RECEIVABLES

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

Group Members

Roll No

Tushar Bhirade

Rohan Cambell

11

James Fernandes

20

Chanky Jain

33

Ajinkya Lavate

49
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RECEIVABLES MANAGEMENT

INTRODUCTION

What are receivables?

Receivables are sales made on credit basis.
Why do we need receivables?

Cash

Receivables

To increase total sales

To increase profits
To meet increasing Competition

Operating
Cycle

Understanding Receivables

As a part of the operating cycle

Inventory

Time lag between sales and receivables creates

need for working capital
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RECEIVABLES MANAGEMENT

DIFFERENT TYPES OF COSTS ASSOCIATED

ADMINISTRATIVE COST:
Administrative costs In form of salaries to clerks who maintain
records of debtors, expenses on investigating the creditworthiness
of debtors, etc.

CAPITAL COST:
Cost incurred in terms of interest (if financed from outside) or
opportunity cost (if internal resourses they could have been put to
some other use)

COLLECTION COST
Cost incurred for collection of amounts at the appropriate time
from the customers.

DEFAULTING COST:
Amounts which have to written off as bad debts.
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RECEIVABLES MANAGEMENT

OBJECTIVES

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)
(The working capital position and profitability)

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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RECEIVABLES MANAGEMENT

CREDIT POLICY

CREDIT POLICY
Whether and how much credit to be extend
Determination of
(1)Credit Standard
(2) credit analysis
Important aspect of Credit Policy
a. Credit Standard
b. Credit Period
c. Cash Discount
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RECEIVABLES MANAGEMENT

1.CREDIT STANDARD
Basic criteria or minimum requirement for
extending credit to customer

LIBERAL CREDIT

STIFF CREDIT

1. Pushes up the sales

1. Pushes down the sales

2. Higher incidence of Bad Debt

2. Less incidence of Bad Debt

3. Large investment in a/c

receivable

3. Less investment in a/c receivable

4. Higher Cost Of Collection

4. Less Cost Of Collection

RECEIVABLES MANAGEMENT

2.CREDIT PERIOD
Length of time the customer allowed to
pay for their purchases
Does not grant Credit Zero
Longer Period of Credit

Shorter Period of Credit

Increases sales

Decreases sales

Increases investment in a/c

receivable

Decreases investment in a/c

receivable

Higher incidence of bad

debt

Less incidence of bad debt

RECEIVABLES MANAGEMENT

3.CASH DISCOUNT
Offer to customer in order to induce them
to pay promptly.
Percentage Discount and period are
reflected in Credit terms
Ex. 5 / 10, net 45
Liberalized cash discount increases
sales Reduces avg. collection period

RECEIVABLES MANAGEMENT

Collection Efforts
Monitoring Receivable

Sending Letters

Telegraphic Advice

Threat of Legal action (overdue)

Legal Action

RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

Investigating the customer by Ratio Analysis
When the financial statements are obtained the financial strengths
and weaknesses can be gauged by the application of ratio
analysis. Some of the important ratios are

a)

Current Assets
Current ratio = ---------------------Current Liabilities

b)

Current Assets - Inventory

Quick ratio = ----------------------------------------Current Liabilities

The above two ratios are widely used to assess the liquidity position of
a company in meeting its short-term obligations.
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RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

Investigating the customer by Ratio Analysis
Average Balance of sundry Creditors
c) Average payment period = ----------------------------------------------------Average Daily Credit Purchases
Average Balance of sundry Debtors
d) Average collection period = ----------------------------------------------------Average Daily Credit Sales
Debt
e) Capital Structure ratio = -----------Equity
Net profit after tax and preference share dividend
f) Return On Equity = ----------------------------------------------------------------Owner Equity
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RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

Investigating the customer

What the Ratios indicate..???

Payment period

Collection period

Return on owners equity.

It throws light on the financial strength of the company

and whether the trend over the years is favourable or
not.
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RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

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

(Credit rating agencies)

Third party guarantees

Field visit: to get information of the existence and general condition of the
customers business

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RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

Credit Evaluation Report on X co. Ltd
Item Head

For X co.
Ltd

Standard

Current Ratio

1.70

1.75

Quick Ratio

1.15

1.00

Average Payment
Period

45 Days

40 Days

40 Days

30 Days

1.5 : 1

2:1

15 %

18 %

Average Collection
Period
Debt - Equity Ratio

Remark

Liquidity position is
good
Can be persuaded
to pay within 40
days.
This may have
caused delay in
payments.
Lower because of
capital structure.

