PRESENTED BY:
NEHA CHOPRA
MBA SEM III
CONTENTS
Introduction
Why do we need Receivables?
Cost of maintaining debtors
Credit Policies
Steps in credit analysis
Factors affecting the size of debtors
Credit Terms
Conclusion
INTRODUCTION
Receivables Management is also called Trade Credit
Management.
Receivables is defined as the debt owed to the firm by
customers arising from sales of goods and services in the
ordinary course of business.
When a firm makes an ordinary sale of goods or services and
does not receive payment ,the firm grants trade credits and
creates accounts receivable which could be collected in future.
NEED OF RECEIVABLES
MANAGEMENT
Reach Sales Potential
Compete with competitors
Optimize the return on investments on the assets.
Establish and communicate the credit policies.
Evaluation of customers and setting credit limits.
Ensure prompt and accurate billing and maintaining up-to-date
records.
COSTS OF MAINTAINING
DEBTORS
Capital Cost: It is the cost on the use of additional capital to
support credit sales which alternatively could have been
employed elsewhere.
Collection Costs: It is the administrative costs incurred in
collecting the accounts receivable and includes costs of additional
steps to increase the chances for eventful payment.
Deliquency Costs: Cost of financing the debtors for extended
period, and cost of additional steps to collect over-due debtors.
Default Costs: Amounts which are to be written off as Bad-
debts, which cannot be collected in spite of serious efforts.
CREDIT POLICIES
It is the determination of credit standard and credit analysis. The
credit policy of a firm provides the framework to determine
whether or not to extend credit to a customer and how much
credit to extend. The credit policy decision of a firm has two
dimensions:
CREDIT STANDARD-It is the minimum requirement for
extending credit to a customer.
CREDIT ANALYSIS-This involves obtaining credit
information and evolution of credit applicant.
CREDIT STANDARDS:
Following factors should be considered while deciding whether
to relax credit standards or not:
COLLECTION COST-The implications of relaxed credit
standards are more credit, a large credit departments to service
accounts receivable and increase in collection cost while
opposite in case of strict credit standards.
AVERAGE COLLECTION PERIOD-The extension of trade
credit to slow paying customers would results in a higher level
of accounts receivable and vice versa.
BAD DEBT EXPENSES-Bad debt can be expected to increase
with relaxation in credit standards and vice versa.
SALES VOLUME- Sales volume is expected to increase as
standards are relaxed, conversely tightening decreases sales.
CREDIT ANALYSIS:
Two basic steps are involved in the credit investigation Process.
A)OBTAINING CREDIT INFORMATION:
The first step in credit analysis is obtaining the information which
form the basis for the evaluation of customers. The sources of
information may be internal such as the historical payment pattern of
a customers, or may be external such as :
FINANCIAL STATEMENTS-The published financial statements
such as balance sheet and profit and loss account.
BANK REFERENCES-The firm’s banker collects the necessary
information from the applicant’s Bank.
TRADE REFERENCES-Reputed Credit organization are
approached about the credit worthiness of proposed customers.
CREDIT BUREAU REPORTS-Credit Bureau reports from
organization which specializes in supplying credit information can
also be utilized.
CREDIT ANALYSIS(CONTD):
B)ANALYSIS OF CREDIT INFORMATION:
The information collected from different sources are analyzed
to determine the credit worthiness of the applicant. The
analysis should cover two aspects:
QUANTITATIVE-The quantitative aspects is based on the
factual information available from the financial statements, the
past records of the firm’s and so on.
QUALITATIVE-The qualitative judgement would cover
aspects relating to the quality of management.
STEPS IN CREDIT ANALYSIS
“Investing The Customers”
It includes customer evaluation on the basis of 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
customers
FACTORS AFFECTING SIZE
OF DEBTORS
LEVEL OF SALES: The most important factors in
determining the volume of Debtors is the level of credit
sales. Others being constant ,more credit sales mean more
Debtors and vice versa.
CREDIT TERMS: A change in credit terms will have a
direct effects on Debtors. When credit terms are relaxed in
leads to a n increase in Debtors balance and vice versa.
COLLECTION POLICY: Collection policy of a firm also
has some influences on the actual Debtors balance. Due to
a relatively lax collection policy, customers do not meet
their commitments on time.
CREDIT TERMS
Credit terms specify the repayments terms required of
credit customers. It has three components:
CREDIT PERIODS-It is the time for which trade credit
is extended to customers in the case of credit sales.
CASH DISCOUNTS-It is the incentive to customers to
make early payments of sum due.
CASH DISCOUNTS PERIOD-The duration of the period
during which discount can be availed off.
CONCLUSION
The framework of analysis of all decisions area in
receivables management is to secure a trade-off
between the costs and benefits of the measurable
effects on the sales volume, capital costs due to
change in investment in debtors ,collection costs, bad
debts and so on.
The firm should select the alternative which has
potentials of more benefits than the costs.
