RECEIVABLES MANAGEMENT 1.

The following information is available for Avinash Co:

Month I Quarter January February March April May June July August September Sales (Rs in Million) 40.0 50.0 60.0 60.0 50.0 40.0 50.0 50.0 50.0 End of quarter Receivales (Rs in million) 3.0 20.0 40.0 5.0 18.0 25.0 4.0 20.0 30.0

II Quarter

III Quarter

Required: a) Calculate the daily sales outstandings (DSO) at the end of each quarter for averaging periods of 30 days and 60 days. b) Draw up the ageing schedules (A/S) at the end of each quarter using the age brackets 0-30, 3160 and 61-90 days. 2. A firm is currently selling a product @ Rs 10 per unit. The most recent annual sales (all credit) were 30,000 units. The variable cost per unit is Rs 6 and the average cost per unit, given a sales volume of 30,000 units is Rs 8. The total fixed cost is Rs 60,000. The average collection period may be assumed to be 30 days. The firm is contemplating a relaxation of credit standards that is expected to result in a 15% increase in unit sales; the average collection period would increase to 45 days with no change in bad debt expenses. It is also expected that increased sales will result in additional net working capital to the extent of Rs 10,000. The increase in collection expenses may be assumed to be negligible. The required return on investment is 15%. Should the firm relax the credit standard? 3. Assume that the firm in problem (2) above is contemplating to allow 2% discount for payment within 10 days after a credit purchase. It is expected that if discounts are offered, sales will increase by 15% and the average collection period will drop to 15 days. Assume bad debt expenses will not be affected; return on investment expected by the firm is 15%; 60% of total sales will be on discount. Should the firm implement the proposal? 4. A firm is contemplating an increase in the credit period from 30 to 60 days. The average collection period which is at present 45 days is expected to increase to 75 days. It is also likely that the bad debt expenses will increase from the current level of 1% to 3% of sales. Total credit sales are expected to increase from the level of 30,000 units to 34,500 units. The present average cost per unit is Rs 8, the variable cost and sales per unit is Rs 6 and Rs 10 respectively. Assume the firm expects a rate of return of 15%. Should the firm extend the credit period?

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5. Easy Ltd specializes in the manufacture of a computer component. The component is currently sold for Rs 1000 and its variable cost is Rs 800. For the year ended 31.12.92 the company sold an average 400 components per month. At present, the company grants one month credit to its customers. The company is thinking of extending the same to two months on account of which the following is expected: Increase in Sales 25% Increase in Stock Rs 2,00,000 Increase in Creditors Rs 1,00,000 You are required to advise the company on whether or not to extend credit terms if a) All customers avail the extended credit period of 2 months and b) Only new customers avail two months credit. Assume in this case that the entre increase in sales is attributable to the new customers. The company expects a minimum return of 40% on the investment. 6. A company deals with consumer durables, having an annual turnover of Rs 80 lakhs, 75% of which are credit sales effected through a large number of dealers while the balance sheets are made through showrooms on cash basis. Normal credit allowed is 30 days. The company proposes to expand its business substantially and there is good demand as well. However, the marketing manager finds that the dealers have difficulty in holding more stocks due to financial problems. He therefore proposes a change in the credit policy as follows:
Proposal A B Credit Period 60 days 90 days (Rs in lakh) Anticipated credit sales 70 75

The products yield an average contribution of 25% on sales. Fixed costs amount to Rs 5 lakh per annum. The company expectes a pre-tax return of 20% on capital employed. The finance manager after a review of the proposal has recommended increasing the provision of bad debts from the current 0.5% to 1% for proposal and to 1.5% for proposal B. Evaluate the merits of the new proposals and recommend the best policy. 7. Golden Syntax has annual sales of Rs 24,00,000. The selling price per unit is Rs 10 and the variable cost is 70% of the selling price. The required rate of return on investment is 20%, average cost Rs 9 per unit; annual collection expenditure, Rs 50,000 and percentage of default, 3 per cent; credit terms, 2 months. Golden Syntax is considering the change in credit policy by following Programme A or Programme B.
Programme Average collection period (months) Average Collection expenditure (Rs) Percentage of default (%) A 1.5 75,000 2 B 1 150,000 1

Determine which collection programme should Golden Syntax follow?

