RECEIVABLES MANAGEMENT

PROBLEMS AND SOLUTIONS

1. A company plans to extend credit facilities to the following categories of customers:

A. Customers with a 10% risk of non-payment and
B. Customers with a 30% risk of non-payment.
The incremental sales expected in the case of category A are Rs.40000 while in the
case of category B is Rs.50000.
The cost of production and selling costs are 60% of sales while collection costs
amount to 5% of sales in the case of category (A) and 10% of sales in the case of
category (B).
You are required to advise the firm about extending credit facilities to each of the
above categories of customers.
Solution
1. Extending credit facilities to Category A Customers (10% risk of non-payment)
Rs.
Incremental Sales 40000
Less: 10% risk of non-payment 4000
Net Sales Revenue 36000
Less: Production and Selling costs (60% of sales) 24000
12000
Less: Collection costs (5% of Sales) 2000
Incremental Profit 10000

Result: If there is 10% risk of non-payment, the firm will earn a profit of
Rs.10000.

2. Extending credit facilities to Category B Customers (30% risk of non-payment)

Rs.
Sales 50000
Less: 30% risk of non-payment 15000
Net Sales Revenue 35000
Less: Production and Selling costs (60% of sales) 30000
5000
Less: Collection costs (10% of sales) 5000
Incremental Profit 0
Result: If there is 30% risk of non-payment, the firm will not get any profit or
loss.
Comment: The firm can extend credit facilities to category A customers with 10%
risk group because it gives an additional profit of Rs.10000.On the other hand,
the firm neither gain or lose on account of extending credit to customers with
30% risk group. Hence the firm should not extend credit to category B.

Problem 2

Sun Star Ltd. proposes to liberalize its credit facilities and also to increase its
sales. The liberalized credit policy will bring additional sales of Rs.300000.The
variable cost will be 60% of sales and there will be 10% risk for non-payment and
5% collection costs. Will the company benefit from the new credit policy?
Or Not?

Solution
Evaluation of New Credit Policy: Rs.
Additional Sales Revenue 300000
Less: 10% risk of non-payment 30000
Net Sales Revenue 270000
Less: Variable cost (60% of sales) 180000
90000
Less: Collection cost (5% of sales) 15000
Increase in profit 75000

Comment: The Company will be benefited from the new credit policy because
the profit of the company will increase by Rs.75000.

Problem 3
From the following information, calculate
(a)Debtors Turnover Ratio (b) Average collection period.
Rs.
Total Sales during the year 420000
Cash sales during the year 150000
Returns inward 20000
Debtors in the beginning 55000
Debtors at the end 45000
Provision for bad debts 5000.