RECEIVABLES

MANAGEMENT

Presented by : Harshit Bhatt

Urvish prajapati
Mayank Patel
Sandeep Paodia
Nisha Singh

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 What are receivables?
• Receivables are sales made on credit basis.

 Why do we need receivables?

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

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 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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Why do Companies In India Grant Credit?

• Competition
• Company’s bargaining Power
• Buyer’s requirement
• Buyer’s status
• Relationship with dealers
• Marketing tool
• Industry Practice
• Transit delay
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 Nature Of credit Policy
• A firm’s investment in account receivable
depends on
(a) The volume of credit sales
(b) The collection period
For e.g. If a firms credit sales are Rs.30 lakh per day
and customers, on an average, take 45 days to
make payment, them the firm’s average
investment in account receivable is :

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 Solution
Average investment account receivable:

=Daily Credit Sales x Average collection period

Rs. 3o lakh x 45 = Rs.1,350 lakh

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 Goals Of Credit Policy
• Marketing tool

• Maximization Of Sales VS. Incremental Profit

• Production and Selling Costs

• Administration Costs

• Bad-debt losses

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 Thus, The evaluation of change in a firm’s credit policy
involve analysis of:

Cost of credit policy

• Opportunity Cost of Lost
Contribution.

• Credit administration costs

and bad-debt losses.

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 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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 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
“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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 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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 BENEFITS

 Helps improve customer satisfaction:

 Takes control of sales processes:

 Enhance your productivity:

 Streamline revenue allocation:

 Providing access to vital information

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