Professional Documents
Culture Documents
Chapter 4 AR
Chapter 4 AR
• It implies futurity.
CREDIT POLICY
A Firms investment in accounts receivable
depends on:
a. The volume of credit sales
b. The collection period
3. Collection efforts:
Determine the actual collection period. The lower the
collection period, the lower the investment in accounts
receivables and vice versa.
GOALS OF CREDIT POLICY
• A firm following a lenient credit policy will
grant credit in liberal terms and standards
and grant credit to longer period and also
to customers whose creditworthiness is
not fully known.
• A firm following a stringent credit policy
sells on credit on a highly selective basis
only to customers with proven
creditworthiness.
CREDIT POLICY AS MARKETING
TOOL
Firms use credit policy as a marketing tool during expansion
sales.
4. Dealer relationship
5. Marketing tool
2. Administration costs:
when the firm loosens its credit policy, two types
of administration costs are involved.
Grant Credit
No Credit
Payment Payment
received Not received
Benefit Cost
PV of Future PV of Lost
Net Cash Investment
Flow
No Pay-off
Net Payoff
PV of
Benefit-cost
CREDIT TERMS
The stipulations under which the firm sells on credit to
customers are called credit terms.
These include
1. Credit period: The length of time for
which credit is extended to customers is
called the credit period.
2. Cash discount: It is a reduction in payment
offered to customers to include them to repay credit
obligations within a specified period of time, which
will be less than the normal credit period. It is
expressed as a percentage of sales. It is a cost to the
firm for faster recovery of cash.
COLLECTION POLICY
Collection policy is needed to accelerate
collections from slow payers and reduce bad
debt losses.
2. It should ensure prompt and regular collection.
3. It should lay down clear cut collection
procedures.
4. The responsibility for collection and follow up
should be explicitly fixed.( Accounts or sales)
5. The firm should decide on cash discounts to
be allowed for prompt payment
6. It should be flexible
CREDIT EVALUATION
For effective management of credit, clear cut
guidelines and procedures for granting credit to
individual customers and collecting individual
accounts should be laid down.
Benefits are:
6. It provides specialised service in credit management
and helps the firm’s management to concentrate on
manufacturing and marketing
7. Helps the firm to save cost of credit administration due
to the scale of economics and specialisation.
A company is currently selling 1,00,000
units of its product at Rs.50 each unit. At
the current level of production, the cost
per unit is Rs. 45, variable cost per unit
being Rs. 40. The company is current
extending one month’s credit to its
customers. It is thinking of extending
credit period to two months in the
expectation that sales will increase by
25%. If the required rate of return(Before
tax) on the fim’s investment is 30%, is the
new credit policy desirable?
Incremental sales unit = 25000
Contribution per unit = Rs. 50-40 = Rs.10
Incremental contribution= Rs.2,50,000