receivables management. opportunity cost collection cost bad debts increased sales increase in...
DESCRIPTION
COVERAGE Terms of Payment Credit Policy Variables Credit Evaluation Credit Granting Decision Control of Accounts Receivable Credit Management in IndiaTRANSCRIPT
RECEIVABLES MANAGEMENT
OPPORTUNITY COST
COLLECTION COST
BAD DEBTS INCREASED SALES
INCREASE IN MARKET SHARE
INCREASE IN PROFITS
COVERAGE
• Terms of Payment
• Credit Policy Variables
• Credit Evaluation
• Credit Granting Decision
• Control of Accounts Receivable
• Credit Management in India
TERMS OF PAYMENT
• Cash Mode
• Open Account
• Bill of Exchange
• Letter of Credit
• Consignment
CREDIT POLICY VARIABLES
The important dimensions of a firm’s credit policy are:
• Credit standards
• Credit period
• Cash discount
• Collection effort
CREDIT STANDARDS
Liberal Stiff
• Sales Higher Lower
• Bad debt loss Higher Lower
• Investment Larger Smaller in receivables
• Collection costs Higher Lower
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
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
CREDIT PERIOD
Longer Shorter
• Sales Higher Lower
• Investment in Larger Smaller
receivables
• Bad debts Higher Lower
IMPACT ON RESIDUAL
INCOME OF LONGER CREDIT PERIOD
P = [S(1 – V) - Sbn] (1 – t ) – k I
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
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
LIBERALISING THE CASH DISCOUNT POLICY
P = [S(1 – V) - DIS] (1 – t ) + k I
DECREASING THE RIGOUR OF COLLECTION PROGRAMME
RI = [S(1 – V) - BD] (1 – t ) – k I
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
:
MONITORING OF ACCOUNTS RECEIVABLES
• RECEIVABLES TURNOVER
• AVERAGE COLLECTION PERIOD (ACP)
• AGEING SCHEDULE
• COLLECTION MATRIX
How quickly RECEIVABLES are CONVERTED in to CASH
Receivables Turnover Rate= Total Net Sales
Avg. Debtors* (*including Bills Receivables)
Time (no. of Days) the Credit Sales are converted In to Cash
ACP= 365/ Receivables Turnover
Statement showing AGE WISE GROUPING OF DEBTORS
OR Breaking up of Debtors according to the LENGTH OF TIME for which they have been
OUTSTANDING
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
Shows the collection pattern (in months) for the CREDIT SALES made in a month
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