receivables management n.
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RECEIVABLES MANAGEMENT

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RECEIVABLES MANAGEMENT - PowerPoint PPT Presentation

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RECEIVABLES MANAGEMENT

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  1. RECEIVABLES MANAGEMENT

  2. COSTS OF RECEIVABLES MANAGEMENT • OPPORTUNITY COST • COLLECTION COST • BAD DEBTS • INCREASED SALES • INCREASE IN MARKET SHARE • INCREASE IN PROFITS

  3. COVERAGE • Terms of Payment • Credit Policy Variables • Credit Evaluation • Credit Granting Decision • Control of Accounts Receivable • Credit Management in India

  4. TERMS OF PAYMENT • Cash Mode • Open Account • Bill of Exchange • Letter of Credit • Consignment

  5. CREDIT POLICY VARIABLES • The important dimensions of a firm’s credit policy are: • Credit standards • Credit period • Cash discount • Collection effort

  6. CREDIT STANDARDS • LiberalStiff • Sales Higher Lower • Bad debt loss Higher Lower • Investment Larger Smaller • in receivables • Collection costs Higher Lower

  7. IMPACT ON RESIDUAL INCOME OF RELAXATION P = [S(1 – V) - Sbn] (1 – t ) – k  I where P = change in Profit S = increase in sales V = ratio if variable costs to sales bn = bad debt loss ratio on new sales t = corporate tax rate I = increase in receivables investment

  8. Q.PSD Ltd. is considering relaxing its credit standards. S = Rs.15 million, bn = 0.10, V = 0.80, ACP = 40 days, k = 0.10, t = 0.4 P = [15,000,000 (1 – 0.80) – 15,000,000 x 0.10] (1 – 0.4) 15,000,000 – 0.10 x x 40 x 0.80 360 = Rs.766,667

  9. CREDIT PERIOD • LongerShorter • Sales Higher Lower • Investment in Larger Smaller • receivables • Bad debts Higher Lower

  10. IMPACT ON RESIDUAL INCOME OF LONGER CREDIT PERIOD P = [S(1 – V) - Sbn] (1 – t ) – k  I

  11. INCREASE IN RECEIVABLES INVESTMENT S0 S I = (ACPn – ACP0) + V (ACPn) 360 360 where: I = increase in receivables investment ACPn = new average collection period (after lengthening the credit period) ACP0 = old average collection period V = ratio of variable cost to sales S = increase in sales

  12. Q. X Limited is considering extending its credit period from 30 to 60 days. S = Rs.50 million, S = Rs.5 million, V = 0.85, bn = 0.08, k = 0.10, t = 0.40 P = [5,000,000 x 0.15 – 5,000,000 x 0.08] (0.6) – 0.10 (60 – 30) x + 0.85 x 60 x = [750,000 – 400,000] (0.6) – 0.10 [4,166,667 + 708,333] = – 277,500 5,000,000 360 50,000,000 360

  13. LIBERALISING THE CASH DISCOUNT POLICY P = [S(1 – V) - DIS] (1 – t ) + k  I

  14. DECREASING THE RIGOUR OF COLLECTION PROGRAMME RI = [S(1 – V) - BD] (1 – t ) – k  I

  15. TRADITIONAL CREDIT ANALYSIS Five Cs of Credit Character : The willingness of the customer to honour his obligations Capacity : The operating cash flows of the customer Capital : The financial reserves of the customer Collateral : The security offered by the customer Conditions : The general economic conditions that affect the customer Case History : Checking customers past transaction to extend credit to the customer :

  16. MONITORING OF ACCOUNTS RECEIVABLES • RECEIVABLES TURNOVER • AVERAGE COLLECTION PERIOD (ACP) • AGEING SCHEDULE • COLLECTION MATRIX

  17. RECEIVABLES TURNOVER • How quickly RECEIVABLES are CONVERTED in to CASH Receivables Turnover Rate = Total Net Sales Avg. Debtors* (*including Bills Receivables)

  18. AVERAGE COLLECTION PERIOD (ACP) • Time (no. of Days) • the Credit Sales • are converted • In to Cash ACP= 365/ Receivables Turnover

  19. AGEING SCHEDULE • Statement showing • AGE WISE GROUPING OF DEBTORS OR • Breaking up of Debtors • according to the LENGTH OF TIME • for which they have been OUTSTANDING

  20. COLLECTION MATRIX • Shows • the collection pattern (in months) • for the CREDIT SALES • made in a month