RECEIVABLES

MANAGEMENT
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 DEFINITION:

Receivable Management may be defined as
collection of steps and procedure required to
properly weigh the cost and benefits attached
with the credit policies.
 COSTS OF RECEIVABLES

 Cost of Financing
 Administrative Cost
 Delinquency Cost
 Cost of Default by Customers.
BENEFITS OF RECEIVABLES

 Increase in Sales
 Increase in Profits
 Extra Profit
 CREDIT POLICY

 The Credit Policy may be defined as the set of
parameters and principles that govern the extension
of credit to the customers.
 Determination of credit policy involves a trade off
between the profit on additional sales that arise due
to credit being extended on one hand and the cost of
carrying those debtors and losses suffered on
account of bad debts on the other hand.
 Dimensions of a firm’s credit
policies

 Credit Standard
 Credit Terms:
 Cash Discount
 Cash Discount Period
 Credit Period
 Credit Standard

 Credit Standard refers to the minimum quality of
credit worthiness of a credit applicant that is
acceptable to the firm.
 There are two categories of credit standard:
 Liberal Credit Standard
 Restrictive Credit Standard
Effects of Liberal Credit
Standard:
 The firm can stimulate sales and attract more
customers. 
 It involves larger working capital investment in
receivables.
 Higher rate of defaults because of the inability of the
customers.
 It incurs higher costs for capital tied in account
receivables.
 Average collection period may be slower.
Effects of strict credit standard
 Decrease in sales as few customers are attracted.
 Reduce the incidents of bad debts losses.



Difficult to attract or satisfy the customers.
Low cost carrying the debtors.
 Extension of credit facilities available to more credit
worthy customers only.
 CREDIT TERMS

 The term credit terms refers to the stipulation under
which the firm sales on credit is extended to the
customers.
 Three important dimensions of the credit terms are:
 Credit Period
 Cash Discount
 Cash Discount Period.
Important Components of the credit
terms

 Credit period: It refers to the period of credit which
is extended to the customers. It is generally stated in
terms of net date.
 Cash Discount: It indicate the rate of discount and
the period for which discount has been offered.
 Cash Discount Period: It represents the period of
time during which a cash discount can be taken for
early payment.
EVALUATION OF CREDIT

The evaluation of credit process consists of three steps:
 Gathering Credit Information
 Analysis of Customer’s Credit Worthiness
 Credit Decision.
A. GATHERING CREDIT INFORMATION:
Before granting credit facilities to a customer, a firm
must identify the source of information to assess clients
credit worthiness.

The sources of such information are:
1. Financial Statements
2. Bazar Reports
3. Reports of Credit Rating Agencies
4. Report from Banks
5. Firm’s Own Records
6. Trade References
7. Other Sources
B. Analysis of Customer’s Credit Worthiness:
To analyze the customer’s credit worthiness the
financial manager consider the four important
approaches:

 Traditional Credit Analysis: Five ‘C’ of credit:
Character
Capacity
Capital
Conditions
Collateral
 Sequential Credit Analysis
 Numerical Credit Scoring Method
 Risk Class Credit Analysis


C. Credit Decisions and line of Credit: The term line of
credit refers to a limit to the amount of credit extended
to an account.
THANK YOU
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