-
*RECEIVABLESMANAGEMENTAny fool can lend money, but it takes a
lot of skill to get it back
-
*
SR.NO.GROUP MEMBERSENROLLMENT NO.1.NIKHIL YADAV11BSP06212.ROHIT
JAMKHANDI11BSP04033.HEMIKA SAWHNEY11BSP03774.PIYOOSH
BAJORIA11BSP06885.NAVNEET BANSAL11BSP05916.EMILY
BORAL11BSP03117.MITHLESH SHARMA11BSP12038.SIDDHARTH
BANSAL11BSP1655
-
* What are receivables? Receivables are sales made on credit
basis.
Why do we need receivables?To increase total salesTo increase
profitsTo meet increasing Competition
Understanding ReceivablesAs a part of the operating cycleTime
lag between sales and receivables creates need for working
capital
INTRODUCTIONRECEIVABLES MANAGEMENT
-
*ADMINISTRATIVE COST: Administrative costs In form of salaries
to clerks who maintain records of debtors, expenses on
investigating the creditworthiness of debtors, etc.
CAPITAL COST:Cost incurred in terms of interest (if financed
from outside) or opportunity cost (if internal resourses they could
have been put to some other use)
COLLECTION COST Cost incurred for collection of amounts at the
appropriate time from the customers.
DEFAULTING COST: Amounts which have to written off as bad
debts.DIFFERENT TYPES OF COSTS ASSOCIATEDRECEIVABLES MANAGEMENT
-
*Creating, presenting and collecting accounting receivables
Establish and communicate the credit policies
Evaluation of customers and setting credit limits
Ensure prompt and accurate billing
Maintaining up-to-date records
Initiate collection procedures on overdue
accountsOBJECTIVESRECEIVABLES MANAGEMENT
-
*Customer Evaluation- The 5 Cs
Character- Reputation, Track Record
Capacity- Ability to repay( earning capacity) (The working
capital position and profitability)Capital- Financial Position of
the co.
Collateral- The type and kind of assets pledged
Conditions- Economic conditions & competitive factors that
may affect the profitability of the customer
STEPS IN CREDIT ANALYSIS Investigating the customerRECEIVABLES
MANAGEMENT
-
CREDIT POLICYWhether and how much credit to be extend
Determination of (1)Credit Standard (2) credit analysis
Important aspect of Credit Policy a. Credit Standard b. Credit
Period c. Cash Discount CREDIT POLICYRECEIVABLES MANAGEMENT
-
1.CREDIT STANDARDBasic criteria or minimum requirement for
extending credit to customer
RECEIVABLES MANAGEMENT
LIBERAL CREDITSTIFF CREDIT1. Pushes up the sales1. Pushes down
the sales2. Higher incidence of Bad Debt2. Less incidence of Bad
Debt3. Large investment in a/c receivable3. Less investment in a/c
receivable4. Higher Cost Of Collection4. Less Cost Of
Collection
-
2.CREDIT PERIODLength of time the customer allowed to pay for
their purchasesDoes not grant Credit Zero
RECEIVABLES MANAGEMENT
Longer Period of Credit Shorter Period of Credit Increases
salesDecreases sales
Increases investment in a/c receivableDecreases investment in
a/c receivable
Higher incidence of bad debtLess incidence of bad debt
-
3.CASH DISCOUNTOffer to customer in order to induce them to pay
promptly.
