RECEIVABLES

Hjalmar C. Rafa
Receivables

- are any claims held against others for

money, goods, services or other non-cash assets.
Classification of Receivables

• Trade receivables
• Nontrade receivables
Trade receivables

• refer to claim arising from sale of merchandise or

services in the ordinary course of business
operations. Trade receivable may be sub-classified
into accounts receivable and notes receivable.
• Accounts receivable, otherwise known as “open
accounts,” are amounts owed by customers for goods
and services sold in the firm’s normal course of
business. Under this claim, the credit is granted
through oral promises to pay. Usually, only sales
invoices without a written promise to pay substantiate
the claim.
• Notes receivable, are “unconditional written
promises” to pay a certain sum of money on a specific
future date. The formal instrument evidencing a note
receivable is called a promissory note.
Non-Trade receivables

• arise from transactions that are “not directly related to the sale of
goods and services.”
• Advances to supplier
• Creditors’ debit balance
• Stock subscriptions receivable
• Interest, dividends, royalty, rent
• Advances to officers and employee
• Deposits with utility companies
• Other claims such as:
• Claims against insurance
• Tax refunds
• Common carriers for damaged or lost goods
• Creditors for returned, damaged or lost goods
Receivable management

refers to the formulation and administration of

plans and policies related to sales on account
and ensuring the maintenance of receivables at
a predetermined level and their collectability as
planned. Strategically defines the quality of
accounts receivable collections.
Objective of receivable
management
• is to maintain receivable at a level that will result
in a combination of turnover and profit rates that
will maximize the over-all return on investment in
a business entity. A high level of receivable exposes
a company to greater risk from uncollectible
accounts, more financing charges and greater
opportunity cost arising from the capital tied up in
receivables. On the other hand, a very low level of
receivables may have its adverse effects on sales
volume and gross margin. This is because longer
credit terms attract more customers and the gross
margin on credit sales far exceeds that on cash
sales.
Receivable Turnover

RT = Net Sales/ Ave. Account Receivable

 Collection Cycle
Delivery of
merchandise

Collection Billing policies

Aging of Accounts Collection policies

receivable

Receivable
portfolio analysis
Variables of receivable management that affect
collections, receivable balance, and receivable
turnover.
• Discount rate
• Discount time
• Credit period
• Credit cap
• Credit class
• Credit assessment
Trade discounts or credit
discounts
Trade discounts or credit discounts are given to
encourage credit customers to pay their accounts
earlier. This win-win situation between the seller
and the buyer speaks of the benefits that could be
derived by the buyer in terms of reduction in the
amount to be paid and the benefit on the part of the
seller for the opportunity to use the money to
generate additional earnings.

The bait is the higher the discount rate, the more

attractive it is for the buyer to pay at an earlier
date.
Discount time

Discount time offered by the business is affected by the

practice in the industry, competition, quality of
customers, operating cycle, financial capability of the
seller, and the long-term objectives of the organization. It
the discount time is short, the discount rate goes higher;
and, if the discount time is long, the discount is lowered.

If the discount time is short, collection is accelerated,

receivable balance is reduced, receivable turnover is
higher, and the collection period is shortened. If the
discount time is long collection is delayed, receivable
balance tends to balloon, receivable turnover gets lower,
and the collection period is lengthened
Credit period

Credit period refers to the entire credit days

granted to customers. A long credit period slows
down collection while a short credit period
quickens the receipts of money from customers.
Credit cap

Credit cap or (credit limit) refers to the

limitation of credit line in terms of amount (or
even merchandise items) set or imposed by the
seller to a given customer depending on his
capability to meet trade payments. The higher
the credit risk of a customer, the lower the
credit cap is. Say, a given customer is allowed
only to be extended credit up to 50, 000. When
the credit limit is reached, deliveries to the said
customer will be stopped unless he settles first
his account.
Credit block

Credit block is the policy of non-delivery of

merchandise to customers once their accounts
become past due. New deliveries will be made
once an account has been paid or becomes
current.
Credit class

Credit class pertains to the group customers to

whom the merchandise shall be delivered.
Customers may be classified according to
income level, place of residence, gender, age,
geographical location, civil status, and other
matters of social demographics. Sometimes, a
product is not technically offered in a given
credit class maybe because of a very high credit
risk or the product is not really intended for
them.
Credit Effects to
Credit policy
mngt.
Collection Rec. Rec. Collection
Variables Balance Turnover Period
Discount rate high faster decrease increase shorter
Discount rate low slower increase decrease longer

Discount time short (strict) faster decrease increase shorter

Discount time long (lax) slower increase decrease longer

Credit period short (strict) faster decrease increase shorter

Credit period long (lax) slower increase decrease longer

Credit cap high (strict) faster decrease increase shorter

Credit cap low (lax) slower increase decrease longer

Credit class low risk faster decrease increase shorter

Credit class (strict) slower increase decrease longer
high risk (lax)
Collection management

Operationally, collection management starts

from the date the merchandise is sold to credit
customers. Billing and collection policies are
interrelated processes to complete a collection
cycle.
Maintain an efficient billing
system!

