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Unit Title
Lecture Number Lecture Title
: Receivable Management
: 14 : Receivable Management
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Financial Management
Objectives:
After studying this unit, you should be able to: Explain the meaning of receivables management Recognise the costs associated with maintaining receivable Determine the credit policy variables Define the process of evaluation of credit policy
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Lecture Outline
Summary
Check Your Learning Activity
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Introduction
Receivables are assets accounts representing amount due to the firm from sale of goods/services in the ordinary course of business. Trade credit is a marketing tool that functions as a bridge for the movement of goods from the firms warehouse to its customers. When a firm sells goods on credit, receivables are created. The receivables arising out of trade credit have three features: Receivables that arise out of trade credit involve an element of risk. Therefore, before sanctioning credit, careful analysis of the risk involved needs to be done. Receivables out of trade credit are based on economic value. Buyer gets economic value in goods immediately on sale, while the seller receives an equivalent value later on. Receivables out of trade credit have an element of futurity. The buyer makes payment in future.
In this session, you will learn about the meaning of receivables management, the cost associated with maintaining receivables, the credit policy variables and the process of evaluation of credit policy.
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To increase profits
To increase sales
Objectives
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Capital cost
Administration cost
Delinquency cost
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Credit standards
Credit periods
Cash discounts
Collection programme
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Collection Programme
The objective of a collection policy is to achieve a timely collection of receivables. Releasing funds locked in receivables and minimising the incidence of bad debts are the other objectives of the collection policy. The collection programmes consist of the following:
Monitoring the receivables
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Liquidity position of a firm can be easily improved without affecting profitability by reducing the duration of the period for which the credit is granted and further by collecting the realised value of receivables as soon as they fail due. To improve profitability one can resort to lenient credit policy as a booster of sales, but the implications are:
Chances of extending credit to those with week credit rating
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Summary
Receivables are assets accounts representing amount due to the firm from sale of goods/services in the ordinary course of business. Trade credit is a marketing tool that functions as a bridge for the movement of goods from the firms warehouse to its customers. Management of accounts receivables may, therefore, be defined as the process of making decision related to the investment of funds in receivables for maximising the overall return on the investment of the firm. The four different varieties of cost associated with maintaining receivables are capital cost, administration cost, delinquency cost and bad debts or default cost. The four aspects of credit policy are credit standards, credit period, cash discount and collection programme. The objective of a collection policy is to achieve a timely collection of receivables. Credit policy of every company is largely influenced by two conflicting objectives, irrespective of the native and type of company. They are liquidity and profitability.
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b. Administration cost
2. List the four aspects of credit policy Ans: The four aspects of credit policy are:
a. Credit standards
b. Credit periods c. Cash discount d. Collection programme
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Activity Assume that for a firm ABC Ltd., the credit policy is influenced by two conflicting objectives - liquidity and profitability. What are the steps to be involved in the evaluation of investment in receivables account in order to achieve the goal for maximising the value of the firm?
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