Percentage Discount and period are reflected in Credit terms
Ex. 5 / 10, net 45
Liberalized cash discount increases sales Reduces avg.
collection periodRECEIVABLES MANAGEMENT
-
Collection EffortsMonitoring ReceivableSending
LettersTelegraphic AdviceThreat of Legal action (overdue)Legal
ActionRECEIVABLES MANAGEMENT
-
* When the financial statements are obtained the financial
strengths and weaknesses can be gauged by the application of ratio
analysis. Some of the important ratios are
Current AssetsCurrent ratio = ---------------------- Current
Liabilities
Current Assets - InventoryQuick ratio =
----------------------------------------- Current Liabilities
The above two ratios are widely used to assess the liquidity
position of a company in meeting its short-term obligations. STEPS
IN CREDIT ANALYSIS Investigating the customer by Ratio
AnalysisRECEIVABLES MANAGEMENT
-
*
Average Balance of sundry Creditors c) Average payment period =
----------------------------------------------------- Average Daily
Credit Purchases
Average Balance of sundry Debtors d) Average collection period =
----------------------------------------------------- Average Daily
Credit Sales
Debte) Capital Structure ratio = ------------ Equity
Net profit after tax and preference share dividendf) Return On
Equity =
-----------------------------------------------------------------
Owner Equity STEPS IN CREDIT ANALYSIS Investigating the customer by
Ratio AnalysisRECEIVABLES MANAGEMENT
-
*What the Ratios indicate..???
Payment period
Collection period
Return on owners equity.
It throws light on the financial strength of the company and
whether the trend over the years is favourable or not.
STEPS IN CREDIT ANALYSIS Investigating the customerRECEIVABLES
MANAGEMENT
-
*
Financial statements: long term, short term solvency etc can be
judged
Bank references: information about the customer from another
bank
Trade references: information about customer obtained from firms
based on their experiences
Credit bureaus: to check the financial viability of the business
(Credit rating agencies)
Third party guarantees
Field visit: to get information of the existence and general
condition of the customers businessSTEPS IN CREDIT
ANALYSISRECEIVABLES MANAGEMENT
-
*
STEPS IN CREDIT ANALYSIS Credit Evaluation Report on X co.
LtdRECEIVABLES MANAGEMENT
Item HeadFor X co. LtdStandard RemarkCurrent Ratio
Quick Ratio
Average Payment Period
Average Collection Period
Debt - Equity Ratio
Return On Equity1.70
1.15
45 Days
40 Days
1.5 : 1
15 %1.75
1.00
40 Days
30 Days
2 : 1
18 %
Liquidity position is good
Can be persuaded to pay within 40 days.This may have caused
delay in payments.Lower because of capital structure.
-
*
STEPS IN CREDIT ANALYSIS Risk Classification SchemeRECEIVABLES
MANAGEMENT
Risk ClassDescription
1.Customer with no risk of default 2.Customer with negligible
risk of default ( default rate less then 2 % ) 3.Customer with a
little risk of default ( default rate between 2 % and 5 % )
4.Customer with some risk of default ( default rate between 5 % and
10 %) 5.Customer with significant risk of default ( default rate in
excess of 10 % )
-
*Helps improve customer satisfaction: enhance service level and
increase retention with customized information.
Takes control of sales processes: manage your sales process more
effectively by measuring trends and analyzing performance.
Enhance your productivity: help reduce administrative costs and
enhance office productivity
Streamline revenue allocation: managed calculations to fit your
business needs
Providing access to vital informationBENEFITSRECEIVABLES
MANAGEMENT
-
*The probability of receiving the payment or defaulting the
payment by the customer.
The Rex company is considering offering credit to customer. The
probability that the customer would pay is 0.9 and the probability
that the customer would default is 0.1. The revenues form the sale
would be 80,000 and the cost of sale would be 60,000.
If the customer pay, the company gets a profit of Rs.20,000
while it losses Rs.60,000 if he fails to pay.
CREDIT GRANTING DECISION DECISION- TREE APPROACHRECEIVABLES
MANAGEMENT
-
*
Credit Granting Decision : Decision tree Approach
The weighted net benefit is Rs.20,000 * 0.9 Rs.60,000 * 0.1 =
12,000.Hence it is preferable to grant credit as the weighted net
benefit is positive.
