RECEIVABLE MANAGEMENT

“Any fool can lend money, but it takes a lot of skill to get it back”

 What are receivables?

• Receivables are sales made on credit basis.

 Why do we need receivables?

• Reach sales potential

• Competition

 Understanding Receivables

• As a part of the operating cycle

• Time lag b/w sales and receivables creates need for working capital

• DECISION FOR GRANTING CREDIT

• Decision based on cost-benefit analysis

• Positive net benefit-Credit granted (Highest Net benefit policy chosen)

• Negative net benefit- Credit not granted.

• Accounts Receivable Management

Are you running a business?

Do you require financing assistance?

Accounts receivable management may be exactly what your business needs to get
started or to grow into that successful company you've dreamed about. Everyone
knows that any flourishing company needs adequate financing in place in order to
prosper and grow. That is exactly what an accounts receivable management firm can
do for you. From helping to reduce the risk of bad debt to supplying your company
with cash for its accounts receivables, the benefits of dealing with an accounts
receivables management firm are endless.
• Accounts receivable management explained
If you are new to the world of business finance, you may not know enough about
accounts receivable management in order to make an informed decision on whether it
is a viable option for your business. In brief, accounts receivables management
companies offer financing services to new companies by paying cash in place of the
sale of receivables (debts owing).
• No one needs to explain to you that a company needs a broad level of cash flow to
make ends meet; from paying employees to paying suppliers to investing in company
growth, finances are vital to the health and growth of any company, large or small.

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 Yet, without any collateral or established credit history, a bank is very unlikely to
provide any business with sufficient financing.

This is where accounts receivable management can help you. For example, rather than wait
for your customers to pay their invoices-this can often take between 30 and 90 days-you can
benefit from accounts receivable management by using these receivables as collateral. By
selling them at a small discount to an accounts receivable management company, you can
have the cash you need within a few days, rather than a few months.

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 account

•
• Services offered by accounts receivable management companies
One of the most common services offered by accounts receivable management
agencies is the offer of cash in return for the sale of your company's account
receivables. Sometimes people mistake this type of financing for a loan; accounts
receivable management is not a loan. Instead, an accounts receivables company, often
referred to as a factoring company, purchases your invoices from you. The invoices
will still be sent by your company to your customers, but payments are mailed to the
factoring company.
• When you hire an accounts receivables management firm, they will assess your
clients' credit history to determine which clients are considered a safe risk to assume.
This credit checking is another service offered by many such companies, and can
benefit your company by highlighting which clients may be potential risks for loss.
After an accounts receivable company has purchases the rights to your invoices, you
can receive a large portion of the invoices in cash; often this is about 80% of the
invoice total. Once your clients have paid their invoices in full, you receive the rest of
the money from your invoices, with a small percentage paid to the accounts receivable
management company for their services.
• Receivables factoring is a safe and effective way to inject cash into your company
quickly and with little risk. Because no collateral other than receivables are required,
you have everything to gain by contacting us for more information today.
• Start today by contacting us here or on our toll-free number. Or apply here and get the
accounts receivable funding process going today!

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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

• 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

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

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 Field visit: to get information of the existence and general condition of the customer’s
business

• BENEFITS

Helps improve customer satisfaction:

enhance service level and increase retention with customized information.

Takes control of sales processes:

manage your sales process more effectively by measuring trends and analyzing
performance.

Enhance your productivity:

help reduce administrative costs and enhance office productivity

Streamline revenue allocation:

managed calculations to fit your business needs

• Providing access to vital information

• COLLECTION METHODS

Centralised / Decentralised collection system

Post – dated cheques

Pay Orders / Bank drafts

Bills of Exchange

• Lock – box System (Under a lock box system, customers are advised to mail their
payments to special post office boxes called lockboxes, which are attended to by local
collection banks, instead of sending them to corporate headquarters.

