RECEIVABLES MANAGEMENT

Any fool can lend money, but it takes a lot of skill to get it back

INTRODUCTION

RECEIVABLES MANAGEMENT

What are receivables? Receivables are sales made on credit basis. Why do we need receivables? Reach sales potential Competition Understanding Receivables As a part of the operating cycle Operating Cycle

Cash

Receivables

Time lag b/w sales and receivables creates

need for working capital

Inventory

GRANTING CREDIT

RECEIVABLES MANAGEMENT

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
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DIFFERENT TYPES OF COSTS ASSOCIATED

RECEIVABLES MANAGEMENT

COLLECTION COST: Administrative costs incurred in collecting the accounts receivable. CAPITAL COST: Cost incurred for arranging additional funds to support credit sales. DELINQUENCY COST: Cost which arises if customers fail to meet their obligations. DEFAULT COST: Amounts which have to written off as bad debts.
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OBJECTIVES

RECEIVABLES MANAGEMENT

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

RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

Investigating the customer

Customer 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 customer
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STEPS IN CREDIT ANALYSIS

RECEIVABLES MANAGEMENT

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 customers business

BENEFITS

RECEIVABLES MANAGEMENT

Helps improve customer satisfaction: enhance service level and increase retention with customized information. Takes control of sales processes: manage your sales process more effectively by measuring trends and analyzing performance. Enhance your productivity: help reduce administrative costs and enhance office productivity Streamline revenue allocation: managed calculations to fit your business needs Providing access to vital information
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COLLECTION METHODS

RECEIVABLES MANAGEMENT

Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking
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COLLECTION METHODS

RECEIVABLES MANAGEMENT

Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking Thus the lock box system: (i) cuts down the mailing time, because Cheque are received at a nearby post office instead of at corporate headquarters, (ii) reduces the processing time because the company does not have to open the envelopes and deposit the Cheque for collection, and (iii) shortens the availability delay because the Cheque are typically drawn on local banks
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Under a lock box system, customers are advised to mail their payments to special post office boxes called lockboxes, which are attended to by local collection banks, instead of sending them to corporate headquarters.

COLLECTION METHODS

RECEIVABLES MANAGEMENT

Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking
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Factoring is a financial service designed to help firms to arrange their receivable better. Under a typical factoring arrangement a factor collects the accounts on due dates, effects payments to the firm on these dates and also assumes the credit risks associated with the collection of the accounts. Sometimes the factor provides an advance against the values of receivable taken over by it. In such cases factoring serves as a source of short-term finance for the firm.

COLLECTION METHODS

RECEIVABLES MANAGEMENT

Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking
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an agency, factor, or broker acting as an intermediary between sellers and buyers and guaranteeing payment

COLLECTION METHODS

RECEIVABLES MANAGEMENT

Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking

A firm may open collection centres (banks) in different parts of the country to save the postal delays. This is known as concentration banking.

The firm may instruct the customers to mail their payments to a regional collection centre / bank rather than to the Central Office
The Cheque received by the regional collection centre are deposited for collection into a local bank account The concentration banking results in saving of time of collection 13

CONTROL OF RECEIVABLES MANAGEMENT

RECEIVABLES MANAGEMENT

DAILY SALES OUTSTANDING (DSO)

DSO = Accounts Receivable Avg. Daily Sales AGEING SCHEDULE Classifies the outstanding accounts receivables at a given point of time into different age brackets. Ex.
Age Group (days) 0-30 31-60 61-90 >=90 % of receivables 30 40 25 5

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