CREDIT GRANTING DECISION DECISION- TREE APPROACHRECEIVABLES
MANAGEMENT
-
*Sunshine Industries is considering offering credit to a
customer. The probability that the customer would pay is 0.5 % and
the probability that the customer would default is 0.5 %.Revenue
from the sale = Rs 2500Cost of sale = Rs 1700The expected profit
from offering credit 0.5 ( 2500 1700 ) 0.5 (1700) = - 500As this is
negative the company cannot offer credit. CREDIT GRANTING DECISION
DECISION- TREE APPROACHRECEIVABLES MANAGEMENT
-
*
Centralised / Decentralised collection system
Post dated cheques
Pay Orders / Bank drafts
Bills of Exchange
Lock box System
Drop box System
Collection staff/ agents
Debt collector
Del Credere agent
Concentration bankingCOLLECTION METHODSRECEIVABLES
MANAGEMENT
-
*Centralised / Decentralised collection system
Post dated cheques
Pay Orders / Bank drafts
Bills of Exchange
Lock box System
Drop box System
Collection staff/ agents
Debt collector
Del Credere agent
Concentration bankingCOLLECTION METHODSRECEIVABLES
MANAGEMENTUnder a lock box system, customers are advised to mail
their payments to special post office boxes called lockboxes, which
are attended to by local collection banks, instead of sending them
to corporate headquarters. Thus the lock box system: (i) cuts down
the mailing time, because Cheque are received at a nearby post
office instead of at corporate headquarters, (ii) reduces the
processing time because the company does not have to open the
envelopes and deposit the Cheque for collection, and (iii) shortens
the availability delay because the Cheque are typically drawn on
local banks
-
*Centralised / Decentralised collection system
Post dated cheques
Pay Orders / Bank drafts
Bills of Exchange
Lock box System
Drop box System
Collection staff/ agents
Debt collector
Del Credere agent
Concentration bankingCOLLECTION METHODSRECEIVABLES MANAGEMENTan
agency, factor, or broker acting as an intermediary between sellers
and buyers and guaranteeing payment
-
*Centralised / Decentralised collection system
Post dated cheques
Pay Orders / Bank drafts
Bills of Exchange
Lock box System
Drop box System
Collection staff/ agents
Debt collector
Del Credere agent
Concentration bankingCOLLECTION METHODSRECEIVABLES MANAGEMENTA
firm may open collection centres (banks) in different parts of the
country to save the postal delays. This is known as concentration
banking.
The firm may instruct the customers to mail their payments to a
regional collection centre / bank rather than to the Central
Office
The Cheque received by the regional collection centre are
deposited for collection into a local bank account
The concentration banking results in saving of time of
collection
-
*
1) Day Sales Outstanding
2) Ageing Schedule
3) Collection MatrixMONITORING RECEIVABLES(Measures for
Monitoring Receivables)RECEIVABLES MANAGEMENT
-
*
The average number of days sales outstanding at any time, say
end of the month or end of the quarter, is obtained by following
the formula.
Accounts receivable at time chosenDays sales outstanding =
-------------------------------------------- Average daily
salesCONTROL OF RECEIVABLES MANAGEMENT(Day Sales
Outstanding)RECEIVABLES MANAGEMENT
-
*
SALES AND RECEIVABLES DATARECEIVABLES MANAGEMENT
Month Sales ReceivablesMonth Sales ReceivablesJanuary
February
March
April
May
June200
225
230
150
150
180460
360
315
310
300
320July
August
September
October
November
December200
200
220
230
245
250340
360
360
390
500
520
-
*AVERAGE COLLECTION PERIODRECEIVABLES MANAGEMENT
Quarter Average Collection PeriodFirst
Second
Third
Fourth 315
-----------------------------------------------------------------------------
= 43 days ( 200 + 225 + 230 ) / 90 days
320
------------------------------------------------------------------------------
= 61 days (150 + 150 + 180) / 91 days 360
------------------------------------------------------------------------------
= 53 days (200 + 200 + 220) / 92 days
520
------------------------------------------------------------------------------
= 66 days (230 + 245 + 250) / 92 days
-
*
Classifies the outstanding accounts receivables at a given point
of time into different age brackets. Ex.Age Group (days)% of
receivables0-30 30 31-60 40 61-90 25 >=90 5
AGEING SCHEDULERECEIVABLES MANAGEMENT
-
*
In order to study correctly the changes in the payment behavior
of customers, it is helpful to look at the pattern of collection
associated with credit sales. From the collection pattern one can
judge whether the collection in improving, stable or deteriorating.
