RECEIVABLES

MANAGEMENT

“Any fool can lend money, but it takes a

lot of skill to get it back”

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RECEIVABLES MANAGEMENT INTRODUCTION

 What are receivables?

•Receivables are sales made on credit basis.

Why do we need receivables? Cash Receivables

•Reach sales potential
•Competition Operating
Cycle

Understanding Receivables
•As a part of the operating cycle
•Time lag b/w sales and receivables creates Inventory
need for working capital

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RECEIVABLES MANAGEMENT GRANTING CREDIT

Basic decisions

1. To give credit or not

2. Duration of credit period

(selecting the right policy)

• Decision based on cost-benefit analysis

•Positive net benefit-Credit granted (Highest Net benefit policy chosen)
•Negative net benefit- Credit not granted

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RECEIVABLES MANAGEMENT DIFFERENT TYPES OF COSTS ASSOCIATED

 COLLECTION COST:
Administrative costs incurred in collecting the accounts
receivable.

 CAPITAL COST:
Cost incurred for arranging additional funds to support credit
sales.

 DELINQUENCY COST:
Cost which arises if customers fail to meet their obligations.

 DEFAULT 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

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 STEPS IN CREDIT ANALYSIS
RECEIVABLES MANAGEMENT

“Investigating the customer”

Customer Evaluation- The 5 C’s

Character- Reputation, Track Record

Capacity- Ability to repay( earning capacity)

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 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

• Third party guarantees

• Field visit: to get information of the existence and general condition of the
customer’s business

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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 COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques

• Pay Orders / Bank drafts

• Bills of Exchange

• Lock – box System

• Drop – box System

• Factoring

• 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 Under a lock box system, customers are

advised to mail their payments to special
• Pay Orders / Bank drafts post office boxes called lockboxes,
which are attended to by local collection
• Bills of Exchange banks, instead of sending them to
corporate headquarters.
• Lock – box System

• Drop – box System Thus the lock box system:

(i) cuts down the mailing time, because
• Factoring Cheque are received at a nearby post
office instead of at corporate
• Collection staff/ agents headquarters,
(ii) reduces the processing time because
• Debt collector the company does not have to open the
envelopes and deposit the Cheque for
• Del Credere agent collection, and
(iii) shortens the availability delay
• Concentration banking because the Cheque are typically drawn
on local banks
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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques Factoring is a financial service

designed to help firms to arrange
• Pay Orders / Bank drafts their receivable better. Under a
•
typical factoring arrangement a
Bills of Exchange
factor collects the accounts on due
• Lock – box System dates, effects payments to the firm
on these dates and also assumes
• Drop – box System the credit risks associated with the
collection of the accounts.
• Factoring
Sometimes the factor provides an
• Collection staff/ agents
advance against the values of
• Debt collector receivable taken over by it. In such
cases factoring serves as a source
• Del Credere agent of short-term finance for the firm.

• 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

• Factoring

• Collection staff/ agents

an agency, factor, or broker acting
• Debt collector as an intermediary between sellers
and buyers and guaranteeing
• Del Credere agent
payment
• Concentration banking

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RECEIVABLES MANAGEMENT COLLECTION METHODS
• Centralised / Decentralised collection system

• Post – dated cheques

• Pay Orders / Bank drafts

A firm may open collection centres
• Bills of Exchange (banks) in different parts of the
country to save the postal delays.
• Lock – box System This is known as concentration
banking.
• Drop – box System
The firm may instruct the customers
• Factoring to mail their payments to a regional
collection centre / bank rather than
• Collection staff/ agents
to the Central Office
• Debt collector
The Cheque received by the regional
• Del Credere agent collection centre are deposited for
collection into a local bank account
• Concentration banking
The concentration banking results in
saving of time of collection 13
RECEIVABLES MANAGEMENT CONTROL OF RECEIVABLES MANAGEMENT

• DAILY SALES OUTSTANDING (DSO)

DSO = Accounts Receivable

Avg. Daily Sales

• AGEING SCHEDULE
Classifies the outstanding accounts receivables at a given
point of time into different age brackets. Ex.
Age Group (days) % of receivables
0-30 30
31-60 40
61-90 25
>=90 5

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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 % of Balance
Total Accounts Outstanding to Total
Debtors’ Balance
A 15 75
B 35 20
C 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.
Sales 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 xxx xxx xxx xxx
Average Investment in Receivables
(Based on Total Costs)
Costs of Extending Credit:
1) ____ % Opportunity Cost of Capital xx xx xx xx
(Calculated on Avg. Invst. in Receivables)
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 16
Incremental Net Benefits --- xx xx xx
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.
Sales xxxx xxxx xxxx xxxx
Less: Variable Cost xx xx xx xx
Contribution [Benefits (A)] xxx xxx xxx xxx
Average Investment in Receivables xxx xxx xxx xxx
(Based on Sales)
Costs of Extending Credit:
1) ____ % Opportunity Cost of Capital xx xx xx xx
(Calculated on Avg. Invst. in Receivables)
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

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