Receivables Management

December 7, 2021
 Topics
• Nature and Goals of Credit Policy
• Optimum Credit Policy
• Credit Policy Variables
• Credit Evaluation of Individual
Accounts
• Monitoring Receivable
• Summary of Key Concepts

December 7, 2021
 Nature of Credit Policy
• Investment in receivable
– volume of credit sales
– collection period
• Credit policy
– credit standards
– credit terms
– collection efforts

December 7, 2021
 Goals of Credit Policy
• Marketing tool
• Maximisation of Costs & Benefits

sales Vs. Profitability

incremental profit
– production and selling Liquidity

costs Tight Credit Loose

policy
– administration costs
– bad-debt losses

December 7, 2021
 •
Optimum
Estimation of
Credit Policy
incremental profit
• Estimation of
incremental investment Costs & Return (%)
in receivable
Marginal cost of capital
• Estimation of
incremental rate of
return (IRR) Marginal rate of return
• Comparison of incre-
Tight Credit Loose
mental rate of return policy
with required rate of
return (RRR)
• Optimum credit policy:
IRR = RRR
December 7, 2021
 Credit Policy Variables
• Credit standards
• Credit analysis
– collection period
– default rate
• character
• capacity
• condition
• capital
• collateral

December 7, 2021
 Credit Policy Variables
– customer categories
• good accounts
• bad accounts
• marginal accounts
– numerical credit scoring
• ad hoc approach
• simple discriminant approach
• multiple discriminant approach

December 7, 2021
 Credit Policy Variables
Credit-Granting Decision
CREDIT GRANTING
DECISION

NO CREDIT GRANT CREDIT

PAYMENT PAYMENT
RECEIVED NOT RECEIVED

BENEFIT COST
PV OF FUTURE PV OF LOST
NET CASH INVESTMENT
FLOWS
NO PAYOFF

NET PAYOFF
PV OF
(BENEFIT - COST)

Credit-granting Decision

December 7, 2021
 Credit Policy Variables
• Credit terms
– credit period
– cash discount
• 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
December 7, 2021
 Credit Evaluation of
Customers
• Credit information
– financial statements
– bank references
– trade references
• Credit investigation and analysis
– analysis of credit file
– financial analysis
– analysis of business and management
• Credit limit
• Collection efforts
December 7, 2021