Receivables

Management

Any fool can lend money, but it

takes a lot of skills to get it back.
MEANING

• Receivable are sales made on credit basis.

It refers to the sum of all monies owed to the firm by
customers arising from the sale of goods or services in
the ordinary course of business. It includes:-
• Debtors
• Accounts Receivable
• Trade Receivable
Features
Process of decision making regarding investment of
receivables.
High working capital implies high interest rates.

If receivables are low, sales becomes restricted.

Receivables to be managed to optimize profits.

 COST OF
RECEIVABLES
Capital Cost

Time gap between cost incurred and sales incurred.

Funds to be raised for payment of wages and
suppliers.
Such funds to be raised from outside or from retained
earnings.
Liability to pay interest to creditors.
Opportunity cost incurred – the money the firm could
have earned if invested outside the firm.
• Administrative Costs
Costs incurred for maintenance of customers’ accounts
Costs incurred for investigating the creditworthiness of the
customers in the market.
 Collection Costs
Expenses for collection of payments from credit customers.
Costs of recovery from defaulting customers
 Defaulting costs
Bad debts
Credit Policies
The credit policy of a firm provides the framework to
determine-
 Whether or not to extend credit to a customer
 How much credit to extend

A firm has to establish and use standards in making

credit decisions, develop appropriate sources of credit
information and methods of credit analysis.
Credit Standards
. The term ‘credit standards’ represents the basic criteria
for the extension of credit to customers. The factors
that should be considered while deciding whether to
relax the standard or not are-
The collection cost
The average collection period
Level of bad debts losses
Level of sales
Collection Costs- The implications of relaxed
credit standard are 1) More Credit 2) A large Credit
Department to service accounts receivables 3)
Increase in collection costs

Investment in Receivables- The investments in

accounts receivable involves a capital cost as funds
have to be arranged by a firm to finance them till
customer makes payment. Higher the average
accounts receivables, higher is the capital or
carrying cost.
Bad Debt Expenses- Another factor which is
expected to be affected by changes in the
credit standards is bad debt expenses. They
can be expected to increase with relaxation in
credit standards and decrease if credit
standards become more restrictive.

Sales Volume- changing credit standard can

also be expected to change the volume of sales.
As standards are relaxed, sales are expected too
increase conversely a tightening is expected to
cause decline in sales.
Credit Analysis
Obtaining Credit Information – to evaluate the
customer the source of information are i) Internal ii)
External
Internal- Usually firms require their customers to fill
various forms & documents giving details about
financial operations. They are also required to furnish
trade references with whom the firms can have
contacts to judge the suitability of customer for credit
External- The availability of information from
external sources to assess the credit-worthiness
of the customer depends upon the development
of institutional facility and industry practices.
Depending upon the availability, the following
external sources may be employed-

Financial Statements- The financial

statement throw light on an applicant’s financial
viability, liquidity, profitability and debt
capacity. Although it does not directly
Reveal the past payment record of the
applicant, they are very helpful in assessing
the overall financial position of a firm,
which significantly determines its credit
standing.

Bank References- The modus operandi

here is that the firm’s banker collects the
necessary information from the applicant’s
bank. Alternatively, the applicant may be
required to ask his banker to provide the
necessary information either directly to the
firm or to its bank.
Trade References- these refer to the collections of
information from firms with whom the applicant has
dealings and who on the basis of their experience would
vouch for the applicant.

Credit Bureau Reports- Finally, specialist credit

bureau reports from organizations specialising in
supplying credit information can also be utilised.

Analysis of Credit Information-

Once the credit information has been collected from
different sources, it should be analysed to determine
the creditworthiness of the applicant.
Credit Terms
Credit terms have three components
1) Credit Period- in terms of the duration of time for which trade
credit is extended – during this period the overdue amount must
be paid by the customer.
2) Cash Discount- the overdue amount will be reduced by this
amount.
3) Cash Discount Period- it refers to the duration during which
the discount can be availed of . Theses terms are usually written in
abbreviations, e.g. 2/10 net 30’.
2 signifies the rate of cash discount, which will be available to
customer if they pay they pay the overdue within the stipulated
time.
10 represents the time duration (10 days) within which a customer
must pay to be entitled to discount.
30 means the maximum period for which credit is available and
the amount must be paid in any case before the expiry of the
period.
 FACTORING
Credit management is a specialised activity, and
involves a lot of time and effort of a company.
Collections of receivables poses a problem ,
particularly for the small scale companies. A
company can assign its credit management and
collection to specialist organizations, called
factoring organizations.
SBI Factors and Commercials Limited was
the first factoring company to start its
operation in India in April, 1991. Since then a
number of companies have started factoring
business in India. At present, there are only
7 NBFC factors registered with RBI.
The list of NBFC Factors registered with RBI as on
September 11, 2018, is mentioned below:

Regional Office Name of the Company

Bengaluru Canbank Factors Limited
IFCI Factors Ltd.
New Delhi Bibby Financial Services (India) Pvt.
Ltd.

SBI Global Factors Ltd. [Formerly:

Global Trade Finance Limited]
Mumbai India Factoring & Finance Solutions
Pvt Ltd
Siemens Factoring Private Limited
Pinnacle Capital Solutions Private
Patna
Limited
Factoring is a unique financial innovation.
It is both a financial as well as a
management support to a client. It is a method
of converting a non-productive, inactive asset (i.e.
receivable) into a productive asset (viz. cash) by
selling receivables to a company that specialises in their
collection and administration.
It is much better to sell that asset for cash which can be
immediately employed in the business. A factor makes
the conversion of receivable into cash possible.
 Factoring Services
Sales Ledger Administration & Credit
management
Credit Collection & Protection
Financial Assistance
Other Services
 Sales Ledger Administration & Credit management

A factor provides full credit administration services to

his clients. He helps and advises them from the stage
of deciding credit extension to customers to the final
stage of book debt collection. He provides clients with
information about market trends, competition and
customers and helps them to determine the
creditworthiness of the customer.
Credit Collection & Protection

When individual book debts become due from the

customer, the factor undertakes a collection activity
that is necessary. He provides full or partial protection
against bad-debts.
Financial Assistance

Often factors provide financial assistance to the client

by extending advance cash against book debts.
Customers of client become debtor of a factor and
have to pay to him directly in order to settle their
obligations.
Other Services

Providing information on prospective buyers

Providing financial counselling
Assisting the client in managing its liquidity and
preventing sickness
Financing acquisition of inventories
Providing facilities for opening letters of credit by the
client
Types of Factoring
• Full service non-recourse
• Full service recourse factoring
• Bulk/Agency factoring
• Non-notification factoring
Full service non-recourse
In this type of factoring, the factor has
recourse to the client (seller of goods) if
importer(buyer of goods) become insolvent.
In other words, risk of account
receivables purchased from client
becoming bad is borne by client himself.
Full service recourse factoring
In this type of factoring, factor has no
recourse to the client if the debt / account
receivables purchased turns out be bad or
irrecoverable. Factor can not claim the
amount from the client. As factor bear the
risk of non payment, commission charged for
the services is higher than recourse type of
factoring.
Non-notification factoring

In this type of factoring, customers are not

informed about the factoring agreement. It
involves the factor keeping the account
ledger in the name of sale company to which
the client sells his book debts. The factor
performs all his usual functions without a
disclosure to customers that he owns the
book debts.