RECEIVABLES

MANAGEMENT

“Any fool can lend money, but

it takes a lot of skill to get it
back”

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RECEIVABLES MANAGEMENT INTRODUCTION

 What are receivables?

•Receivables are sales made on credit basis.

Why do we need receivables? Cash Receivables

•Reach sales potential
•Competition Operating
Cycle

Understanding Receivables
•As a part of the operating cycle
•Time lag b/w sales and receivables creates Inventory
need for working capital

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RECEIVABLES MANAGEMENT GRANTING CREDIT

Basic decisions

1. To give credit or not

2. Duration of credit period

(selecting the right policy)

• Decision based on cost-benefit analysis

•Positive net benefit-Credit granted (Highest Net benefit policy chosen)
•Negative net benefit- Credit not granted

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RECEIVABLES MANAGEMENT DIFFERENT TYPES OF COSTS ASSOCIATED

 COLLECTION COST:
Administrative costs incurred in collecting the accounts
receivable.

 CAPITAL COST:
Cost incurred for arranging additional funds to support credit
sales.

 DELINQUENCY COST:
Cost which arises if customers fail to meet their obligations.

 DEFAULT COST:
Amounts which have to written off as bad debts.

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RECEIVABLES MANAGEMENT OBJECTIVES

• Creating, presenting and collecting accounting receivables

• Establish and communicate the credit policies

• Evaluation of customers and setting credit limits

• Ensure prompt and accurate billing

• Maintaining up-to-date records

• Initiate collection procedures on overdue accounts

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 STEPS IN CREDIT ANALYSIS
RECEIVABLES MANAGEMENT

“Investigating the customer”

Customer Evaluation- The 5 C’s

Character- Reputation, Track Record

Capacity- Ability to repay( earning capacity)

Capital- Financial Position of the co.

Collateral- The type and kind of assets pledged

Conditions- Economic conditions & competitive factors that may affect

the profitability of the customer

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RECEIVABLES MANAGEMENT STEPS IN CREDIT ANALYSIS

• Financial statements: long term, short term solvency etc can be judged

• Bank references: information about the customer from another bank

• Trade references: information about customer obtained from firms based

on their experiences

• Credit bureaus: to check the financial viability of the business

• Third party guarantees

• Field visit: to get information of the existence and general condition of the
customer’s business

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RECEIVABLES MANAGEMENT BENEFITS

• Helps improve customer satisfaction:

enhance service level and increase retention with customized
information.

• Takes control of sales processes:

manage your sales process more effectively by measuring trends
and analyzing performance.

• Enhance your productivity:

help reduce administrative costs and enhance office productivity

• Streamline revenue allocation:

managed calculations to fit your business needs

• Providing access to vital information

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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques

• Pay Orders / Bank drafts

• Bills of Exchange

• Lock – box System

• Drop – box System

• Factoring

• Collection staff/ agents

• Debt collector

• Del Credere agent

• Concentration banking
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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques Under a lock box system, customers are

advised to mail their payments to special
• Pay Orders / Bank drafts post office boxes called lockboxes,
which are attended to by local collection
• Bills of Exchange banks, instead of sending them to
corporate headquarters.
• Lock – box System
Thus the lock box system:
• Drop – box System (i) cuts down the mailing time, because
Cheque are received at a nearby post
• Factoring office instead of at corporate
headquarters,
• Collection staff/ agents (ii) reduces the processing time because
the company does not have to open the
• Debt collector envelopes and deposit the Cheque for
collection, and
• Del Credere agent (iii) shortens the availability delay
because the Cheque are typically drawn
• Concentration banking on local banks
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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques Factoring is a financial service

designed to help firms to arrange
• Pay Orders / Bank drafts their receivable better. Under a
typical factoring arrangement a
• Bills of Exchange factor collects the accounts on due
dates, effects payments to the firm
• Lock – box System on these dates and also assumes
the credit risks associated with the
• Drop – box System
collection of the accounts.
• Factoring
Sometimes the factor provides an
• Collection staff/ agents advance against the values of
receivable taken over by it. In such
• Debt collector cases factoring serves as a source
of short-term finance for the firm.
• Del Credere agent

• Concentration banking
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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques

• Pay Orders / Bank drafts

• Bills of Exchange

• Lock – box System

• Drop – box System

• Factoring

• Collection staff/ agents an agency, factor, or broker acting

as an intermediary between sellers
• Debt collector
and buyers and guaranteeing
payment
• Del Credere agent

• Concentration banking
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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques

• Pay Orders / Bank drafts A firm may open collection centres

(banks) in different parts of the
• Bills of Exchange country to save the postal delays.
This is known as concentration
• Lock – box System
banking.
• Drop – box System
The firm may instruct the customers
•
to mail their payments to a regional
Factoring
collection centre / bank rather than
• Collection staff/ agents to the Central Office

• Debt collector The Cheque received by the regional

collection centre are deposited for
• Del Credere agent collection into a local bank account

• Concentration banking The concentration banking results in

saving of time of collection 13
RECEIVABLES MANAGEMENT CONTROL OF RECEIVABLES MANAGEMENT

• DAILY SALES OUTSTANDING (DSO)

DSO = Accounts Receivable Avg. Daily Sales

• AGEING SCHEDULE
Classifies the outstanding accounts receivables at a given point of
time into different age brackets. Ex.
Age Group (days) % of receivables
0-30 30
31-60 40
61-90 25
>=90 5

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