Any fool can lend money, but it takes lot of skills to get it back Presented By-Anisha.

INTRODUCTION
WHAT IS RECEIVABLES?
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 Compete with Competitors

Optimize the return on investments on the assets

UNDERSTANDING RECEIVABLES
As a part of Operating Cycle

A time lag between sales and receivables creates need for Working Capital

Cash

Receivables

Operating Cycle

Inventory

OBJECTIVES
Achieving growth in sales and profit. Meeting Competition. 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.

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: Administrative costs incurred in

collecting the accounts receivable. Costs of additional steps to increase the chances for eventful payment.

DELINQUENCY 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 Baddebts, which cannot be collected in spite of serious efforts.

CREDIT POLICIES
It is the determination of credit statandard 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

and evolution of credit applicant.

information

CREDIT STANDARDS
Following factors should be considered while deciding whether to relax credit 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.

EFFECT OF RELAXATION OF STANDARDS

ITEM DIRECTION OF CHANGE(Increase=1 Decrease =D) Sales Volume EFFECT ON PROFITS (Positive+ Negative -)

1(D)
1(D)

+(-)

Average Collection period

-(+)

Bad Debts

1(D)

-(+)

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 : I)FINANCIAL STATEMENTS-The published financial statements such as balance sheet and profit and loss account. II)BANK REFERENCES-The firms banker collects the necessary information from the applicants 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.

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:

I)QUANTITATIVE-The quantitative aspects is based on the

factual information available from the financial statements,the past records of the firms and so on.

II)QUALITATIVE-The qualitative judgement would cover

aspects relating to the quality of management. .

STEPS IN CREDIT ANALYSIS

Investing The Customers
Customers Evaluation-The 5 Cs-

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.

EFFECT OF INCREASE IN CASH DISCOUNT

ITEM DIRECTION OF CHANGE(I=Increase D= Decrease) EFFECT ON PROFITS (Positive +or Negative-)

Sales volume Average collection period

I D

+ +

Bad debt expenses Profit per unit

D D

+ -

TYPE OF COLLECTION EFFORTS

Steps usually taken are Letters, including reminders Telephone call for personal contact Personal visit Help of collection agencies Legal action

BENEFITS
INCREASED SALES-The impact of liberal trade policy result
in increased in sales volume.

STREAMLINE REVENUE ALLOCATION-To fit

business needs calculations are managed.

ENHANCE PRODUCTIVITY-The decrease in administrative

cost enhances productivity.

HELPS IMPROVE CUSTOMER SATISFACTIONEnhances service level and increase retention with customized information.

PROFORMA
Type A-if fixed Cost Is Given
Credit Policy Credit Period (days/ weeks/months) Particulars Present Policy xx Rs. Option 1 xx Rs. Option 2 xx Rs. Option 3 xx Rs.

Sales
Less: Variable Cost Contribution Less: Fixed Cost Profit [Benefits (A)] Total Cost= Variable Cost +Fixed Cost Average Investment in Receivables (Based on Total Costs) Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) 2) Bad debts as % of Sales 3) Credit Collection and Admin costs Total Costs [B] Net Benefits [A-B]

xxxx
xx xxx xx xxx xxx

xxxx
xx xxx xx xxx xxx

xxxx
xx xxx xx xxx xxx

xxxx
xx xxx xx xxx xxx

xx xx xx xxxx xxx

xx xx xx xxxx xxx

xx xx xx xxxx xxx

xx xx xx xxxx xxx

Incremental Net Benefits

---

xx

xx

xx

PROFORMA
Type B- fixed cost is not given
Credit Policy Credit Period (days/ weeks/months) Particulars Sales Less: Variable Cost Contribution [Benefits (A)] Average Investment in Receivables (Based on Sales) Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) 2) Bad debts as % of Sales 3) Credit Collection and Admin costs Total Costs [B] xx xx xx xxxx xx xx xx xxxx xx xx xx xxxx xx xx xx xxxx Present Policy xx Rs. xxxx xx xxx xxx Option 1 xx Rs. xxxx xx xxx xxx Option 2 xx Rs. xxxx xx xxx xxx Option 3 xx Rs. xxxx xx xxx xxx

Net Benefits [A-B]

Incremental Net Benefits

xxx
---

xxx
xx

xxx
xx

xxx
xx

CONCLUSION
The framework of analysis of all decisions area in receivables management is to secure a trade-off between the costs and benefits off 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.

THANK YOU