Working capital

management

ROLL NO : PGC 18007

MCOM PART II
 Receivable management
Meaning
• Accounts receivable are
legally enforceable claims • Receivable management is
for payment held by a process of making decision
business for goods relating to investment in
supplied and/or services trade debtors.
rendered that
customers/clients have
ordered but not paid for. Objective is of receivable
management is to promote
sales and profit.
 Cost of Receivables
Cost of financing

Administration cost

Delinquency cost

Cost of default by the customer

 COST OF FINANCING
• The credit sales delays the time of sales realization & therefore
the time gap between incurring the cost and the sales
realization is extended
• This results in blocking of funds for a longer period
• On other hand the firm has to arrange funds to meet its
obligation towards payment to the supplier, employee etc.
• Procurement through Implicit or explicit cost
 Administration cost
• Firm requires to incur various cost in order to maintain
the record of credit customer both before the credit sale
and as well as after the credit sale .
 Delinquency cost
• Delay in payment by a customer
• Firm have to incur cost on reminders, phone calls,
postages, , legal notice etc.
• There is always an opportunity cost of the funds tied up
in the receivables due to delay in payment
 Cost of default by customer
• If there is default by the customer & the receivables
becomes partly or wholly , unrealizable, then this amount
is known as bad debt
 BENEFITS OF RECEIVABLES
1. Increase in sales :
Most firms sell goods on credit because of trade customs or
other conditions .
The sale can be further increased by liberalizing the credit terms .
This will attract more customers to the firm resulting in higher
sales & growth of the firm.
2. Increase in profit :

Increase in sell help the firm in

a) To easily recover the fixed expenses & attaining the break
even level
b) Increase the operating profit of the firm
3. Extra profit :
Sometimes the firm makes the credit sales higher than the usual
cash selling price
This bring opportunity to make extra profit & the normal profit
 Reference:

• www.tutorhelpdesk.com
• Working capital management by bhalla