Thus the lock box system:

(i) cuts down the mailing time, because Cheque are received at a nearby post office
instead of at corporate headquarters,

(ii) reduces the processing time because the company does not have to open the
envelopes and deposit the Cheque for collection, and

(iii) shortens the availability delay because the Cheque are typically drawn on local banks )

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• Drop – box System

• Factoring (Factoring is a financial service designed to help firms to arrange

their receivable better. Under a typical factoring arrangement a factor collects
the accounts on due dates, effects payments to the firm on these dates and also
assumes the credit risks associated with the collection of the accounts.
 Sometimes the factor provides an advance against the values of receivable taken over by
it. In such cases factoring serves as a source of short-term finance for the firm. )

• Collection staff/ agents

• Debt collector

• Del Credere agent(an agency, factor, or broker acting as an intermediary between sellers
and buyers and guaranteeing payment )

• Concentration banking (firm may open collection centres (banks) in different parts of the
country to save the postal delays. This is known as concentration banking. A

• The firm may instruct the customers to mail their payments to a regional collection
centre / bank rather than to the Central Office

• The Cheque received by the regional collection centre are deposited for collection into a
local bank account

• The concentration banking results in saving of time of collection )

 CONTROL OF RECEIVABLES MANAGEMENT

• DAILY SALES OUTSTANDING (DSO)

DSO = Accounts Receivable

Avg. Daily Sales

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AGEING SCHEDULE

Classifies the outstanding accounts receivables at a given point of time into

different age brackets. Ex.

Age Group (days) % of receivables

0-30 30

31-60 40

61-90 25

>=90 5

• ABC Analysis of Receivables

A – Represents a small proportion of accounts of debtors representing a large

value

B – Represents moderate value

C – Represents a large number of accounts of debtors but representing a small

amount

Category % of accounts to % of Balance

Total Accounts Outstanding to
Total Debtors’
Balance
A 15 75
B 35 20
C 50 5

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PROFORMA

Type A- If Fixed Costs is given

Credit Policy Present Policy Option 1 Option 2

Credit Period (days/ xx xx xx

weeks/months)

Particulars Rs. Rs. Rs.

Sales xxxx xxxx xxxx

Less: Variable Cost xx xx xx

Contribution xxx xxx xxx

Less: Fixed Cost xx xx xx

Profit [Benefits (A)] xxx xxx xxx

Total Cost= Variable xxx xxx xxx

Cost +Fixed Cost
Average Investment in
Receivables
(Based on Total Costs)

Costs of Extending Credit:

1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. xx xx xx

in Receivables)

2) Bad debts as % of Sales xx xx xx

3) Credit Collection and Admin costs xx xx xx

Total Costs [B] xxxx xxxx xxxx

Net Benefits [A-B] xxx xxx xxx

Incremental Net Benefits --- xx xx

Type B: If Fixed costs is NOT given

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 Credit Policy Present Policy Option 1 Optio
Credit Period (days/ weeks/months) xx xx xx
Particulars Rs. Rs. Rs
Sales xxxx xxxx xxx
Less: Variable Cost xx xx xx
Contribution [Benefits (A)] xxx xxx xx
Average Investment in Receivables xxx xxx xx
(Based on Sales)
Costs of Extending Credit:
1) ____ % Opportunity Cost of Capital xx xx xx
(Calculated on Avg. Invst. in Receivables)
2) Bad debts as % of Sales xx xx xx
3) Credit Collection and Admin costs xx xx xx
Total Costs [B] xxxx xxxx xxx
Net Benefits [A-B] xxx xxx xx
Incremental Net Benefits --- xx xx

Optimizing cash flow with proper accounts receivable

management
Many businesses suffer from poor cash flow despite generating healthy profits.  Often poor
credit control results in overdue receivables, unpaid cheques and bad debts.

