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Receivables Management2023

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17 views26 pages

Receivables Management2023

Uploaded by

20BCC535 SAIMAHARAJ G
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Receivables

Management
Dr. Khalid Ul Islam
[email protected]
Receivables Management
• Receivables management refers to a business’s decision regarding the
overall credit, collection policies, and evaluating individual credit
applicants.

• Receivables Management is also called trade credit management.

• Average investment in receivables = Credit sales per day*Average


collection period

• Total sales is uncontrollable, however, credit sales is controllable.


Purpose of Receivables
Management
• Maximising shareholders’ wealth through increase in sales leading to
a net improvement in profitability.

• Trade-off between incremental return and cost of incremental


investment.

• Lenient vs stringent credit policy

• Marketing tool for expanding sales


Costs of receivables
• Production and selling Costs

• Administrative Costs

• Bad-Debt Losses
Production and Selling Costs
• Is sales maximisation the goal of the firm’s credit policy?

• At existing capacity, only fixed costs vary, however, with increasing capacity, both
variable and fixed costs increase.

• Incremental Contribution = incremental sales minus incremental production and


selling costs

• ∆Cont = ∆Sales - ∆Costs

• Tight credit policy leads to opportunity loss; the solution is loosening of credit policy.
Administrative Costs
• Credit investigation and supervision costs

• Collection costs
Bad debt Losses
• Is minimisation of bad debt losses a goal of credit policy?
• Evaluation of change in firm’s credit policy involves analysis of;

Opportunity cost of loss contribution


Credit administration and bad-debt losses
• Incremental or marginal rate of return of an investment is equal to the
incremental or marginal cost of funds
Credit Policy Variables
• Credit Standards

• Credit Terms

• Collection Policy and Procedures


Credit Standards
• Criteria which a firm follows in selecting customers for the purpose of credit extension.

• Tight vs lenient credit standards

Average collection period


Default rate

• Customer is rated as per 5 C’s which are Character, Capital, Capacity, Collateral, and
Condition.

• Good accounts, bad accounts and marginal accounts


Analysing change in credit
standards on profit
• A company has divided its customers into 4 categories depending upon the probabilities
of default.

Risk Category Low to high


Potential Sales Rs. 1.2 Cr Rs. 1.0 Cr Rs. 0.55 Cr Rs. 0.40 Cr
ACP 30 days 35 days 45 days 60 days
Bad-debt ratio - - 2.0% 5.0%
Credit Unlimited Unlimited Unlimited None
extension

• Variable Cost Ratio is 80% ad after-tax required rate of return is 15%.


• Corporate tax rate is 35%.
• Change in credit standards- Extend full credit to 4th Category
• Impact- 5% collection costs for 4th Category
Rs in Lacs
Incremental Sales, ∆S 40
Incremental Contribution ∆C = ∆S*c = ∆S *(1-VC)
= 40*(1-0.8) 8
Incremental bad debt losses and collection
∆S*(b+d) = 40*(0.05 + 0.05) 4
Incremental after-tax operating profit,
∆OPAT = [∆C - ∆S*(b+d)](1-T)
= (8 – 4)(1-0.35) 2.6
Incremental investment in receivables
∆INVEST = (∆S*ACP*V/360) = (40*60*0.8/360) 5.33
Marginal rate of return = ∆OPAT/∆INVEST 48.78%
Net increase in operating profits
= ∆OPAT –k*∆INVEST = 2.6 – 0.15*5.33 1.8
Credit Terms

• Credit Period: Time for which credit is extended to customers, usually


stated as a net date, e.g. ‘net 35’ means that it is expected that the
customers will repay not later than 35 days.

• Cash Discount: Reduction in the payment offered to customers to induce


them to repay credit obligations within a specific period of time, which is
less than the normal credit period. It includes the rate of cash discount
and the net credit period, e.g., ‘2/10 net 30’ means that a 2% discount will
be given if the customer pays within 10 days, else he must pay within 30
days.
Analysing change in credit period on
profit
• ABC company is deciding to increase its credit period from ‘net 35’ to
‘net 50’.

• The firms sales are expected to increase from Rs. 120 lakh to Rs. 180
lakh.

• The bad-debt loss ratio and collection costs are expected to remain at
5% and 6% respectively.