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8. The existing sales of ABC Ltd are Rs 18,60,000. The current customers are dran from companies having elevated or excellent credit rating. With partially liberalized credit standards, the companys sales are likely to go up by Rs 5,70,000, the mix of new customers being 54% and 42% from groups rated fair and imperfect respectively. The average collection period is likely to be 55 days and the incidence of bad debt losses 20% for the new customers. The contribution to sales ratio for ABC Ltd is 25% and the cost of funds 20%. Calculate the following: a) Additional contribution from increased sales and additional receivables b) Additional investment in receivables and the cost of financing the additional investment in receivables c) Total additional cost and net additional benefit d) Effect of relaxing credit standards on profit 9. M Ltds current sales are Rs 65,00,000. The current collection period is 45 days. The company is planning to introduce a cash discount policy of 3/10 net 45. As a result, the company expects the average collection period to go down by 15 days. 75% of the customers opt for the cash discount facility. Compute: a) Accounts receivable before and after the cash discount b) Decrease in accounts receivable investment c) If the companys required return on investment in receivables is 25%, cost saved on this reduced investment d) Cash discount. Should the company introduce the new credit policy? 10. H Ltd has a present annual sales level of 10,000 units at Rs 300 per unit. The variable cost is Rs 200 per unit and the fixed costs amount to Rs 3,00,000 per annum. The present credit period allowed by the company si 1 month. The company is considering a proposal to increase the credit period to 2 months and 3 months and has made the following estimates:
Credit Policy Increase in sales % of bad debts Existing 1 month 1% Proposed 2 months 3 months 15% 30% 3% 5%

There will be an increase in fixed cost by Rs 50,000 on account of sales beyond 25% of the present level. The company plans a pre-tax rerun of 20% on investment in receivables. You are required to calculate the most paying credit policy for the company. 11. The credit manager of XYZ Ltd. is reappraising the companys credit policy. The companys ells it products on terms of net 30. Cost of goods sold is 85% of sales and fixed costs are further 5% of sales. XYZ classifies its customers on a scale of 1 to 4. During the past five years, the experience was as under:

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Classification 1 2 3 4

Default as a percentage of sales 0 2 10 20

Average collection period -in days for non-defaulting customers 45 42 40 80

The average rate of interest is 15%. What conclusions do you draw about the companys credit policy? What other factors should be taken into account before changing the present policy? Discuss. 12. Fine Chemicals is dealing in caustic soda and their customers are spread throughout the country. The company currently provides a credit period of 30 days to its customers. 25% of the customers pay on the 15th day while 50% of the customers pay on the 30th day. The balance customers pay on the 85th day. For the year ended March 31, 1999, the company recorded sales of Rs 10 crores, out of which credit sales are 80%. Its variable cost to sales ratio is 80%. The company financed its receivables using bank finance at an interest rate of 18% p.a. and a margin requirement of 40%. The marketing manager of the company proposed to change credit terms from net 30 to 1/10 net 45. He expects that this would improve credit sales by Rs 2 crores and also change the payment pattern of customers. If this credit policy is introduced, as per his market survey, 75% of the customers pay on the 10th day, 10% customers pay on the 45th day and the balance 15% of the customers will pay on the 120th day. He considers that these 15% customers are also long-standing customers and need not be discouraged. The bank will provide finance as per the existing terms on the additional credit sales also. Out of the additional sales of Rs 2 crores, there is a risk of bad debts to the extent of 5%. The cost of capital of the company is 16% and the tax rate applicable to it is 35%. What is the total cost of bank finance and own funds? You are required to advise whether change in credit terms is advisable. 13. Vineeta Enterprises sells on terms 2/10, net 45. Annual sales are Rs 90 million. 30% of its customers pay on the 10th day and take the discount. If accounts receivable average Rs 12 million, what is the average collection period (ACP) on non-discount sales?

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