This document summarizes key aspects of managing receivables, including:
1) Defining receivables as unpaid amounts from credit sales and outlining objectives like collecting accounts receivable.
2) Explaining reasons companies offer credit like promoting sales and factors affecting credit policies like collection costs.
3) Describing steps in determining credit policies including evaluating customers' character, capital, and repayment ability.
4) Outlining collection policies for overdue accounts involving escalating efforts like phone calls, visits, and legal action if needed.
2. 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
3. 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.
“ In simple terms it known as sales of good and
service in credit and make an promissory note to
receive payment later.”
4. 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.
5. Reasons to Offer Credit
Competition
Market Share
Promotion
Credit Availability to Customers
Customer Convenience
Profit
6. 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
7. The Five C’s of Credit or Receivable
control
Character
Capacity
Capital
Collateral - security
Conditions – Terms of asset sale
8. Optimumcredit
policy
Credit policy mean those decision variables that
influence the amount of trade credit. i.e.
investment in receivables.
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 .
9. Factors of 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
11. 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:
Sales During Period $425,000
Avg.Daily Credit Sales = = = $4,722.22
Number of Days in Period 90
Outstanding A/R $350,000
DSO = = = 74.11Days
Avg.Daily Credit Sales $4,722.22
Average Past Due =DSO - Avg.Days of Credit Terms
= 74.11Days - 60 Days =14.11Days
If the company’s credit terms are net 60, the average past due is
computed as follows:
12. Credit policy decision
Credit standard
Credit policy
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
13. 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
14. Credit terms
Credit terms the repayment of the amount under
the credit sale.
Three components are:
Credit period
Sales volume of the firm would increase
Average collection period would increase
Bad debt expensive would increase. Thus the net effect of
increase period may be negative.
15. Cont.… 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.
Item Direction of change Effect on profit
Sales volume Increase Positive
Average collection
period
Decrease Positive
Bad debt expenses Decrease Positive
Profit per unit Decrease negative
16. Cont.….
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.
17. 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.
18. Aspect of collection policies
Degree of efforts to collect the over dues
Tight : the collection policy would be tight if very
vigorous procedure are followed. A tight collection
policy has both types of implication benefits as well
as cost. The management has to consider the trade-
off between them. The bad debt expenses would
decline and average collection period will be
reduced. There fore the profit of the firm will
increase. There may be decline in sales volume
because some consumer may not like the pressure
and switch to another one.
19. Cont.…
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.
Item Direction of change Effect on profit
Bad debt expenses Decrease Positive
Average collection
period
Decrease Positive
Sales volume Decrease Negative
Collection cost Increase Negative
Tight
20. Types of collection period
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.
After the collection period is over and payment
remain due, the firm should take measures to
collect them.
21. Cont.…
Following steps may be taken in this connection.
Letter to expedite payment
Telephone visit
Personal visit
Help to collection agencies
Legal action