• The firm’s variable costs ratio is 85%, corporate tax rate is 35% and
the after tax required rate of return is 20%.
Rs in Lacs
Incremental Sales, ∆S 60
Incremental Contribution ∆C = ∆S*c = ∆S *(1-VC)
= 60*(1-0.85) 9
Incremental bad debt losses and collection
∆S*(b+d) = 60*(0.05 + 0.06) 6.6
Incremental after-tax operating profit,
∆OPAT = [∆C - ∆S*(b+d)](1-T)
= (9 – 6.6)(1-0.35) 1.56
Incremental investment in receivables
∆INVEST = (ACPn - ACPo)*(So/360)+V(ACPn)*∆S/360) = (50 – 12.08
35)*(120/360)+0.85*50*60/360)
Marginal rate of return = ∆OPAT/∆INVEST = 1.56/12.08 12.9%
Net increase in operating profits
= ∆OPAT –k*∆INVEST = 1.56 – 0.20*12.08 -0.856
Analysing change in Cash Discount
on profit
• Rama company is presently having sales of Rs.108 lakh.
• Its existing credit terms are 1/10, net 45 days and the average collection period is 30 days.
• Fifty percent of customers in terms of sales revenue are utilizing the cash discount
incentive. The contribution to sales ratio of the company is 20 percent and cost of funds
15 percent.
• In order to hasten the collection process further as also to increase sales, if possible, the
company is contemplating liberalization of its existing credit terms to 2/10, net 45 days.
• It is expected that sales are likely to increase by Rs.3 lakh and average collection period
to decline to 20 days.
• Eighty percent of customers in terms of sales revenue are expected to avail themselves of
the cash discount under the liberalization scheme. Should the company increase its cash
discount?
Solution
• ΔP = ΔS(1-V) + k Δ I – ΔDIS

• Δ I= (So/360)*(ACPo – ACPn) – V*(ΔS/360)*ACPn

• ΔDIS = Pn*(So + ΔS)*dn – Po*So*do


Collection Policy
• The objective of the collection policy is to achieve timely collection of
receivables, thereby releasing funds locked up in receivables for longer than they
should have been under the credit terms and minimizing bad debt losses.

• The collection program consists of the following.


 Monitoring the state of receivables
 Dispatch of letters to customers whose due date is approaching
 Telegraphic and telephonic advice to customers around the due date
 Threat of legal action against overdue accounts
 Legal action against overdue accounts.
Illustration
• The present sales of PK Ltd. are Rs.108 lakh, the average collection period 60
days, bad debt losses 6 percent of sales and collection expenses Rs.1 lakh. The
company’s cost of funds is 15 percent. It is contemplating to increase the
collection effort through special programs to reduce the amount of receivables and
the incidence of bad debt losses. Two separate programs called A and B are under
consideration. Program A is likely to reduce the average collection period to 45
days, decrease bad debt losses to 4 percent of sales and involve collection
expenses of Rs.3 lakh. Program B is envisaged to reduce the average collection
period to 30 days, decrease bad debt losses to 3 percent sales and involve
collection expenses of Rs.5 lakh. On the assumption that sales are not likely to get
affected, should the company go in for any of the programs under consideration?
Receivables Exchange of India Ltd.
(RXIL)
• RXIL is an electronic platform for the discounting of trade receivables under the
TReDS (Trade Receivables Discounting System) mechanism.

• It was established as a joint venture between the Small Industries Development


Bank of India (SIDBI) and the National Stock Exchange (NSE).

• The platform primarily aims to support Micro, Small, and Medium Enterprises
(MSMEs) by improving their access to working capital.
Key Features
Trade Receivables Discounting:

• Facilitates MSMEs selling their trade receivables (invoices) to financiers at


competitive rates.

• Helps improve cash flow for MSMEs without the need for collateral.

Participants:

• MSMEs (suppliers).
• Corporates (buyers).
• Banks and Non-Banking Financial Companies (NBFCs) (financiers).
Key Features
Transparency and Efficiency:

Ensures real-time, transparent, and seamless transactions between suppliers, buyers, and
financiers.

Regulated Platform:

Operates under the guidelines of the Reserve Bank of India (RBI).

Technology-Driven:

Uses a secure and digital interface for processing receivables, enabling quick settlement.
Process
• Invoice Upload
• Acceptance by Buyers
• Discounting by Financers
• Payment to MSMEs
• Repayment
Benefits
For MSMEs:

• Improved access to finance without additional borrowing.

• Reduction in payment cycles and delays.

For Buyers:

• Strengthened supplier relationships by ensuring timely payments.

For Financiers:

• Access to a broad base of receivables with creditworthy buyers.


Thank You!

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