Unit 5
Unit 5
Unit 5
MANAGEMENT
RECEIVABLES
Risk
Futuristic
Economic value of goods is transferred
to customers on the date of sale but the
company will receive the economic
value only after the expiry of credit
period.
RECEIVABLES MANAGEMENT
RM is the process of making decisions relating to
investment in trade debtors
The term Receivables Management may be defined as
collection of steps and procedure required to properly
weigh the cost and benefits attached with the credit
policies
The receivables management consists of matching the
cost of increasing sales (Particularly credit sales) with
the benefits arising out of increased sales with the
objective of maximizing the return on investment of
the firm
Different costs associated with RM :
1. Capital cost
a. Interest on funds borrowed
b. opportunity cost.
2. Collection costs- Creation and maintenance of
credit departments, accounting records, reminder
letters.
3. Delinquency cost- failure of customers to pay on
due date. (legal charges)
4. Default costs – (irrecoverable): Cost of default by
customers
Dimensions of RM
Credit policy
Credit Evaluation/Credit Analysis
Control of account receivables
Credit policy
Credit Policy is the determination of credit
standards and credit analysis.
It determines-
a) Whether or not to extend credit to a customer
b) How much credit to extend.
Credit policy variables
Merits
a. Increase in sales
b. Higher profits
Demerits
c. Bad debt loss
d. Liquidity problem
Stringent credit policy
Sells goods on credit on a highly selective basis.
The customers who have proven creditworthiness and
financially sound.
Merits
a. Less bad debts
b. Sound liquidity position
Demerits
c. Less sales
d. Less profit
Credit Terms
Credit Terms specify the repayment terms
required of credit customers/ receivables.
Credit Terms have 3 components-
1. Credit Period
2. Cash Discount
3. Cash discount period
the quality of the customer depends on the time taken
by customers to repay credit obligation and the
default rate.
Default risk is the likelihood that a customer will fail
to repay the credit obligation.
Should
credit be
granted?
Strong Weak
Character
Capacity Capacity
Strong Strong
Weak Weak
Capital
Capital Capital Capital
How much
credit
should be
granted ?
2. Numerical Credit Scoring
Identify factors relevant for credit evaluation.
Assign weight to these factors that reflect there
relative importance.
Rate the customer on various factors, using a
suitable rating scale.
For each factor, multiply the factor rating with the
factor weight to get factor score.
Add all the factor scores to get overall customer
rating index.
Based on the rating index, classify the customer.
Credit Rating Index
Factor Factor Rating Factor
weight Score
5 4 3 2 1
Risk Description
Class
1 Customer with no risk of default
2 Customer with negligible risk of default
3 Customer with little risk of default
4 Customer with some risk of default
5 Customers with significant risk of default
Control of account receivables:
Management of receivables
Employment of regular checks and continuous
monitoring system
Methods which can be applied for this purpose is:
Accounting ratios
Days sales outstanding
Aging schedule of receivables
Line of credit
Collection matrix
FACTORING
INTRODUCTION
The factoring service was started because the
debts are not collected in time and are
handicapped by lack of sufficient working capital,
the production and expansion of business is
affected
CLIENT
2 3 6 1
4
FACTOR CUSTOMER
5
PROCESS :