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Receivables MGMT

This document discusses receivables management and credit policy. It covers the nature of credit policy including goals, variables like credit standards, terms, and collection procedures. It also discusses monitoring receivables, factoring as an alternative where a firm can sell accounts receivable to a factor at a discount in exchange for financing and collection services, and the costs and benefits of factoring. The key aspects of managing receivables and establishing an optimal credit policy are estimating the incremental profit and investment in receivables to determine the incremental rate of return.

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31 views

Receivables MGMT

This document discusses receivables management and credit policy. It covers the nature of credit policy including goals, variables like credit standards, terms, and collection procedures. It also discusses monitoring receivables, factoring as an alternative where a firm can sell accounts receivable to a factor at a discount in exchange for financing and collection services, and the costs and benefits of factoring. The key aspects of managing receivables and establishing an optimal credit policy are estimating the incremental profit and investment in receivables to determine the incremental rate of return.

Uploaded by

Evangeline
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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RECEIVABLES

MANAGEMENT
INTRODUCTION
• Trade credit happens when a firm sells its
products or services on credit and does not
receive cash immediately.

• A credit sale has three characteristics:


– First, it involves an element of risk that should be
carefully analyzed.
– Second, it is based on economic value.
– Third, it implies futurity.
Nature of Credit Policy
• Investment in receivable
– volume of credit sales
– collection period
• Credit policy
– credit standards
– credit terms
– collection efforts
Goals of Credit Policy
• Marketing tool
• Maximisation of sales Vs. incremental profit
– production and selling costs
– administration costs
– bad-debt losses
Optimum Credit Policy

• Estimation of incremental
profit
• Estimation of incremental
investment in receivable
• Estimation of incremental
rate of return (IRR)
• Comparison of incre-
mental rate of return with
required rate of return
(RRR)
• Optimum credit policy:
IRR = RRR Costs of Credit Policy
Credit Policy Variables

• Credit standards and analysis


• Credit terms
• Collection policy and procedures
Credit Standards
• Credit standards are the criteria which a
firm follows in selecting customers for the
purpose of credit extension.
• The firm may have tight or loose credit
standards.

• Credit analysis
– Average collection period (ACP)
– Default rate
Cont…
 Customer categories
• good accounts
• bad accounts
• marginal accounts
 Numerical credit scoring
• ad hoc approach
• simple discriminant approach
• multiple discriminant approach
Credit-granting Decision
Credit terms
• Credit period
• Cash discount
Collection policy and
procedures
– regularity of collections
– clarity of collection procedures
– responsibility for collection and follow-up
– case-by-case approach
– cash discount for prompt payment
CREDIT EVALUATION OF
INDIVIDUAL ACCOUNTS
• Credit Information
– Financial statement
– Bank references
– Trade references
– Other sources
• Credit Investigation and Analysis
– Analysis of credit file
– Analysis of financial ratios
– Analysis of business and its management
• Credit Limit
• Collection Efforts
MONITORING RECEIVABLES

• Average Collection Period


• Aging Schedule
• Collection Experience Matrix
FACTORING
• Factoring may be defined as ‘a contract between the
suppliers of goods/services and the factor under which
Factoring Services
• Credit administration
• Credit collection and protection
• Financial assistance
• Other services
Factoring and Short-term
Financing
• Factoring involves ‘sale’ of book debts.
• Factoring provides flexibility as regards
credit facility to the client.
• Factoring is a unique mechanism which
not only provides credit to the client but
also undertakes the total management of
client’s book debts.
Factoring and Bills
Discounting
1. Bills discounting is a sort of borrowing while factoring is the
efficient and specialized management of book debts along
with enhancement of the client’s liquidity.

2. The client has to undertake the collection of book debt. Bill


discounting is always ‘with recourse’, and as such, the client
is not protected from bad-debts.

3. Bills discounting is not a convenient method for companies


having large number of buyers with small amounts since it is
quite inconvenient to draw a large number of bills.
Types of Factoring
• Full service non-recourse Advance factoring

• Full service recourse factoring Maturity factoring

• Bulk/agency factoring
• Non-notification factoring
Costs of Factoring
• the factoring commission or service fee
• the interest on advance granted by the
factor to the firm.
Benefits of Factoring
• Factoring provides specialized service in credit
management, and thus, helps the firm’s
management to concentrate on manufacturing
and marketing.

• Factoring helps the firm to save cost of credit


administration due to the scale of economics
and specialization.

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