Return On Equity
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RECEIVABLES MANAGEMENT

STEPS IN CREDIT ANALYSIS

Risk Classification Scheme
Risk Class

Description

1.

Customer with no risk of default

2.

Customer with negligible risk of default

( default rate less then 2 % )

3.

Customer with a little risk of default

( default rate between 2 % and 5 % )

4.

Customer with some risk of default

( default rate between 5 % and 10 %)

5.

Customer with significant risk of default

( default rate in excess of 10 % )
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RECEIVABLES MANAGEMENT

BENEFITS
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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RECEIVABLES MANAGEMENT

CREDIT GRANTING DECISION

DECISION- TREE APPROACH

The probability of receiving the payment or

defaulting the payment by the customer.

The Rex company is considering offering credit to

customer. The probability that the customer would pay
is 0.9 and the probability that the customer would
default is 0.1. The revenues form the sale would be
80,000 and the cost of sale would be 60,000.

If the customer pay, the company gets a profit of

Rs.20,000 while it losses Rs.60,000 if he fails to pay.
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RECEIVABLES MANAGEMENT

CREDIT GRANTING DECISION

DECISION- TREE APPROACH

Credit Granting Decision : Decision tree Approach

Pay :
Prob = 0.9

Grant

Credit

Do not
grant

Does not pay :

Prob = 0.1

The weighted net benefit is Rs.20,000 * 0.9 Rs.60,000 *

0.1 = 12,000.
Hence it is preferable to grant credit as the weighted net
benefit is positive.

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RECEIVABLES MANAGEMENT

CREDIT GRANTING DECISION

DECISION- TREE APPROACH

Sunshine Industries is considering offering credit to a

customer. The probability that the customer would pay is
0.5 % and the probability that the customer would default
is 0.5 %.
Revenue from the sale = Rs 2500
Cost of sale = Rs 1700
The expected profit from offering credit
0.5 ( 2500 1700 ) 0.5 (1700) = - 500
As this is negative the company cannot offer credit.

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RECEIVABLES MANAGEMENT

COLLECTION METHODS

Centralised / Decentralised collection

system

Post dated cheques

Pay Orders / Bank drafts

Bills of Exchange

Lock box System

Drop box System

Collection staff/ agents

Debt collector

Del Credere agent

Concentration banking

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RECEIVABLES MANAGEMENT

COLLECTION METHODS

Centralised / Decentralised collection system

Post dated cheques

Pay Orders / Bank drafts

Bills of Exchange

Lock box System

Drop box System

Collection staff/ agents

Debt collector

Del Credere agent

Concentration banking

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.

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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Thank You
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RECEIVABLES MANAGEMENT

COLLECTION METHODS

Centralised / Decentralised collection system

Post dated cheques

Pay Orders / Bank drafts

Bills of Exchange

Lock box System

Drop box System

Collection staff/ agents

Debt collector

Del Credere agent

Concentration banking

an agency, factor, or broker acting

as an intermediary between sellers
and buyers and guaranteeing
payment

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RECEIVABLES MANAGEMENT

COLLECTION METHODS

Centralised / Decentralised collection system

Post dated cheques

Pay Orders / Bank drafts

Bills of Exchange

Lock box System

Drop box System

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

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RECEIVABLES MANAGEMENT

MONITORING RECEIVABLES
(Measures for Monitoring Receivables)

1) Day Sales Outstanding

2) Ageing Schedule
3) Collection Matrix

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RECEIVABLES MANAGEMENT

CONTROL OF RECEIVABLES MANAGEMENT

(Day Sales Outstanding)
The average number of days sales outstanding at any
time, say end of the month or end of the quarter, is
obtained by following the formula.

