receivables mgt &credit policy

1. RECEIVABLES
MANAGEMENT & CREDIT
POLICY
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2. 2
 What are receivables?
•Receivables are sales made on credit basis.
•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
•Receivables Management is also called Trade Credit Management
Why do we need receivables?
•Reach sales potential
•Competition
Understanding Receivables
•As a part of the operating cycle
•Time lag b/w sales and receivables creates need for working capital
INTRODUCTION

3. OBJECTIVE OF MAINTAINING RECEIVABLES
• Increase in sales
• Increase in profits
• To meet the competition
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4. 4
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
GRANTING CREDIT

5.  COLLECTION COST:
Administrative costs incurred in collecting the accounts
receivable. Such expenses include salaries of the employees
engaged in collection, cash discount given to customers, legal
expenses, commission paid to third party etc.
 ADMINISTRATIVE COST: Salaries and allowances to the
additional staff for maintaining customer’s accounts, for
examining the credit standard of the customers , stationary and
other items of expenses.
 CAPITAL COST:
Cost incurred for arranging additional funds to support credit
sales.
 DELINQUENCY COST:
Sometimes, the customer is doubtful and make payment after due
date. Thus, the enterprise has to incur certain expenses for
arranging the funds for the period between the due date and
payment date and such expenses are known as delinquency cost
 DEFAULT COST:
Amounts which have to written off as bad debts.
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DIFFERENT TYPES OF COSTS ASSOCIATED

6. • Liquidity Risk
• Risk of opportunity loss
Funds blocked in receivables
Credit only to few selected customers
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DIFFERENT TYPES OF RISKS ASSOCIATED

7. GENERAL FACTORS: These factors are uncontrollable and their effects are long term.
Such factors include Nature and form of business, management outlook, volume of
business, general economic conditions, inflation, availability of funds etc.
SPECIFIC FACTORS:
• LEVEL OF CREDIT 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 an 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 relax collection policy, customers do not
meet their commitments on time.
• STABILITY OF SALES: If the business is of seasonal nature, the level of receivables
will be high in season, otherwise will remain constant
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FACTORS AFFECTING SIZE OF RECEIVABLES/DEBTORS

8. • 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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OBJECTIVES

9. •To which customer the enterprise is ready to grant
credit?
•What factors should be taken into account while
analyzing the customers who are ready to purchase
goods on credit?
•What should be the credit terms?
•What collection policies should be adopted?
•What should be the system of monitoring and
controlling the receivable accounts? 9
STEPS INVOLVED IN MANAGEMENT OF RECEIVABLES

10. To consider all these matters, the following steps are involved:
A) Credit Analysis
B) Credit Standards
C) Credit Terms
D) Collection Policies
E) Control and Monitoring
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STEPS INVOLVED IN MANAGEMENT OF RECEIVABLES

11. • 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.
A)CREDIT STANDARD-It is the minimum
requirement for extending credit to a customer.
B)CREDIT ANALYSIS-This involves obtaining
credit information and evaluation of credit
applicant.
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Credit Policies

12. 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 customer, or
may be external such as :
I)FINANCIAL STATEMENTS-The published financial statements
such as balance sheet and profit and loss account.
II)BANK REFERENCES-The firm’s banker collects the necessary
information from the applicant’s Bank.
III)TRADE REFERENCES-Reputed Credit organization are
approached about the credit worthiness of proposed customers.
IV)CREDIT BUREAU REPORTS-Credit Bureau reports from
organization which specializes in supplying credit information can
also be utilized.
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CREDIT ANALYSIS

13. 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:
I)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.
II)QUALITATIVE-The qualitative judgment would
cover aspects relating to the quality of management.
.
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CREDIT ANALYSIS

14. 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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STEPS IN CREDIT ANALYSIS
“Investigating the customer”

15. • 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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STEPS IN CREDIT ANALYSIS

16. 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
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CREDIT TERMS