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The document discusses the management of receivables, defining them as debts owed to a firm by customers from sales. It outlines the objectives of accounts receivable management, costs associated with it, and the benefits of effective management, including increased sales and profits. Additionally, it covers credit policies, standards, terms, and various collection techniques to ensure timely payment from customers.

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MUHAMMAD IMRAN
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5 views

PPT

The document discusses the management of receivables, defining them as debts owed to a firm by customers from sales. It outlines the objectives of accounts receivable management, costs associated with it, and the benefits of effective management, including increased sales and profits. Additionally, it covers credit policies, standards, terms, and various collection techniques to ensure timely payment from customers.

Uploaded by

MUHAMMAD IMRAN
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Abdul Tawwab

M-IMRAN
Bs IT Evening A7th
Financial Management
MANAGEMENT OF RECEIVABLES
Receivable is defined as "debt owed to the firm by customers arising from
sale of goods or services in the ordinary course of business".

• A firm requires to allow credit to its customers for expansion of sales.


• Receivables contribute a significant portion of current assets.

Objectives of Accounts Receivable

Maximizing Initiate
value of the Optimum collection
firm investment in procedure on
Debtors Overdue
1. By achieving
1.Reduction of costs accounts
Doubtful debts
by optimum
trade off between reduces profit.
investment in
risk and return
2. Retaining old
receivables. Receivables policy
2. Balance between ensures timely and
customers &
liberal credit sales and
attracting new
investment in hassle free
customers
OBJECTIVES
"According to Bolton S the objective of receivable management is" to
promote sales and profits 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 credit"
Costs associated with receivables
management

Opportun Collectio
ity Cost n cost

COST
S

Delinque Default
ncy cost cost
1. Opportunity costs: it is the cost for arranging additional funds
to support credit sales which could be profitably employed
elsewhere.

2. Collection costs: these are cost incurred in collecting the


debts from the customers to whom the credit sales is made. These
costs include stationery, administration expenses, expenses
incurred for collecting information about the credit standing of the
prospective customer.

3.Delinquency cost: It arises if customers fail to meet their


obligations on due dates. It involves blocking up of funds for an
extended period

4. Default cost: it is the cost incurred when the customer is not


able to honor the dues of the firm. However these can be reduced
Benefits of Accounts Receivables
Management

Increase
Increased
in Market
Sales
share

Benef
its

Increase Ideal
in profits credit
policy
Credit Policy

Libera String
l ent

Goods are sold to Goods are sold on


customers whose credit on a highly
creditworthiness is not selective basis, i.e only
up to standard to the customers who
are financially sound
Liberal credit policy
Advantages Disadvantages

Increase in Sales Bad Debt Loss

Liquidity
Higher Profits Problem
Stringent credit policy
Advantages Disadvantages

Less Bad Debt


Loss Less Sales

Sound Liquidity Less Profits


Position
Credit Policy Variables
• Minimum criteria for the extension of credit to the
Credit customer
Standa • Credit rating, credit references, average payment period &
rds financial ratios provide a quantitative basis for establishing
and enforcing credit standards
• It means stipulations under which goods and services are
sold
Credit
Terms • It includes three components: Credit period, Cash discount
& Cash discount period

• It is the procedures passed to collect amount receivables,


Collect
when they become due It
ion
• It is required because all customers do not pay on the due
Policy
date
Collection Policy
Technique Description

Letters Initially a polite letter of overdue account is sent. Later a more


demanding letter is sent to remind the customer about payment.

Telephone calls If the response from the letter is not positive a telephonic conversation
requesting the payment is done. If the customer is able to give reasonable
reasons the credit period can be extended.

Personal Visit If telephonic calls could not serve the purpose a collection person is send
requesting on the spot payment.

A firm can appoint collection agencies to collect the amount overdue. The
Collection agencies collection agencies can exercise all the rights necessary for collection of
amount from defaulting customers.

This is the last resort available to the firm for collection of overdue. Legal
Legal action action has different consequences, like the debtor might be declared
bankrupt and there will be remote chances of recovering the money.

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