Management

of Current
Assets
RECEIVABLES

2
Receivable Management
Objective The objective of the
s firm’s accounts
receivable policy is
to encourage the
sales and gain
additional customers
by extending credit. 3
Responsibilities of Financial Officer

 To evaluate the pertinent cost and

benefits related to credit extension
 To finance the firm’s investment in
accounts receivable
 Implement the firm’s chosen credit
policy
 To enforce collection 4
Components of Receivable
Management

Credit
Management

Collection
Management 5
Cycles of Receivable
Management
CREDIT CYCLE
Credit
Standards
Credit system Credit
assessment policies

Credit Credit
approval evaluation
6
Cycles of Receivable
Management
COLLECTION CYCLE
Delivery of
Merchandise
Collection Billing policies

Aging of Accounts
Collection
receivable
policies
Receivable
7
portfolio
analysis
Credit Management

▪ Credit
Standards
- the criteria that
determine which
customers will be
granted credit and
how much 8
Factors to consider in
establishing credit standards

Five C’s of
Credit ▪ Collateral
▪ Character ▪ Conditions
▪ Capacity
▪ Capital
9
Credit Management

▪ Credit Terms
-the length of credit
terms if stretched
generally results to
an increase in
product demand but
also an increase in
the cost of financing 1
0
it.
Cost and Benefits of a credit extension
policy

Cash discounts
Credit and collection costs
Bad debt losses
Financing costs
1
1
Aids in analyzing
Receivables
Ratio of receivables to net
credit sales
Receivable turnover
Average collection period
Aging of accounts
1
2
Summar
y
Trade-offs in CREDIT
POLICIES 1
3
Cycles ofPolicy
Credit ReceivableTrade-offs
Management Benefit Cost
Relaxation of credit a. Increase in sales a. Increase in credit
standards COLLECTION CYCLE processing costs
andDelivery
total contribution
of
b. Increase in
margin
Merchandise collection costs
c. Higher defaults
Collection costs
Billing policies
d. Higher capital
cost
Lengthening of credit a. Increase in sales a. Higher capital cost
Aging of
period and total contribution
Collection policies
Accounts
receivable margin
1
Receivable 4
portfolio analysis
 Credit
Cycles of Policy
ReceivableTrade-offs
Benefit Cost
Management
Granting cash a. Increase in sales a. Lesser profit
discount COLLECTION
and total CYCLE
contribution
margin
Delivery of
b. Merchandise
Opportunity
income on lower
Collection investment in Billing policies
receivable
Intensified collection a. Lower defaults a. Higher collection
efforts Aging of costs expenses
Accounts b. Lower cost of Collection policies
receivable capital
1
Receivable 5
portfolio analysis
1. Relaxation of Credit
Policy
Relaxation of Credit Standards
2. Change of Credit
Terms
Lengthening and shortening of
credit period
3. Change of Credit
Terms
Granting cash discounts
4. Intensified Collection

Efforts
Marginal or
Incremental
Analysis of Credit
Policy

Definition
2
0
What is the rule?

;
Then accept
1. Incremental
Incremental the change in
profit
Cost credit policy
contribution

;
2. Incremental Then reject
profit Incremental the change in
contribution Cost credit policy

;
3. Incremental Then be
Incremental indifferent to
profit
Cost the change in
contribution 2
1
credit policy
Summar
y
Trade-offs in
Collection Policies 2
2
THAT’S ALL
FOLKS,
THANK
YOU! 2
3