Receivables Management: Receivables result from credit sales.

A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes, other concerns in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increase profitability. Meaning of Receivables: Receivables represent amounts owed to the firm as a result of sale of goods or services in the ordinary course of business. These are claims of the firm against its customers and Form part of its current assets. Receivables are known as accounts receivables, customer receivables or book debts. Costs of Maintaining Receivables: The concern incurs the following costs on maintaining receivables: 1 Cost of Financing Receivables: When goods and services are provided on credit then Concerns capital is allowed to be used by the customers. The receivables are financed from the funds supplied by shareholders for long term financing & through retained earnings. The concern incurs some cost for collecting funds which finance receivables. 2 Cost of Collection: The customers who do not pay the money during a stipulated

credit period are sent reminders for early payments. Some persons may have to be sent for collecting these amounts. In some cases legal recourse may have to be taken for collecting receivables. 3 Bad Debts: Some customers may fail to pay the amounts due towards them. The

amounts which the customer fail to pay are known as bad debts. Factors Influencing the Size of Receivables: 1 Size of Credit Sales: The higher the part of credit sales out of total sales, figures of

Receivable will also be more or vice versa. 2 Credit Policies: A firm with conservative credit policy will have a low size of receivables.

While a firm with liberal credit policy will be increasing this figure. The vigour with which the concern collects the receivables also affects its receivables. If collections are prompt then even if credit is liberally extended the size of receivables will remain under control. 3 Terms of Trade: The size of receivables also depends upon the terms of trade. The

Period of credit allowed and rates of discount given are linked with receivables. If credit period allowed is more then receivables will also be more. Sometimes trade Policies of competitors have to be followed otherwise it becomes difficult to expand the sales. The trade terms once followed cannot be changed without adversely affecting sales Opportunities. 4 Expansion Plans: When a concern wants to expand its activities, it will have to enter

new markets. To attract customers, it will give incentives in the form of credit facilities. In the early stages of expansion more credit becomes essential & size of receivables will be more. 5 Relation with Profits: The credit policy is followed with a view to increase sales. When

sales increase beyond a certain level the additional costs incurred are less than the Increase in revenues. The increase in profits will be followed by an increase in the size of receivables or vice-versa. 6 Credit Collection Efforts: The collection of credit should be streamlined. The customers should be sent periodical reminders if they fail to pay in time. On the other hand, if Adequate attention is not paid towards credit collection then the concern can land Itself in a serious financial problem. Habits of Customers: The paying habits of customers also have a bearing on the size of

receivables. The customers may be in the habit of delaying payments even though they are financially sound. Dimensions of Receivables Management Receivables management involves the careful consideration of the following aspects: 1 2 3 Forming of Credit policy Executing the credit policy Formulating & executing collection policy.

1 Forming of Credit Policy: For efficient management of receivables, a concern must adopt a credit policy. A credit policy is related to decisions such as credit standards, Length of credit period , cash discount & discount period ,etc. a) Quality of Trade Accounts or Credit Standards: The volume of sales will be influenced by the credit policy of a concern. By liberalising credit policy the volume can be Increased resulting into increased profits. The increased volume of sales is associated with certain risks too. It will result in enhanced costs and risks of bad debts & delayed receipts. There may be more bad debts losses due to extension of credit to less worthy customers. These customers may also take more time than normally allowed in making the payments Resulting into tying up of additional capital in receivables. On the other hand, extending Credit to less worthy customers will save costs like bad debt losses , collection costs, Investigation costs, etc. The restriction of credit to such customers only will certainly Reduce sales volume, thus resulting in reduced profits. A finance manager has to match the increased revenue with additional costs. The credit should be liberalised only to the level where incremental revenue with additional costs. Thus, optimum level of investment in receivables is achieved at a point where there is a trade off between cost, profitability & liquidity. b) Length of Credit Period: Credit terms or length of credit period means the period Allowed to the customers for making the payment. A firm may allow liberal credit terms to increase the volume of sales. The lengthening of this period will mean blocking of more money in receivables which could have been invested somewhere else to earn Income. There may be an increase in debt collection costs & bad debts losses too. If the earnings from additional sales by lengthening credit period are more than the additional costs then the credit terms should be liberalised. Cash Discount: Cash discount is allowed to expedite the collection of receivables. The funds in Tied up in receivables are released.The discount involves cost. The financial manager should

