chapter 18-receivables management.ppt

Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat

Copyright © 2008, Dr Sudhindra Bhat

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RECEIVABLES

MANAGEMENT

18

Chapter

RECEIVABLES MANAGEMENT



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MANAGEMENT

LEARNING OBJECTIVES Say what are accounts receivables and their characteristics

Define accounts receivables management

Explain, objectives, benefits, costs of receivables management

Discuss the modes of payment f credit

Say what is credit policy? Types of credit policies with their advantages and

disadvantages

Explain the credit policy variables

Discuss the aspects of receivables management

Explain the steps involved in credit evaluation



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Meaning of Accounts Receivables

The term receivable is defined as “debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business”.(2) When the firm sells its products services on credit, and it does not receive cash for it immediately, but would be collected in near future. Till collection they form as a current assets.

CHARACTERISTICS OF RECEIVABLES

1. Risk Involvement: Receivables involve risk, since payment takes plBajaj in future, and future is uncertain so they should carefully analyzed.

2. Based on Economic Value: Accounts receivables are based on economic value. The economic value in goods or services passes to the buyer currently in return the seller expects an equivalent value from the buyer latter.

3. Implies Futurity: Buyer will make cash payment of the goods or services received by him/her in a future period. [i.e generally after credit period]



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Meaning of Accounts Receivables Management

Accounts Receivable management means making decisions relating to the

investment in these current assets as an integral part of operating process, the

objective being maximization of return on investment in receivables.



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Objectives of Accounts Receivables Management

Maximizing the Value of the Firm:

Optimum Investment in Sundry Debtors

Control and Cost of Trade Credit



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Costs of Accounts Receivables Management

Opportunity Cost / Capital Cost

Collection Cost

Bad Debts



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Benefits of Accounts Receivables Management

Increased Sales: Providing goods or services on credit expands sales, by

retaining old customers and attraction of prospective customers.

Market Share Increase: When the firm’s able to retain old customer and attract

new customer automatically market share will be increased to the extent of new

sales.

Increase in Profits: Increased sales, leads to increase in profits, because, it need

to produce more products with a given fixed cost and sales of products with a

given sales network, in both cost per unit comes down and the profit will be

increased.



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MANAGEMENT

Factors Influencing the Size of Investment in Receivables

Volume of Credit Sales

Credit Policy of the Firm

Trade Terms

Seasonality of Business

Collection Policy

Bill Discounting and Endorsement



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MANAGEMENT

Credit Policy Variables

Credit standards

Credit analysis

collection period

default rate

character

capacity

condition

capital

collateral



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MANAGEMENT


customer categories

good accounts

bad accounts

marginal accounts

numerical credit scoring

ad hoc approach

simple discriminant approach

multiple discriminant approach



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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



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Credit Evaluation of Customers

Credit information

financial statements

bank references

trade references

Credit investigation and analysis

analysis of credit file

financial analysis

analysis of business and management

Credit limit

Collection efforts



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Monitoring Receivable

Collection period

Aging schedule

Collection experience matrix



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MANAGEMENT

Case Study for Class Discussion…

Case One From Text Book..

Case 1. YAHOO.. PRODUCTS LIMITED

Case 2 – CREDIT LIMIT DECISION BAJAJ ELECTRONICS COMPANY

Case 3 - CREDIT DECISION AGARWAL CASE

chapter 18-receivables management.ppt

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