsibility for collection and follow-up case-by-case approach cash discount for prompt payment
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CREDIT EVALUATION OF INDIVIDUAL ACCOUNTS
Credit Information Financial statement Bank references Trade references Other sources
Credit Investigation and Analysis Analysis of credit file Analysis of financial ratios Analysis of business and its management
Credit Limit Collection Efforts
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FACTORING Factoring may be defined as ‘a contract between the
suppliers of goods/services and the factor under which
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Factoring Services
Credit administration Credit collection and protection Financial assistance Other services
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Factoring and Short-term Financing Factoring involves ‘sale’ of book debts. Factoring provides flexibility as regards credit
facility to the client. Factoring is a unique mechanism which not only
provides credit to the client but also undertakes the total management of client’s book debts.
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Factoring and Bills Discounting
1. Bills discounting is a sort of borrowing while factoring is the efficient and specialized management of book debts along with enhancement of the client’s liquidity.
2. The client has to undertake the collection of book debt. Bill discounting is always ‘with recourse’, and as such, the client is not protected from bad-debts.
3. Bills discounting is not a convenient method for companies having large number of buyers with small amounts since it is quite inconvenient to draw a large number of bills.
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Types of Factoring
Full service non-recourse Full service recourse factoring Bulk/agency factoring Non-notification factoring
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Advance factoringMaturity factoring
Costs of Factoring
the factoring commission or service fee the interest on advance granted by the factor to the
firm.
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