compare the earnings resulting from released funds and the cost of discount. The discount Should be allowed only if its cost is less than the earnings from the additional funds. Discount Period: The collection of receivables is influenced by the period allowed for availing the Discount. The additional period allowed for this facility may prompt more customers to avail Discount and make payments. At the same time the extending of discount period will result in late collection of funds because those who were getting discount and making payments earlier Schedule will also delay their payments. 2 Executing Credit Policy:

a) Collecting Credit Information: The first step in implementing credit policy will be to gather credit information about the customers. This information should be adequate enough so that Proper analysis about the financial position of the customers is possible.This type of investigation Can be undertaken only upto a certain limit because it will involve cost. The cost incured in Collecting this information & the benefit from reduced bad debts losses will be compared. The information may be available from financial statements, Credit rating agencies, reports from banks, firms records etc. Financial reports of the customer For a number of years will be helpful in determining the financial position and profitability position. The balance sheets will help in finding out the short term & long-term position of the concern. The income statement shows the profitability position of the concern. There are credit rating agencies which can supply information about various concerns.These Agencies regularly collect information about business units from various sources & keep this this information upto date. b) Credit Analysis: After gathering the required information, the finance manager should analyse it to find out the credit worthiness of potential customers & also to see whether they satisfy the standards of the concern or not. c) Credit decision: After analyzing the creditworthiness of the customer, the finance Manager has to take a decision whether the credit is extended & if yes then upto what level. He will match the creditworthiness of the customer with the credit standards of the company.

If customers creditworthiness is above the credit standards then there is no problem in taking a Decision. d) Financing Investments in Receivables and Factoring : Account receivables block a part of Working capital. Efforts should be made that funds are not tied up in receivables for longer Periods. The finance manager should make efforts to get receivables financed so that working Capital needs are met in time. The banks allow raising of loans against security of receivables. The bank will accept receivables of dependable parties only. Another method of getting funds is their outright sale to the bank. Besides banks ,there may be other agencies which can buy receivables and pay cash for them. This facility is known as factoring. 3 Formulating and Executing Collection Policy: The collection of amounts due to the Customers is very important. The concern should devise procedures to be followed when accounts become due after the expiry of credit period. The collection policy be termed as strict and lenient. A strict policy of collection will involve more efforts on Collection. Such a policy has both plus and negative effects. This policy will enable Early collection of dues and will reduce bad debts losses. The money collected will be used for other purposes and the profits of the concern will go up.On the other hand A rigorous collection policy will involve increased collection costs.It may also reduce the volume of sales. Some customers may not appreciate the efforts of the concern and may Shift to anther concern thus causing reduced sales & profits. A lenient policy may increase the Debt collection period and more bad debts losses. A customer not clearing the dues for long may not repeat his order. The collection policy should device the steps to be followed in collecting over due amounts. The Objective is to collect the dues and not to annoy the customer. The steps should be like i) Sending a reminder for payments ii) Personal request through telephone etc. Iii) Personal visits to the customers iv) Taking help of collecting agencies & lastly v) Taking legal action.

The last step should be taken only after exhausting all other means because it will have a bad impact on relations with customers. The genuine problems of customers should never be

ignored while making collections.

Meaning of Working Capital: Funds are also needed for short-term purposes for the purchase of raw materials, payment of wages and other day-to-day expenses,etc. These funds are known as working capital. In Simple words, working capital refers to that part of the firms capital which is required for Financing short term or current assets such as cash, marketable securities, debtors and Inventories.Funds , thus , invested in current assets keep revolving fast and are being Constantly converted into cash and this cash flows out again in exchange for other current assests. Hence, it is also known as revolving or circulating capital or short-term capital. Working capital is the amount of funds necessary to cover the cost of operating the enterprise. Concept of Working Capital: 1 Gross Working Capital 2 Net Working Capital