COLLECTION MATRIXRECEIVABLES MANAGEMENT
-
*COLLECTION MATRIXRECEIVABLES MANAGEMENT
% of receivables collected during the monthJanuary salesFebruary
salesMarch sales April salesMay sales June salesMonth of sales
First following Month
Second following month
Third following month
Fourth following month10
42
36
1214
35
40
1115
40
21
2412
38
26
19
5
9
35
26
25
513
31
26
25
5
-
*ABC Analysis of Receivables
A Represents a small proportion of accounts of debtors
representing a large valueB Represents moderate valueC Represents a
large number of accounts of debtors but representing a small
amount
CONTROL OF RECEIVABLES MANAGEMENTRECEIVABLES MANAGEMENT
Category% of accounts to Total Accounts% of Balance Outstanding
to Total Debtors BalanceA1575B3520C505
-
*PROFORMARECEIVABLES MANAGEMENTType A- If Fixed Costs is
given
Credit Policy Present PolicyOption 1Option 2Option 3Credit
Period (days/ weeks/months)
xxxxxxxxParticularsRs.Rs.Rs.Rs.SalesxxxxxxxxxxxxxxxxLess: Variable
CostxxxxxxxxContributionxxxxxxxxxxxxLess: Fixed CostxxxxxxxxProfit
[Benefits (A)]xxxxxxxxxxxxTotal Cost= Variable Cost +Fixed
CostAverage Investment in Receivables (Based on Total
Costs)xxxxxxxxxxxxCosts of Extending Credit:1) ____ % Opportunity
Cost of Capital (Calculated on Avg. Invst. in
Receivables)xxxxxxxx2) Bad debts as % of Salesxxxxxxxx3) Credit
Collection and Admin costsxxxxxxxxTotal Costs
[B]xxxxxxxxxxxxxxxxNet Benefits [A-B]xxxxxxxxxxxxIncremental Net
Benefits---xxxxxx
-
*Type B: If Fixed costs is NOT given.PROFORMARECEIVABLES
MANAGEMENT
Credit Policy Present PolicyOption 1Option 2Option 3Credit
Period (days/ weeks/months)
xxxxxxxxParticularsRs.Rs.Rs.Rs.SalesxxxxxxxxxxxxxxxxLess: Variable
CostxxxxxxxxContribution [Benefits (A)]xxxxxxxxxxxxAverage
Investment in Receivables (Based on Sales)xxxxxxxxxxxxCosts of
Extending Credit:1) ____ % Opportunity Cost of Capital (Calculated
on Avg. Invst. in Receivables)xxxxxxxx2) Bad debts as % of
Salesxxxxxxxx3) Credit Collection and Admin costsxxxxxxxxTotal
Costs [B]xxxxxxxxxxxxxxxxNet Benefits [A-B]xxxxxxxxxxxxIncremental
Net Benefits---xxxxxx
-
*Though various techniques have been discussed here for the
management of accounts receivable, in practice very few Indian
companies have a stated and systematic credit policy. Companies
have to :-Strengthen their management of receivables. State
explicit and articulate credit policies. An efficient collection
program. Better co ordination between production , sales , and
finance departments .RECEIVABLES MANAGEMENT
-
Thank you
*RECEIVABLES MANAGEMENT
*First explain what is the liberal and stiff credit and then
differntiate*We can explain example in detail**