• Bill completeness. Statement of bills sent to

customers should contain all relevant information
about the credit sales and payment to be made.
Bills do not only serve as reminders that the
customers have an obligation to the selling
company but also serve as a source of information
on the accuracy of good sold, unit prices, invoices
prices, credit terms, and date of delivery.
Adjustment made cause by merchandise returns
are sometimes shown in the billing statement to
send a message of accuracy and openness.
Maintain an efficient billing
system!

• Error-free statement of bills. An error found

by the debtor in the billing statement would
be a reason for him not to pay unless
corrections are made. This would unreasonably
delay collections and promote inefficiencies.
Maintain an efficient billing
system!
• Send bills on time. Promptness in sending bills
sends a strong message of the seller’s quality
operations and a resolve to make collections on
time. This makes the debtor not only informed on
time but is also given the choice to avail of any
promotional discounts and be informed of other
relevant information occasionally contained or
inserted in the billing package(e.g. new
promotional package, upcoming products, changes
in the delivery time and system, etc.). Sending
bills on time is a prompt reminder to the debtors
that they have to make true commitment of paying
their dues on time.
Maintain an efficient collection
system!

• Frequency of collection follow-up. Bills are

normally sent before the discount period elapses.
Bills are sent again before the end of the credit
period. If receipts are not made within the credit
period, a notice of collection of past due accounts
should be sent. Friendly, tact, and frequent notices
of collections through calls, other electronic means
or personal visitation are also tested practices in
making effective collections.
Maintain an efficient collection
system!

• Visibility of collection personnel. Companies

whose business is related to credit retailing
engage the service of collectors to move
around, visit, and make collections. These
collectors are part of the treasury department
and should not be a member of the sales
department. Maintaining an effective field
collection personnel group is also a successful
technique most commonly applied by small
and medium size distribution and financing
companies.
Maintain an efficient collection
system!
• Electronic fund transfer and concentration
banking. The advantages of electronic technology
have contributed immensely in banking sector.
Funds are now transferred electronically from one
location to another, one account to another in just
a few seconds. Debtors can now pay on time and
avail of the trade discounts less the hassles of
catching up the mail and rushing for check
deliveries. Banks, upon proper authorizations, can
readily transfer account balances from one account
number to another without regard to geographical
dispersion.
Receivable portfolio analysis
• Receivable portfolio (i.e.,”receivable spread”) refers to the
strategy of spreading investments in receivables over a customer
base. It gives an impression of whether the management is strict or
lax its receivable policies and whether the management is
conservative or aggressive in its receivable investments.

• Receivables should also be tracked down – per customer, customer

group, customer receivable age, and customer balances. This is
done in relation with the goal of speeding up the collection of
receivables.

• Accounts receivable are to be aged in relation with the credit

period. An account which is not yet due for collection is classified
as “current account”. An account that is still outstanding even after
the credit period is called as “past due account”.
Aging of accounts receivables

• Aging of account receivables classifies the accounts

according to their number of days outstanding. It
has the following advantages:
• It tracks down receivable balances.
• It serves as an analysis sheet to study receivable
balances according to their “age” as either current
account or past due account.
• It gives an idea of which accounts are “moving”
and which are “not moving” by doing supplemental
analysis of the long past due accounts.
• It is reasonable technique of estimated doubtful
accounts expense
The Five Cs System

No matter what approach is, methods used to

measure credit quality are concerned with
evaluating five areas generally considered
important to determining a customer’s
creditworthiness. These five areas, which are
referred to with words beginning with letter C,
are called the Five Cs of credit
The Five Cs System

1. Character refers to the probability that the

customers will try to honor their obligations. This
factor is of considerable importance because every
credit transactions imply a promise to pay: Will
debtors make an honest effort to pay their debts, or
are they likely to try to get away with something?
Experienced credit managers frequently insist that
the moral factor is the most important issue in credit
evaluation. Thus, credit reports provide background
information on people’s and firms’ past
performances. Often credit analysts will seek this
type of information from a firm’s bankers, its other
suppliers, its customers, and even its competitors.
The Five Cs System

2. Capacity is a subjective judgment of

customers’ abilities to pay. It is gauged in part
by the customers’ past records and business
methods, and it may be supplemented by
physical observation of their plants or stores.
Again, credit analysis will obtain judgmental
information on this factor from a variety of
sources.
The Five Cs System

3. Capital is measured by the general financial

condition of a firm as indicated by an
analysis of its financial statements. Special
emphasis is given to risk ratios-the
debt/assets ratio, the current ratio, and the
times-interest-earned ratio.
The Five Cs System

4. Collateral is represented by assets that

customers may offer as security in order to
obtain credit.
The Five Cs System

5. Conditions refers both to general economic

trends and to special developments in certain
geographic regions or sectors of the company
that might affect customer’s abilities to meet
their obligations.
Thank you…