Receivables Management

1. WHAT IS RECEIVABLES MANAGEMENT?

Receivables management refers to the decision a business makes regarding to the
overall credit, collection policies and the evaluation of individual credit applicants.
Receivables Management is also called trade credit management.
2. WHAT ARE THE OBJECTIVES OF RECEIVABLES MANAGEMENT?

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.

3. WHAT ARE THE DIFFERENT TYPES OF COSTS ASSOCIATED WITH

RECEIVABLES MANAGEMENT?
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.
4. WHAT ARE THE BENEFITS OF RECEIVABLES MANAGEMENT?
Increased Sales: Providing goods and services on credit expands sales by retaining
old customers and attracting new customers.
Market share increased: when the firm is retaining old customers and attracting new
customers automatically the market share will increase.
Increase in profit: increased sales, leads to an increased profits.

5. WHAT ARE THE STEPS TO BE FOLLOWED IN DETERMINING THE

APPROPRIATE RECEIVABLE POLICY?
The following steps must be taken in determining the appropriate Receivable policy
Credit Standards- The term credit standards represent the basic criteria for the
extension of credit to customers. The quantitative basis of establishing credit
standards are:

Average Payment Periods

Credit References
Credit Ratings
Financial Ratios

6. WHAT FACTORS ARE TO BE CONSIDERED WHILE DECIDING THE

CREDIT STANDARDS?

Investment in receivables or average collection period

Collection Costs
Sales Volume
Bad debts expenses
The effects of relaxed or tightened credit standards can be proved with an

example in two manners Short-Term/ Marginal Approach

Long-Term approach
7. CUSTOMER EVALUATION- THE 5 CS?

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

8. 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
customers business
9. WHAT IS CREDIT PERIOD, CREDIT DISCOUNT AND CREDIT TERM?
CREDIT PERIOD

It refers to the length of time over which the customer are allowed to delay the

payments. Credit period differ from one market to another.

LENGTHENING Increase investment in receivables & bad debts loss
SHORTENING - Lower Sales, decrease in investment & reduce bad debt loss
CREDIT TERMS

The credit terms specify how the credit will be offered including length of credit,

interest rate on credit, cost of credit & so on.

E.g. 3/10 net 30 means 3 % cash discount if payment made within 30 days
CREDIT DISCOUNT

The credit discount is offered as an inducement for the credit buyer to pay promptly.
Different discount rates may be offered for different period

10. DETERMINANT OF POTENTIAL CREDIT POLICY?

Collection of Information
Credit Analysis
Credit Standard
Credit Period
Credit Terms
Credit Limit
Credit Discount
Discount Terms

11. BENEFITS OF RECEIVABLES MANAEMENT?

Helps improve customer satisfaction

Takes control of sales processes

Enhance your productivity

Streamline revenue allocation

Providing access to vital information

12. 5CS OF CREDIT ANALYSIS?

Character

Capacity

Capital

Collateral

Condition

13. STEPS IN DETERMINING THE APPROPRIATE RECEIVABLE POLICY?

Credit standards

Credit ratings

Credit references

Average payment periods

Financial ratios

14. FACTORS ARE CONSIDERED WHILE DECIDING THE CREDIT STANDARD?

Collection costs

Bad depts. Expenses

Sales volume

Long-term approach

Short-term approach

15. STEPS IN CREDIT ANALYSIS & DECISION?

Obtaining Credit information

a) Internal sources
b) External sources

Analysis of Credit information

a) Quantitative
b) Qualitative

16. COMPONENTS OF CREDIT TERMS?

Credit Period
Cash Discount
Cash Discount Period

17. COMPONENTS OF COLLECTION POLICIES?

Degree of collection efforts

a) Strict
b) Lenient

Type of collection efforts

a) Letters
b) Telephonic calls
c) Legal action

18. OBJECTIVES OF INVENTORY MANAGEMENT?

To achieve satisfactory levels of customer service while keeping inventory costs

within reasonable bounds

Level of customer service

Costs of ordering and carrying inventory

19. INVENTORY CONTROL TECHNIQUES?

ABC analysis
EOQ model
VED model
HML model
SDE model
FSN model

20. ASSUMPTIONS OF EOQ MODEL?

Only one product is involved

Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts

21. DERIVING THE EOQ?

We take the derivative of the total cost function and set the derivative (slope) equal to zero
and solve for Q.

QOPT =

2Ds/H

2 ( Annual Demand )( OrderSetup Cost )

Annual HoldingCost

22. WHEN TO REORDER WITH EOQ ORDERING?

Reorder Point - When the quantity on hand of an item drops to this amount, the

item is reordered
Safety Stock - Stock that is held in excess of expected demand due to variable

demand rate and/or lead time.

Service Level - Probability that demand will not exceed supply during lead time.

23. DETERMINANTS OF THE REORDER POINT?

The rate of demand

The lead time
Demand and/or lead time variability

Stock out risk (safety stock)

24. WHAT IS ABC ANALYSIS?

ABC analysis is an inventory categorization technique.
ABC analysis divides an inventory into three categories"A items" with very tight control and accurate records,
"B items" with less tightly controlled and good records, and
"C items" with the simplest controls possible and minimal records.
25. WHAT IS ABC CLASSIFICATION SYSTEM?
Classifying inventory according to some measure of importance and allocating control efforts
accordingly.
A- Very important
B - Mod. Important
C- Least important

NEFITS