Download - AFM_MOD III

8/10/2019 AFM_MOD III

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RECEIVABLES

MANAGEMENT

Module 3


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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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Receivables Mgt

Cost

- Collection cost

- Capital Cost

- Delinquency Cost

- Default Cost

Benefit

- Marketing Tool

- Helps in growth of business

- Helps in client retention

ObjectivesCredit Standard

1) Qualitative

- Credit Rating

- Credit Ref, Ratio

2) Tradeoff Factors

- Collection cost

- Avg Collection period

- Bad Debts

- Sales volume

Credit Analysis

- Internal , External

- Fin Statement, Bank Ref,

- Tradeoff Ref, CIBIL check

CreditPolicy


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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 incrementalrate of return (IRR)

Comparison of incre-

mental rate of return with

required rate of return

(RRR) Optimum credit policy:

IRR = RRR Costs o f Credit Pol icy


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Credit Policy Variables

Credit standards and analysis

Credit terms

Collection policy and procedures


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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

Customer categories

good accounts

bad accounts

marginal accounts Numerical credit scoring

ad hocapproach

simple discriminant approach

multiple discriminant approach


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Credit-granting Decision


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Credit terms

Credit period

Cash discount


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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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MONITORING RECEIVABLES

Average Collection Period

Aging Schedule

Collection Experience Matrix


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FACTORING

Factoring may be defined as a contract between thesuppliers 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 saleof 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

clientsbook debts.


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Factoring and Bills

Discounting1. Bills discounting is a sort of borrowing while factoring is the

efficient and specialized management of book debts along

with enhancement of the clientsliquidity.

2. The client has to undertake the collection of book debt. Billdiscounting is always withrecourse,and as such, the client

is not protected from bad-debts.

3. Bills discounting is not a convenient method for companieshaving 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

Advance factoring

Maturity factoring


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Costs of Factoring

the factoring commission or service fee

the interest on advance granted by the

factor to the firm.


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Benefits of Factoring

Factoring provides specialized service in credit

management, and thus, helps the firms

management to concentrate on manufacturing

and marketing.

Factoring helps the firm to save cost of credit

administration due to the scale of economics

and specialization.