receivables management. opportunity cost collection cost bad debts increased sales increase in...
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COVERAGE Terms of Payment Credit Policy Variables Credit Evaluation Credit Granting Decision Control of Accounts Receivable Credit Management in IndiaTRANSCRIPT
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RECEIVABLES MANAGEMENT
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OPPORTUNITY COST
COLLECTION COST
BAD DEBTS INCREASED SALES
INCREASE IN MARKET SHARE
INCREASE IN PROFITS
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COVERAGE
• Terms of Payment
• Credit Policy Variables
• Credit Evaluation
• Credit Granting Decision
• Control of Accounts Receivable
• Credit Management in India
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TERMS OF PAYMENT
• Cash Mode
• Open Account
• Bill of Exchange
• Letter of Credit
• Consignment
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CREDIT POLICY VARIABLES
The important dimensions of a firm’s credit policy are:
• Credit standards
• Credit period
• Cash discount
• Collection effort
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CREDIT STANDARDS
Liberal Stiff
• Sales Higher Lower
• Bad debt loss Higher Lower
• Investment Larger Smaller in receivables
• Collection costs Higher Lower
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IMPACT ON RESIDUAL INCOME OF RELAXATION
P = [S(1 – V) - Sbn] (1 – t ) – k I
where P = change in Profit
S = increase in sales
V = ratio if variable costs to sales
bn = bad debt loss ratio on new sales
t = corporate tax rate
I = increase in receivables investment
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Q.PSD Ltd. is considering relaxing its credit standards.
S = Rs.15 million, bn = 0.10, V = 0.80,
ACP = 40 days, k = 0.10, t = 0.4
P = [15,000,000 (1 – 0.80) – 15,000,000 x 0.10] (1 – 0.4)
15,000,000 – 0.10 x x 40 x 0.80
360
= Rs.766,667
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CREDIT PERIOD
Longer Shorter
• Sales Higher Lower
• Investment in Larger Smaller
receivables
• Bad debts Higher Lower
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IMPACT ON RESIDUAL
INCOME OF LONGER CREDIT PERIOD
P = [S(1 – V) - Sbn] (1 – t ) – k I
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INCREASE IN RECEIVABLES INVESTMENT
S0 SI = (ACPn – ACP0) + V (ACPn)
360 360
where: I = increase in receivables investment
ACPn = new average collection period (after lengthening the credit period)
ACP0 = old average collection period
V = ratio of variable cost to sales
S = increase in sales
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Q. X Limited is considering extending its credit period from 30 to 60 days.
S = Rs.50 million, S = Rs.5 million, V = 0.85, bn = 0.08,
k = 0.10, t = 0.40
P = [5,000,000 x 0.15 – 5,000,000 x 0.08] (0.6)
– 0.10 (60 – 30) x + 0.85 x 60 x
= [750,000 – 400,000] (0.6) – 0.10 [4,166,667 + 708,333]
= – 277,500
50,000,000360
5,000,000360
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LIBERALISING THE CASH DISCOUNT POLICY
P = [S(1 – V) - DIS] (1 – t ) + k I
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DECREASING THE RIGOUR OF COLLECTION PROGRAMME
RI = [S(1 – V) - BD] (1 – t ) – k I
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TRADITIONAL CREDIT ANALYSIS
Five Cs of Credit
Character : The willingness of the customer to honour his obligations
Capacity : The operating cash flows of the customer
Capital : The financial reserves of the customer
Collateral : The security offered by the customer
Conditions : The general economic conditions that affect the customer
Case History : Checking customers past transaction to extend credit to
the customer
:
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MONITORING OF ACCOUNTS RECEIVABLES
• RECEIVABLES TURNOVER
• AVERAGE COLLECTION PERIOD (ACP)
• AGEING SCHEDULE
• COLLECTION MATRIX
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How quickly RECEIVABLES are CONVERTED in to CASH
Receivables Turnover Rate= Total Net Sales
Avg. Debtors* (*including Bills Receivables)
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Time (no. of Days) the Credit Sales are converted In to Cash
ACP= 365/ Receivables Turnover
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Statement showing AGE WISE GROUPING OF DEBTORS
OR Breaking up of Debtors according to the LENGTH OF TIME for which they have been
OUTSTANDING
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Age Group(in Days)
Amount Outstanding (Rs.)
Percentage of Debtors
to Total DebtorsLess Than
30
31-45
46-60
Above 60
40,00,000
20,00,000
30,00,000
10,00,000
40
20
30
10
Total 1,00,00,000 100
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Shows the collection pattern (in months) for the CREDIT SALES made in a month
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Percentage of Receivables January February March April May June Collected During the Sales Sales Sales Sales Sales Sales Month of sales 13 14 15 12 10 9 First following month 42 35 40 40 36 35 Second following month 33 40 21 24 26 26 Third following month 12 11 24 19 24 25 Fourth following month - - - 5 4 5