RECEIVABLE MANAGEMENT

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INTRODUCTION
WHAT IS RECEIVABLES? Receivables is defined as the debt owed to the firm by customers arising from Sales of goods and services in the ordinary course of business. When a firm makes an ordinary sale of goods or services and does not receive payment ,the firm grants trade credits and creates accounts receivable which could be collected in future. Receivables Management is also called Trade Credit Management.
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 WHY DO WE NEED RECEIVABLES?

Reach Sales potential Compete with Competitors Optimize the return on investments on the assets UNDERSTANDING RECEIVABLES As a part of Operating Cycle A time lag between sales and receivables creates need for Working Capital

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OBJECTIVES and profit. Achieving growth in sales

Meeting Competition. Establish and communicate the credit policies. Evaluation of customers and setting credit limits. Ensure prompt and accurate billing. Maintaining up-to-date records. Initiate collection procedures on overdue accounts.

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COSTS OF MAINTAINING DEBTORS CAPITAL COST: It

is the cost on the use of additional capital to support credit sales which alternatively could have been employed elsewhere. in collecting the accounts receivable. Costs of additional steps to increase the chances for eventful payment.

COLLECTION COSTS: Administrative costs incurred

DELINQUENCY COSTS: Cost of financing the debtors

for extended period, and cost of additional steps to collect over-due debtors.

DEFAULT COSTS: Amounts which are to be written

off as Bad-debts, which cannot be collected in spite of serious efforts.

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CREDIT POLICIES
CREDIT POLICIES It is the determination of credit

standard and credit analysis. The credit policy of a firm provides the framework to determine whether or not to extend credit to a customer and how much credit to extend. The credit policy decision of a firm has two dimensions. requirement for extending credit to a customer.

A)CREDIT STANDARD-It is the minimum B)CREDIT ANALYSIS-This involves obtaining

credit information and evolution of credit applicant.

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CREDIT STANDARDS
Following factors should be considered while deciding whether to relax credit standards or not.
COLLECTION COST-The implications of relaxed

credit standards are more credit, a large credit departments to service accounts receivable and increase in collection cost while opposite in case of strict credit standards.
AVERAGE COLLECTION PERIOD-The extension of

trade credit to slow paying customers would results in a higher level of accounts receivable and vice versa.
BAD DEBT EXPENSES-Bad debt can be expected to 5/10/12

CREDIT ANALYSIS
Two basic steps are involved in the credit investigation Process.
A)OBTAINING CREDIT INFORMATION-The first step in

credit analysis is obtaining the information which form the basis for the evaluation of customers. The sources of information may be internal such as the historical payment pattern of a customers, or may be external such as :
I)FINANCIAL STATEMENTS-The published financial

statements such as balance sheet and profit and loss account.

II)BANK REFERENCES-The firms banker collects the

5/10/12 necessary information from the applicants Bank.

B)ANALYSIS OF CREDIT INFORMATION-The

information collected from different sources are analyzed to determine the credit worthiness of the applicant. The analysis should cover two aspects: on the factual information available from the financial statements, the past records of the firms and so on.

I)QUANTITATIVE-The quantitative aspects is based

II)QUALITATIVE-The qualitative judgment would

cover aspects relating to the quality of management. .

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STEPS IN CREDIT ANALYSIS Investing The Customers 5 Cs The

CHARACTER - Reputation, Track Record CAPACITY- Ability to repay( earning capacity) CAPITAL- Financial Position of the co. COLLATERAL- The type and kind of assets

pledged
CONDITIONS- Economic conditions &

competitive factors that may affect the profitability of the customers

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FACTORS AFFECTING SIZE OF DEBTORS

LEVEL OF SALES: The most important factors

in determining the volume of Debtors is the level of credit sales. Others being constant ,more credit sales mean more Debtors and vice versa.

CREDIT TERMS: A change in credit terms will

have a direct effects on Debtors. When credit terms are relaxed in leads to a n increase in Debtors balance and vice versa. firm also has some influences on the actual

COLLECTION POLICY: Collection policy of a

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TYPE OF COLLECTION EFFORTS

Steps usually taken are
Letters, including reminders Telephone call for personal contact Personal visit Help of collection agencies Legal action

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BENEFITS
INCREASED SALES-The impact of liberal trade policy

result in increased in sales volume. needs calculations are managed.

STREAMLINE REVENUE ALLOCATION-To fit business ENHANCE PRODUCTIVITY-The decrease in

administrative cost enhances productivity.

HELPS IMPROVE CUSTOMER SATISFACTION-

Enhances service level and increase retention with customized information.

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THANK YOU

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