Accounts receivable at time chosen

Days sales outstanding = -------------------------------------------Average daily sales

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RECEIVABLES MANAGEMENT

SALES AND RECEIVABLES DATA

Month

Sales

Receivables

Month

Sales

Receivable
s

January

200

460

July

200

340

February

225

360

August

200

360

March

230

315

September

220

360

April

150

310

October

230

390

May

150

300

November

245

500

June

180

320

December

250

520

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RECEIVABLES MANAGEMENT

AVERAGE COLLECTION PERIOD

Quarter

Average Collection Period

First

315
----------------------------------------------------------------------------- = 43 days
( 200 + 225 + 230 ) / 90 days

Second

320
------------------------------------------------------------------------------ = 61 days
(150 + 150 + 180) / 91 days

Third

360
------------------------------------------------------------------------------ = 53 days
(200 + 200 + 220) / 92 days

Fourth

520
------------------------------------------------------------------------------ = 66 days
(230 + 245 + 250) / 92 days

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RECEIVABLES MANAGEMENT

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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RECEIVABLES MANAGEMENT

COLLECTION MATRIX

In order to study correctly the changes in the

payment behavior of customers, it is helpful to
look at the pattern of collection associated with
credit sales. From the collection pattern one can
judge whether the collection in improving, stable
or deteriorating.

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RECEIVABLES MANAGEMENT

COLLECTION MATRIX
% of
receivables
collected
during the
month

Janua
ry
sales

Februar March
y sales sales

April
sales

May
sales

June
sales

Month of sales

10

14

15

12

13

First following
Month

42

35

40

38

35

31

Second
36
following month

40

21

26

26

26

Third following
month

11

24

19

25

25

Fourth
following month

12

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RECEIVABLES MANAGEMENT

CONTROL OF RECEIVABLES MANAGEMENT

ABC Analysis of Receivables

A Represents a small proportion of accounts of debtors
representing a large value
B Represents moderate value
C Represents a large number of accounts of debtors but
representing a small amount
Category

% of accounts to
Total Accounts

% of Balance
Outstanding to Total
Debtors Balance

15

75

35

20

50

5
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RECEIVABLES MANAGEMENT

PROFORMA
Type A- If Fixed Costs is given
Credit Policy

Present Policy

Option 1

Option 2

Option 3

Credit Period (days/ weeks/months)

xx

xx

xx

xx

Particulars

Rs.

Rs.

Rs.

Rs.

xxxx

xxxx

xxxx

xxxx

Less: Variable Cost

xx

xx

xx

xx

Contribution

xxx

xxx

xxx

xxx

Less: Fixed Cost

xx

xx

xx

xx

Profit [Benefits (A)]

xxx

xxx

xxx

xxx

Total Cost= Variable Cost +Fixed Cost

Average Investment in Receivables
(Based on Total Costs)

xxx

xxx

xxx

xxx

1) ____ % Opportunity Cost of Capital

(Calculated on Avg. Invst. in Receivables)

xx

xx

xx

xx

2) Bad debts as % of Sales

xx

xx

xx

xx

3) Credit Collection and Admin costs

xx

xx

xx

xx

Total Costs [B]

xxxx

xxxx

xxxx

xxxx

Net Benefits [A-B]

xxx

xxx

xxx

xxx 35

Incremental Net Benefits

---

xx

xx

xx

Sales

Costs of Extending Credit:

RECEIVABLES MANAGEMENT

PROFORMA
Type B: If Fixed costs is NOT given.
Credit Policy

Present Policy

Option 1

Option 2

Option 3

Credit Period (days/ weeks/months)

xx

xx

xx

xx

Particulars

Rs.

Rs.

Rs.

Rs.

xxxx

xxxx

xxxx

xxxx

Less: Variable Cost

xx

xx

xx

xx

Contribution [Benefits (A)]

xxx

xxx

xxx

xxx

Average Investment in Receivables

(Based on Sales)

xxx

xxx

xxx

xxx

1) ____ % Opportunity Cost of Capital

(Calculated on Avg. Invst. in Receivables)

xx

xx

xx

xx

2) Bad debts as % of Sales

xx

xx

xx

xx

3) Credit Collection and Admin costs

xx

xx

xx

xx

Total Costs [B]

xxxx

xxxx

xxxx

xxxx

Net Benefits [A-B]

xxx

xxx

xxx

xxx

Incremental Net Benefits

---

xx

xx

xx

Sales

Costs of Extending Credit:

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RECEIVABLES MANAGEMENT

Though various techniques have been

discussed here for the management of accounts
receivable, in practice very few Indian
companies have a stated and systematic credit
policy.
Companies have to :1. Strengthen their management of receivables.
2. State explicit and articulate credit policies.
3. An efficient collection program.
4. Better co ordination between production , sales
, and finance departments .
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