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    14 views10 pages

    Working Capital Management. Receivable Management PDF

    Uploaded by

    Alok

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 10
    Credit Policy >Xenient Credit Polic i: 7 Firm tends o sell on credit to “customers on very liberal terms and standards, credit 01 are granted for longer “even to those customer whose crei doubt not fully known or whose financial position is doubtful. vAtrin ent Credit Policy - Firm sells on credit on a highly selective basis only to those customer who roven creditworthiness and who are financially Credit Policy Profitability ___ Costs and benefits ~) bene ———— — oak vag Zs and) p+ jomaiaarasanecnd oo Gute 2s) So = ait Capacity is added- for sales. Fealiting | rom loosening of credit then incrementa production & selling cost wi ag ude both-variable & ixed cost. _ 2)_Administrations Cost- (i) Credit_investigation & supervision costs «uy Coll jection co: » 3) Bad=debt Losses- firm is unable to collect its ccount receivable. ptimum Credit Policy » Incremental Rate. of Return can be calculated as Incremental Operating Profit divide y Incremental investment Receivable. CPt le Frcs, Rane WNL ad OF RETURN Wwceearenerpy, Ivesicerr Ye Trend =e ie tee eel » The Incremental Cost of Funds is the Rate of Return Required by the suppliers of funds, given the Risk of investment in account receivable. Higher the Risk.of investment, Higher the Required Rate of Return. » As the firm Loosen its Credit Policy, its investment in A/c Receivable becomes more Risky because. cf Increasing. slowing paving arid ulting customer. Thus the Required Rate of Return is an Upward ptimum Credit Policy: ¥1.Credit Standard and Analysis Credit Standards are the criteria which a_firm follows in selecting customer for the purpose of credit extension. ae = Credit standard influence the quality of _firm’s customers . there are two aspects of the quality of customer. - (i) The Time Taken by customers to repay credit obligation.(ACP) ii) Default Rate (Bad Debt Losses Ratio) .Credit Standard and analysis Average Fallection_Period- determines the speed of payment by customer. soe wade » It measures the gumber of day’ for which credit sales remaining outstanding .Longer the ACP , higher the firm's investment in A/c Receivable. » Default Rate is.measured in term of Bad-Debt Losses Ratio-the proportion of uncollected receivable. » Bad-Debt Losses Ratio indicates default risk. Default Risk-is the likelihood that a customer will fail e credit obligation. 1.Credit Standard and Analysis » To estimate the Probability of Default (FM should consider ree Se \1 & Gar arT ts EE Aa) Character-refers to the customer's willingness to pay. » (b) Capacity -refer to the customer's ability to pay. » (©) Condition- refer to the prevailing economic & other conditions which may affect the customer's ability to pay. » The firm may categorise its customer , 3 categories : Account , Bad Account , Marginal Accounts. at least in following 22 2.Credit Term » The stipulations under which the firm sell on cr ustomer are talled Credit Term.(Stipulations include (a) Credit Period (b) the Cash Discount. CD, RP bey v€tedit Period-the length of time for which credit is extended to customer is called the credit period. It is generally stated in terms of Net Date. Cash Discount-A cash discount is a reduction in payment offered to customers to induce them to repay credit obI igation within specified period of time, which will be less than the normal credit per period. It is usually expressed as a percentage of sales. — Credit term may be expressed as ‘2/10, net 30.’. this means tnata ustomer pays within 10 days

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