This document summarizes key aspects of managing receivables, including: 1) Defining receivables as unpaid amounts from credit sales and outlining objectives like collecting accounts receivable. 2) Explaining reasons companies offer credit like promoting sales and factors affecting credit policies like collection costs. 3) Describing steps in determining credit policies including evaluating customers' character, capital, and repayment ability. 4) Outlining collection policies for overdue accounts involving escalating efforts like phone calls, visits, and legal action if needed.

1. MANAGEMENT
OF
RECEIVABLES
BY : RAHUL SINGH
LECTURAR:- MRS PRABHA.

2. AFTER PRESENTATION
 Definition of Receivables
 Objective
 Reasons to offer credit
 Cost associated with credit polices
 5 c’s
 Optimum credit policy
 Factors of credit policy
 Factors determine credit standard
 Credit policy decision
 Steps in credit policy decision
 Collection policy
 Aspect of collection policy
 Collection period

3. RECEIVABLES
 Receivables is known as when firm makes an
ordinary sale of goods or service and does not
receive payment , it grant trade credit and creates
accounts receivables which would be collected in
future.
 “ In simple terms it known as sales of good and
service in credit and make an promissory note to
receive payment later.”

4. Objectives of Receivables
 Creating, preserving, and collecting A/R.
 Establishing and communicating credit policies.
 Evaluation of customers and setting credit lines.
 Ensuring prompt and accurate billing.
 Maintaining up-to-date records of accounts
receivables.
 Initiating collection procedures on overdue
accounts.

5. Reasons to Offer Credit
Competition
Market Share
Promotion
Credit Availability to Customers
Customer Convenience
Profit

6. Cost Associated With a Credit
policy Credit Department Costs
 Credit Evaluation Costs
 A/R Carrying Cost
 Discounted Payments
 Selling and Production Cost
 Collection Expenses
 Bad Debts

7. The Five C’s of Credit or Receivable
control
 Character
 Capacity
 Capital
 Collateral - security
 Conditions – Terms of asset sale

8. Optimumcredit
policy
 Credit policy mean those decision variables that
influence the amount of trade credit. i.e.
investment in receivables.
 A firm’s credit policy provides the guide lines for
determining whether to extend credit to customer
and how much credit to extend.
 A credit policy may be lenient or tight .

9. Factors of Credit Policy
 Cost of credit extension
 Collection cost
 Capital cost
 Delinquency cost
 Default cost
 Benefits of credit extension
 Oriented to sales expansion
 Protect from competition

10. Factor determine credit
standard Collection cost
 Average collection period
 Level of bad debt
 Level of sales

11. Days’ Sales Outstanding (DSO)
Assume that a company has outstanding receivables of $350,000 at the
end of the first quarter and credit sales of $425,000 for the quarter.
Using a 90-day averaging period, the DSO for this company can be
computed as follows:
Sales During Period $425,000
Avg.Daily Credit Sales = = = $4,722.22
Number of Days in Period 90
Outstanding A/R $350,000
DSO = = = 74.11Days
Avg.Daily Credit Sales $4,722.22
Average Past Due =DSO - Avg.Days of Credit Terms
= 74.11Days - 60 Days =14.11Days
If the company’s credit terms are net 60, the average past due is
computed as follows:

12. Credit policy decision
 Credit standard
 Credit policy
Besides credit standard the second aspect of credit policy is the credit
analysis and investigation which involves the evaluation of credit worthiness
of the individual’s desirous to obtain credit from the firm.
• Character
• Capacity
• Capital
• Collateral
• Conditions

13. Steps in Credit policy
 Obtaining credit information
 Internal
 External
 Financial statements
 Bank reference
 Trade reference
 Credit bureau reports
 Analysis of credit information
 Quantitative aspects
 Qualitative aspects

14. Credit terms
 Credit terms the repayment of the amount under
the credit sale.
 Three components are:
 Credit period
 Sales volume of the firm would increase
 Average collection period would increase
 Bad debt expensive would increase. Thus the net effect of
increase period may be negative.

15. Cont.… Cash discount
 This is the rate of discount offered to customer in
which the overdue amount will be reduced by this
amount. The changes in the discount rate would have
both positive and negative effects.
Item Direction of change Effect on profit
Sales volume Increase Positive
Average collection
period
Decrease Positive
Bad debt expenses Decrease Positive
Profit per unit Decrease negative

16. Cont.….
 Cash discount period
 It also affects the firm’s collection period and profit.
An increase in it and it will have a positive effect on
profit because many customer who did not take
advantage of discount in the past may now avail it. It
reduces the average collection period. However,
when the discount period is increased there is also a
negative effect on profit because it would make
average collection period slow.

17. Collection policies
 Collection policies are the last area involved in
accounts receivables management. These refers to
the procedures followed to collect accounts
receivable when they become due after the expiry
of the credit period.
 Their purpose should be to speed up the collection
of dues.
 Various steps to collect dues from customer by
firm are: letter, telephone calls etc.

18. Aspect of collection policies
 Degree of efforts to collect the over dues
 Tight : the collection policy would be tight if very
vigorous procedure are followed. A tight collection
policy has both types of implication benefits as well
as cost. The management has to consider the trade-
off between them. The bad debt expenses would
decline and average collection period will be
reduced. There fore the profit of the firm will
increase. There may be decline in sales volume
because some consumer may not like the pressure
and switch to another one.

19. Cont.…
 Lenient : a lenient collection effort also affect the
cost benefits trade off. The effect of lenient policy
will be just the opposite of the tight policy.
Item Direction of change Effect on profit
Bad debt expenses Decrease Positive
Average collection
period
Decrease Positive
Sales volume Decrease Negative
Collection cost Increase Negative
Tight

20. Types of collection period
 This relates to the steps that should be taken to
collect over dues from the customers. The
collection policy should have clear cut guide-lines
about the sequences of collection efforts.
 After the collection period is over and payment
remain due, the firm should take measures to
collect them.

21. Cont.…
 Following steps may be taken in this connection.
 Letter to expedite payment
 Telephone visit
 Personal visit
 Help to collection agencies
 Legal action