RECEIVABLES MANAGEMENT AND

FACTORING
 LEARNING OBJECTIVES
Emphasize the need and goals of establishing a sound credit
policy

Show how an optimum credit policy can be established

Explain the credit policy variables

Indicate the credit procedure for and control of individual

accounts

Suggest methods of monitoring receivables

Discuss the nature and costs and benefits of factoring

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INTRODUCTION
Trade credit happens when a firm sells its products or
services on credit and does not receive cash immediately.

A credit sale has three characteristics:

First, it involves an element of risk that should be carefully

analyzed.

Second, it is based on economic value.

Third, it implies futurity.

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Nature of Credit Policy
Investment in receivable
 volume of credit sales

collection period

Credit policy
 credit standards

credit terms

collection efforts

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 Goals of Credit Policy
 Marketing tool

 Maximisation of sales Vs. incremental profit

 production and selling costs

administration costs

bad-debt losses

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 Optimum Credit Policy
Estimation of incremental profit

Estimation of incremental
investment in receivable

Estimation of incremental rate

of return (IRR)

Comparison of incremental rate

of return with required rate of
return (RRR)
Costs of Credit Policy
Optimum credit policy: IRR =
RRR
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 Credit Policy Variables

 Credit standards and analysis

Credit terms

Collection policy and procedures

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 Credit Standards
 Credit standards are the criteria which a firm follows in
selecting customers for the purpose of credit extension.

The firm may have tight or loose credit standards.

 Credit analysis
 Average collection period (ACP)

Default rate

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 Collection policy and procedures

 regularity of collections

clarity of collection procedures

responsibility for collection and follow-up

case-by-case approach

cash discount for prompt payment

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CREDIT EVALUATION OF INDIVIDUAL ACCOUNTS
Credit Information
Financial statement

Bank references

Trade references

Other sources

Credit Investigation and Analysis

Analysis of credit file

Analysis of financial ratios

Analysis of business and its management

Credit Limit

Collection Efforts
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FACTORING
Factoring may be defined as ‘a contract between the suppliers
of goods/services and the factor under which
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Factoring Services

 Credit administration

Credit collection and protection

Financial assistance

Other services

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 Factoring and Short-term Financing

Factoring involves ‘sale’ of book debts.

Factoring provides flexibility as regards credit facility

to the client.

Factoring is a unique mechanism which not only

provides credit to the client but also under takes the total
management of client’s book debts.

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 Factoring and Bills Discounting

1.Bills discounting is a sort of borrowing while factoring is the

efficient and specialized management of book debts along with
enhancement of the client’s liquidity.

2.The client has to undertake the collection of book debt. Bill

discounting is always ‘with recourse’ ,and as such, the client is
not protected from bad-debts.

3.Bills discounting is not a convenient method for companies

having large number of buyers with small amounts since it is
quite inconvenient to draw a large number of bills.

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 Types of Factoring

 Full service non-recourse

Full service recourse factoring

Non-notification factoring

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 Costs of Factoring

Factoring commission or service fee

Interest on advance granted by the factor to the firm

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Benefits of Factoring

Factoring provides specialized service in credit

management, and thus, helps the firm’s management to
concentrate on manufacturing and marketing.

Factoring helps the firm to save cost of credit

administration due to the scale of economies and
specialization.

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