An introduction to Receivables management is the content of this presentation

1. Receivables
Management
By
Dr.K.P.Malathi Shiri

2. RECEIVABLES MANAGEMENT
• MEANING
• It refers to the sum of all monies owed to the firm by
customers arising from the sale of goods or services in the
ordinary course of business. It includes:-
• Debtors
• Accounts Receivable
• Book debts/ customer receivable
• Trade Receivable

3. Features
Process of decision making regarding investment of
receivables.
High working capital implies high interest rates.
If receivables are low, sales becomes restricted.
Receivables to be managed to optimise profits.
Maximises the overall return on investment of the firm.

4. Purpose
Increase in Sales
Increase in Profits
Meeting the Competition

5. Cost of maintaining Receivables
• Capital Cost
Time gap between cost incurred and
sales incurred.
Funds to be raised for payment of
wages and suppliers.
Such funds to be raised from outside or
from retained earnings.
Liability to pay interest to creditors.
Opportunity cost incurred – the money
the firm could have earned if invested
outside the firm.

6. • Administrative Costs
Costs incurred for maintenance of customers’ accounts
Costs incurred for investigating the creditworthiness of the
customers in the market.
 Collection Costs
 Expenses for collection of payments from credit customers.
Costs of recovery from defaulting customers
 Defaulting costs
Bad debts

7. Aspects of Receivables
Management
• I - CREDIT POLICY – CRITERIA
Whether to grant credit or not?
 How much is the credit limit?
• These depend on the credit
• standards that are either tight and
• restrictive OR liberal and non- restrictive
•

8. Credit Standards - determinants
•Collection Costs
•Avg Collection Period
•Extent of bad debts
•Level of sales

9. Collection Costs – implications
of relaxed credit standards
Increased credit.
Need to maintain a large
Department to process the
Accounts Receivables and
related issues.
Increased collection costs
which are semi-variable by
nature.
Should be included in the
semi-variable costs only.

10. Average Collection Period
• It involves a capital cost.
• Higher the average Accounts
Receivable, higher is the cost.
• A change in the credit standards
leads to a change in the A/R
• This is through a change in sales
or change in the collections.
• In case of a tight policy, a decrease
in average A/R.
• Credit extended only to credit
worthy customers with a prompt
payment history.

11. Bad Debts
• They change with the change in the credit policy of a firm.
• Bad debts increase with a liberal credit standard.
• They tend to reduce with a tight credit policy of a firm.

12. Sales Volume
• Changing credit standards impact the
sales volume of a firm.
• A relaxed credit policy will tend to
increase the sales.
• A tight credit policy tends to decrease
the sales of a firm.

13. Credit Terms
(A)CREDIT PERIOD – is the time for which the credit is extended.
It is generally stated in terms of Net Date.
 If the policy of a company states “Net 30” , it means the
payment will be made after 30 days of credit sale. The effects of
a liberal credit policy are:-
Increase in Sales Volume
Relaxed Collection Period
 Increase in bad and doubtful debts


14. (B) Cash Discount
• Credit terms – 5/15 net 90
• 5 represents the cash discount
offered
• 15 represents the number of days
for which this discount is valid
• If payment is not made within
15 days, then the customer should
make full payment within 90 days
of sale.
Increased sales
Reduced
Collection
Period
Increased cost of
discount

15. II –CREDIT ANALYSIS through
credit rating
Sources of Credit Rating
Published information
Bank Reference
Trade Reference
Salesman’s Interview and Report
Credit Bureau Reports
Reports from other Agencies
Past Experience

16. III. Control of Receivables
This depends on the following:-
(i) Collection Policy
(ii) Monitoring of Receivables
(iii) Ageing Schedule

17. (i) Collection Policy
It depends on (a) Degree of Collection Efforts
Item Direction of Change Effect on Profits
Bad Debt Losses Decrease Positive
Average Collection
Period
Decrease Positive
Sales Volume Decrease Negative
Collection Cost Increase Negative

18. (b) Type of collection efforts
Reminder Letters to make the payment
Telephone calls for follow up
Personal Visits
Seek assistance from Collection Agencies
Legal Action

19. (iii) Monitoring of Receivables
• Average Collection Period using Ratio Analysis
• Ageing Schedule
Receivables are classified according to their age
Helps to compare the liquidity of receivables on an inter and
intra basis
Helps to monitor the dues according to their maturity
Supports Sales Analysis
Age in
days
2014 2015
Month
of Sale
Balance of
Receivable
% to
total
Month
of Sale
Balance of
Receivable
% to total
1 - 30 Dec 50,500 March 1,32,000
31 -60 Nov 86,700 Feb 3,14,000