Chapter - 28

Receivables Management
and Factoring
Topics
 Nature and Goals of Credit Policy
 Optimum Credit Policy
 Credit Policy Variables
 Credit Evaluation of Individual Accounts
 Monitoring Receivable
 Summary of Key Concepts

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Nature of Credit Policy
 Investment in receivable
 volume of credit sales
 collection period

 Credit policy
 credit standards
 credit terms
 collection efforts

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Goals of Credit Policy
 Marketing tool
 Maximisation of Costs & Benefits

sales Vs. Profitability

incremental profit
 production and
Liquidity
selling costs
Tight Credit Loose
 administration costs policy

 bad-debt losses

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Optimum Credit Policy
 Estimation of incremental
profit
Costs & Return (%)
 Estimation of incremental
investment in receivable Marginal cost of capital
 Estimation of incremental
rate of return (IRR)
 Comparison of incre- Marginal rate of return
mental rate of return with
Tight Credit Loose
required rate of return policy
(RRR)
 Optimum credit policy:
IRR = RRR

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Credit Policy Variables
 Credit standards
 Credit analysis
 collection period
 default rate
 character
 capacity
 condition
 capital
 collateral

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Credit Policy Variables
 customer categories
 good accounts
 bad accounts
 marginal accounts
 numerical credit scoring
 ad hoc approach
 simple discriminant approach
 multiple discriminant approach

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Credit Policy Variables
Credit-Granting Decision
CREDIT GRANTING
DECISION

NO CREDIT GRANT CREDIT

PAYMENT PAYMENT
RECEIVED NOT RECEIVED

BENEFIT COST
PV OF FUTURE PV OF LOST
NET CASH INVESTMENT
FLOWS
NO PAYOFF

NET PAYOFF
PV OF
(BENEFIT - COST)

Credit-granting Decision

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Credit Policy Variables
 Credit terms
 credit period
 cash discount

 Collection policy and procedures

 regularity of collections
 clarity of collection procedures
 responsibility for collection and follow-up
 case-by-case approach
 cash discount for prompt payment

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Credit Evaluation of Customers
 Credit information
 financial statements
 bank references
 trade references

 Credit investigation and analysis

 analysis of credit file
 financial analysis
 analysis of business and management

 Credit limit
 Collection efforts

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Monitoring Receivable
 Collection period
 Aging schedule
 Collection experience matrix

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