Receivables management

• RECEIVABLES
– Issues in Credit management
• Assessing credit status
• Terms
• Day to day management
 Receivables management
• RECEIVABLES
– Issues in Credit management
• Assessing credit status
– Existing credit history
– Bank References
– Trade References
– Published Financial accounts
– Credit rating agencies
– Company’s own Sales Record.
 Receivables management
• RECEIVABLES
– Issues in Credit management
• Terms
– Credit limit value
– Number of days credit
– Discount on early payment
– Interest on overdue account.
 Receivables management
• RECEIVABLES
• Day to day management
 Key categories that are to be considered when
assessing the credit-worthiness of a customer
• Four Groups of credit customers
1. Prompt payers
2. Those who pay within 30 days of the due
date
3. Those who pay between 40 days and 60 days
of the due date
4. Those who pay over 60 days or late
 Rating Example
• Payment Record of Mr. Y

Invoice Date Payable Date Payment Received Days Overdue

March 07, 2010 April 07, 2010 April 28, 2010 21

June 26, 2010 July 26, 2010 September 01, 2010 37

July 19, 2010 August 19, 2010 September 01, 2010 13

September 01, 2010 October 03, 2010 November 05, 2010 33

• Total Overdue days = 104

• Average Overdue days = 26 days
< Mr. Y is ‘Average Risky’ >
 12/08/2021
7

Overdue debt
• Overdue Debt
– Time to pay already passed

• Aged Receivable listing

– Lists of actual invoices outstanding
 12/08/2021
8

Collection of Overdue debt

• Two Stage Process
1. Agreed Credit Terms
– Customer aware about terms
– Invoice correctly drawn up
– Aware of customer’s payment habit
2. Chasing Late payers
– Issuing reminders
– Remind by phone
 12/08/2021
9

Collection of Overdue debt (cont’d)

– Making personal approach
– Notifying credit control department
– Handing to specialist debt collection section
– Hiring an external debt collection agency
– Instituting legal action
 12/08/2021
10

Factoring and Invoice Discounting

• Definition
• Differences between factoring and invoice
discounting
 Factor
• A financial institution that buys a firm’s
accounts receivable and collects the accounts

• Sale of a firm’s accounts receivable to a

financial institution (factor) is known as
factoring.
 Factoring
• Some Features
– Administration of client’s invoicing, sales
accounting and debt collection
– Credit protection for the client’s debts
– Making payment to the client in advance of
collecting the debts.
 Factoring – pros and cons
• Advantage
– Pay suppliers promptly
– Maintaining optimum inventory level
– Growth financed from sales
– Financed linked to its volume of sales
– No time for slow paying customers
– Cost of running its receivable ledger
• Disadvantage
– A negative impression about the firm
 Invoice Discounting
• Purchase of trade debts at a discount
• Factors might provide invoice discounting
service
• Purchase of a selection of invoices
• Does not take over the administration of the
clients’ receivable ledger
• Fill the temporary cash shortages
 Factoring Invoice Discounting
• Sale
Purchase
of a firm’s
of trade
accounts
debts at
receivable
a discount
to a financial institution
• Collect all cash
• Provide cash to meet temporary shortage