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.
These are the claims of the firm against its customers &
form a part of its current assets.
Receivables are also known as Account Receivables,
Book debts, trade receivables etc
Process of making decisions relating to
investment in trade debtors.
Objective of Receivables management is to
promote sales & profit until that point is reached
where the return on investment in further funding
of receivables is less than the cost of funds raised
to finance that additional funds.
Receivables Management is also called Trade
Credit Management.
Reach Sales potential
Compete with Competitors
Optimize the return on investments on the
assets
Receivables
Inventory
Cash
Operating
Cycle
Achieving growth in sales and profit.
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.
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.
COLLECTION POLICY:Collection policy of a firm also
has some influences on the actual Debtors balance.Due to a
relatively lax collection policy,customers do not meet their
commitments on time.
CAPITAL COST: It is the cost on the use of additional capital to
support credit sales which alternatively could have been employed
elsewhere.
COLLECTION COSTS: Administrative costs incurred in
collecting the accounts receivable. Costs of additional steps to increase
the chances for eventful payment.
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.
` Size of credit sales
` Credit policies
` Terms of trade
` Expansion plans
` Relations with profits
` Credit collection efforts
` Habits of customers
` Credit period allowed
` Effect of cost of goods sold
` Forecasting expenses
` Forecasting average collection period & discounts
` Average size of recievables
It is the determination of credit statandard 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 following dimensions.
A)CREDIT STANDARD-It is the minimum requirement for
extending credit to a customer.
B)CREDIT PERIOD-Period allowed to the customers for making the
payments
C) CASH DISCOUNT- It is allowed to expedite the collection of
receivables.
D) DISCOUNT PERIOD
Following factors should be considered while deciding whether to relax credit
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 increase with
relaxation in credit standards and vice versa.
SALES VOLUME-Sales volume is expected to increase as standards are
relaxed,conversely tightening decreases sales.
` Collecting credit information
` Credit analysis
` Credit decision
` Financing Investment in Receivables & factoring
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 necessary
information
from the applicants Bank.
III)TRADE REFERENCES-Reputed Credit organization are approached
about
the credit worthiness of proposed customers.
IV)CREDIT BUREAU REPORTS-Credit Bureau reports fromorganization
which specializes in supplying credit information can also be utilized.
The information collected from different sources are analyzed to
determine the credit worthiness of the applicant.The analysis should
cover two aspects:
I)QUANTITATIVE-The quantitative aspects is based on the
factual information available from the financial statements,the past
records of the firms and so on.
II)QUALITATIVE-The qualitative judgement would cover
aspects relating to the quality of management.
.
Customers Evaluation-The 5 Cs-
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
` Decision is to be taken that whether the credit is to
be extended & if yes then upto what level.
` If customers creditworthiness is above credit
standards , then there is no problem in taking
decision.
` If decisions are difficult to made, then credit
should be compared with likely bad debt losses.
` Collection policy can be lenient or strict.
` Strict policy will involve more efforts on collection.
` Lenient policy means less efforts on collecting
recievables.
COLLECTION METHOD
Centralised / Decentralised collection system
Post dated cheques
Pay Orders / Bank drafts
Bills of Exchange
Lock box System
Drop box System
Factoring
Collection staff/ agents
Debt collector
Del Credere agent
Concentration banking
19
` Centralised / Decentralised collection system
` Post dated cheques
` Pay Orders / Bank drafts
` Bills of Exchange
` Lock box System
` Drop box System
` Factoring
` Collection staff/ agents
` Debt collector
` Del Credere agent
` Concentration banking
20
Factoring is a financial service
designed to help firms to arrange
their receivable better. Under a
typical factoring arrangement a
factor collects the accounts on due
dates, effects payments to the firm
on these dates and also assumes
the credit risks associated with the
collection of the accounts.
Sometimes the factor provides an
advance against the values of
receivable taken over by it. In such
cases factoring serves as a source
of short-term finance for the firm.
` Centralised / Decentralised collection system
` Post dated cheques
` Pay Orders / Bank drafts
` Bills of Exchange
` Lock box System
` Drop box System
` Factoring
` Collection staff/ agents
` Debt collector
` Del Credere agent
` Concentration banking
21
an agency, factor, or broker acting
as an intermediary between sellers
and buyers and guaranteeing
payment
COLLECTION METHOD
` Centralised / Decentralised collection system
` Post dated cheques
` Pay Orders / Bank drafts
` Bills of Exchange
` Lock box System
` Drop box System
` Factoring
` Collection staff/ agents
` Debt collector
` Del Credere agent
` Concentration banking
22
A firm may open collection centres
(banks) in different parts of the
country to save the postal delays.
This is known as concentration
banking.
The firm may instruct the customers
to mail their payments to a regional
collection centre / bank rather than
to the Central Office
The Cheque received by the regional
collection centre are deposited for
collection into a local bank account
The concentration banking results in
saving of time of collection
` INCREASED SALES-The impact of liberal trade policy result
in increased in sales volume.
` STREAMLINE REVENUE ALLOCATION-To fit
business needs calculations are managed.
` ENHANCE PRODUCTIVITY-The decrease in administrative
cost enhances productivity.
` HELPS IMPROVE CUSTOMER SATISFACTION-
Enhances service level and increase retention with customized
information.