Management of Receivables

in the ordinary course of .Meaning of receivables The debt owed to the firm by customers arising from the sale of goods and services business.

Benefits and costs  Receivables are a marketing tool to promote sales and thereby profit Creation of receivables involves risk and cost  .

Objectives To promote sales and profit until that point is reached where the return on investment in further funding receivables is less than the cost of funds raised to finance that additional credit. .

Costs Additional expenses on the creation and maintenance of credit department  Collection cost Expenses in acquiring credit information .

 Capital cost cost on the use of additional capital to support credit sales cost of blocking-up of fund for an extended period  Delinquency cost cost of collecting overdues .

 Default cost Bad debts arising from the inability of customers .

Benefits Increased sales Increased profit .

Optimum receivables  The decision to commit funds to receivables will be based on a comparison of the benefits and costs The costs and benefits to be compared are marginal costs and benefits  .

Decision areas in receivables Mgt  Credit policies Credit terms   Collection policies .

Credit Policies A framework to determine .To whom credit is to be extended ? .How much credit to extend ? Credit Decision .

average collection period/cost of investment in receivables. How credit decision is taken ? .set credit standard (the basic criteria for extension of credit) Tight Liberal Compare the collection cost. bad debt losses to different levels of sales .

) .Credit analysis (the procedures evaluating credit applicants) Obtain credit information Analysis of credit information Internal External Quantitative Qualitative . How credit decision is taken ? (Cont..

cash discount . mainly specify repayment terms of receivables .cash discount period (‘2/10 net 30’) .credit period .Credit terms The stipulations under which goods are sold on credit.

Collection Policies Collection policies refer to the procedures followed to collect accounts receivables when.strict/tight policy increased reduced turnover) (lower bad debts.lenient policy (reverse of above) . reduced collection period. after the expiry of the credit period. collection cost and . they become due .

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