1 In the broad sense, the term working capital refers to the gross working capital and Represents the amount of funds invested in current assets 2 Net Working Capital: In a narrow sense, the term working capital refers to net working Capital. Net working capital is the excess of current assets over current liabilities Net working Capital= Current Assets- Current Liabilities Operating Cycle : Working Capital refers to that part of firms capital which is required for Financing short-term or current assets keep revolving fast and being constantly converted into cash and this cash cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital.The cycle starts with the purchase of raw material and other resources & ends with the realisation of cash from the sale of finished Goods. Classification or Kinds of Working Capital: a) On the basis of concept

b) On the basis of Time c) On the basis of Concept: Gross Working Capital Net Working Capital b) On the basis of Time 1) Permanent or Fixed Working Capital a) Regular working capital b) Reserve working capital 2) Temporary or Variable Working Capital a) Seasonal Working Capital b) Special Working Capital Importance or Advantages of Adequate Working Capital 1 Solvency of the business 2 Goodwill 3 4 5 6 7 8 9 Easy loans Cash discounts Regular supply of raw materials Regular payment of salaries, wages and other day-to-day commitments Exploitation of favourable market conditions Ability to face crisis Quick & regular return on investments

Factors Determining the Working Capital Requirements: The following , are important factors generally influencing the working capital requirements. 1 Nature or Character of Business: The working capital requirements of a firm basically depend upon the nature of its business.Public utility undertakings like Electricity, Water Supply and Railways need very limited working capital because they offer cash sales

Only and supply services, not products and as such no funds are tied up in inventories & receivables. On the other hand trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets like inventories, receivables and cash; as such they need large amount of working capital. The Manufacturing undertakings also require sizeable working capital along with fixed Investments. 2 Size of Business/ Scale of Operations: Size of its business may be measured in

Terms of scale of operations. Greater the size of a business units , generally larger will be the requirements of working capital. 3 Production Policy: In certain industries the demand is subject to wide fluctuations due to seasonal variations. The requirement of working capital, in such cases, depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be curtailed during the slack and increased during the peak season.If the policy is to keep production steady by accumulating inventories it will require higher working capital. 4 Manufacturing Process/ Length of Production Cycle: In manufacturing business,

the requirements of working capital increase in direct proportion to length of manufacturing process. Longer the process period of manufacture , larger is the amount of working capital required. 5 Seasonal Variations: In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and process them during the entire year. A huge amount is, thus, blocked in the form of material inventories during such season, which gives rise to more working capital requirements. 6 Working Capital Cycle: In a manufacturing concern, the working capital cycle starts with the purchase of raw material & ends with the realisation of cash from the sale of

finished products.This cycle involves purchase of raw materials & stores, its conversion into stocks of finished goods through work-in-progress , conversion of finished stock into sales, debtors and receivables and ultimately realisation of cash and this cycle continues again from cash to purchase of raw material & so on. The speed with which the working capital completes one cycle determines the requirements of working capital-longer the period of the cycle larger is the requirement of working capital. 7 Rate of Stock Turnover: There is a high degree of inverse co-relationship

between the quantum of working capital and the velocity or speed with which the sales are effected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover. 8 Credit Policy : The credit policy of a concern in its dealing with debtors and Creditors influence considerably the requirements of working capital.A concern that Purchases its requirements on credit and sells its products/services on cash requires Lesser amount of working capital.On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working Capital as very huge amount of funds are bound to be tied up in debtors or bills Receivables. 9 Business Cycles: Business cycle refers to alternate expansion and contraction in general business activity.In a period of boom i.e., when the business is prosperous, there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business, etc. On the contrary in the times of depression i.e, when there is a down swing of the cycle, the business contracts, ,sales decline, difficulties are faced in collections from debtors & firms may a large amount of working capital lying idle.

10. Rate of Growth of Business: The working capital requirements of a concern increase with the growth & expansion of its business activities. For normal rate of expansion in the volume of business, we may have retained profits to provide for more working capital but in fast growing concerns, we shall require larger amount of working capital 11. Other Factors: Certain other factors such as operating efficiency, management Ability, irregularities of supply, import policy, asset structure, importance of labour, Banking facilities etc, also influence the requirements of working capital.