Businesses miss on growth opportunities and even close their doors every day, not because
they arent profitable enough, but because they are strangled by poor cash flow. The problem is
that while their profit and loss statement shows success, their bank account cries poor.
Excessive money tied up in delinquent receivables, bad checks, and bad debt write-offs, rob
businesses of valuable cash flow, handcuffing their ability to grow or even stay in business at
all.

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It doesnt take long for a business to get caught up in a spiraling trend of increasingly late
receivables, only needing a few additional delinquent accounts to start the process. Most
companies lack the expertise and manpower needed to handle a spike in delinquent accounts.
Soon, their staff is doing more work chasing late receivables, and they end up neglecting the
easier to collect, more current accounts. Eventually, a higher and higher percentage of
accounts become delinquent and more and more accounts become uncollectible, forcing
companies to employ expensive collection agencies to recover at least some of their money at
a big loss or they write off the debt completely. The end result is a loss in profitability and a
serious strain on cash flow.

There are some more obvious, common sense practices that companies can employee to
maintain a healthy accounts receivable portfolio. A few examples include:

1. Perform a credit history check before extending credit.

2. Set and adhere to credit limits.
3. Establish your credit terms in writing on statements and invoices
4. Require all sales and money management staff to know and follow credit policies.

As for maintaining or restoring a healthy accounts receivable portfolio, companies may need
to invest in additional personnel or outside services with expertise in delinquent debt
collection. If a companys receivables are large enough and they have a budget which allows
them to add experienced, full-time debt collectors to their staff, they should make the
investment in additional personnel. If a company cant afford it or their delinquent receivables
dont require full-time attention, outsourcing would be a better alternative.

National Revenue Corporation is a collections agency that specializes in "preventative

maintenance" collections strategies. They offer variety of low, fixed fee solutions that make it
attractive for businesses to employ their services to perform collections on delinquent
accounts right as they become delinquent. They provide the necessary expertise to collect on
the harder, delinquent accounts, while their clients staff focuses its efforts on the more current,
easier to collect accounts. With this approach, both current and delinquent account collections
improve yielding improved cash flow and a well-balanced accounts receivable portfolio.

.
 

HOT DEAL
Atlas Financial Services

Increase your profitability through accounts receivable management.

Have Atlas Financial Services help keep your business in the black by assisting you in the
collection of your delinquent accounts. For this HOT DEAL Lake Oswego Chamber
members are being offered our services at a 35% commission rate on consumer accounts and
as low as 20% on commercial accounts. There are no fees involved and if we litigate on your
behalf, we pick up the up-front legal costs. In other words, it doesn't cost you anything for us
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to make the attempt and we only earn our commission if we succeed in recovering your
delinquent accounts.

For more information contact Ron Gayer:

Phone: 503-297-0419
Email: ron_gayer@hotmail.com

Improving hospital billing and receivables

management: principles for profitability

Credit Research Center, Purdue University, West Lafayette, IN.

Abstract

For many hospitals, billing and receivables management are inefficient and costly. Economic
recession, increasing costs for patient and provider alike, and cost-containment strategies will
only compound difficulties. The author describes the foundations of an automated billing
system that would save hospitals time, error, and, most importantly, money.

CONCLUSION

The framework of analysis of all decision area in

receiavable management is to secure a trade off
Between the cost & benefits off the mesurabe effect

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On the sales volume,capital cost due to change in
Investments in debtors,collection costs,bad debts & so
on.
The firm should select the alternatives which has
potential of more benefits than the cost.

REFERENCES
Kishore, Ravi.M,Financial Management,2004,Fifth Edition ,Taxmann, New Delhi

Machiraju H.R.,Indian Financial System,1998,Vikas Publishing house.

James C Van Home, Finance management & Policy,2002,Twelfth Edition,Prentice Hall of

india.

Prasanna Chandra, Financial Mndanagement; Theory & Practice, 2001,fifth edition (Reprint),

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 Tata McGraw Hill.

I.M. Pandey,Finance Management,2005,Ninth Edition, Vikas publishing house

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