RECEIVABLES AND RECEIVABLESÂ MANAGEMENT
Presented By VISHNU DEV
AFTER PRESENTATION • Definition of Receivables • Objective • Reasons to offer credit • Cost associated with credit polices • 5 c’s • Optimum credit policy • Factors of credit policy • Factors determine credit standard • Credit policy decision • Steps in credit policy decision • Collection policy • Aspect of collection policy • Collection period
“ In simple terms it known as sales of good and service in credit and make an promissory note to receive payment later.�
RECEIVABLES Receivables is known as when firm makes an ordinary sale of goods or service and does not receive payment , it grant trade credit and creates accounts receivables which would be collected in future.
OBJECTIVES OF RECEIVABLES • Creating, preserving, and collecting A/R. • Establishing and communicating credit policies. • Evaluation of customers and setting credit lines. • Ensuring prompt and accurate billing. • Maintaining up-to-date records of accounts receivables. • Initiating collection procedures on overdue accounts.
REASONS TO OFFER CREDIT
• Competition • Market Share • Promotion • Credit Availability to Customers • Customer Convenience • Profit
COST ASSOCIATED WITH A CREDIT POLICY
• Credit Department Costs • Credit Evaluation Costs • A/R Carrying Cost • Discounted Payments • Selling and Production Cost • Collection Expenses • Bad Debts
PIT AL
PAC IT Y
AC TER
CO – T NDIT ASS ERMS IONS ET OF SAL E
CO - SE LLAT CU ERA RI T L Y
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CA
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THE FIVE C’S OF CREDIT OR RECEIVABLE CONTROL
Credit policy mean those decision variables that influence the amount of trade credit. i.e. investment in receivables .
OPTIMUM CREDIT POLICY A firm’s credit policy provides the guide lines for determining whether to extend credit to customer and how much credit to extend. A credit policy may be lenient or tight .
OPTIMUM CREDIT POLICY Cost of credit extension Collection cost Capital cost Delinquency cost Default cost Benefits of credit extension Oriented to sales expansion Protect from competition
FACTORS DETERMINING CREDIT STANDARD • Collection cost • Average collection period • Level of bad debt • Level of sales
DAYS’ SALES OUTSTANDING (DSO) • Assume that a company has outstanding receivables of $350,000 at the end of the first quarter and credit sales of $425,000 for the quarter. • Using a 90-day averaging period, the DSO for this company can be computed as follows:
• If the company’s credit terms are net 60, the average past due is computed as follows:
CREDIT POLICY DECISION Besides credit standard the second aspect of credit policy is the credit analysis and investigation which involves the evaluation of credit worthiness of the individual’s desirous to obtain credit from the firm. Character Capacity Capital Collateral Conditions
STEPS IN CREDIT POLICY
• Obtaining credit information • Internal
• External
• Financial statements • Bank reference • Trade reference • Credit bureau reports
• Analysis of credit information • Quantitative aspects • Qualitative aspects
CREDIT TERM'S
• Three components are: 1.Credit period • Sales volume of the firm would increase Credit terms the repayment of the amount under the credit sale.
• Average collection period would increase • Bad debt expensive would increase. Thus the net effect of increase period may be negative.
CREDIT TERM'S
2.Cash discount • This is the rate of discount offered to customer in which the overdue amount will be reduced by this amount. • The changes in the discount rate would have both positive and negative effects.
CREDIT TERM'S
3.Cash discount period • It also affects the firm’s collection period and profit. An increase in it and it will have a positive effect on profit because many customer who did not take advantage of discount in the past may now avail it. • It reduces the average collection period. However, when the discount period is increased there is also a negative effect on profit because it would make average collection period slow.
COLLECTION POLICIES
• Collection policies are the last area involved in accounts receivables management. • These refers to the procedures followed to collect accounts receivable when they become due after the expiry of the credit period. • Their purpose should be to speed up the collection of dues. • Various steps to collect dues from customer by firm are: letter, telephone calls etc.
ASPECT OF COLLECTION POLICIES
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Degree of efforts to collect the over dues •
Tight : the collection policy would be tight if very vigorous procedure are followed.
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A tight collection policy has both types of implication benefits as well as cost.
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The management has to consider the trade- off between them.
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The bad debt expenses would decline and average collection period will be reduced. Therefore the profit of the firm will increase.
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There may be decline in sales volume because some consumer may not like the pressure and switch to another one.
ASPECT OF COLLECTION POLICIES
• Lenient : • a lenient collection effort also affect the cost benefits trade off. • The effect of lenient policy will be just the opposite of the tight policy.
TYPES OF COLLECTION PERIOD
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This relates to the steps that should be taken to collect over dues from the customers. •
The collection policy should have clear cut guide-lines about the sequences of collection efforts.
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After the collection period is over and payment remain due, the firm should take measures to collect them.
TYPES OF COLLECTION PERIOD
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Following steps may be taken in this connection. •
Letter to expedite payment
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Telephone visit
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Personal visit
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Help to collection agencies
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Legal action
THANK YOU