Receivable Management
Unit 5th
Financial Management
MBA 2nd Semester
Department of Business Administration,
University of Lucknow
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Receivables Management
Meaning
Accounts receivable management is the process of making
credit sales and ensuring that resulting debtors pay their
dues on time. It helps the business to prevent itself from bad
debt losses and running out of cash at any point of time. It
strengthens the profitability and liquidity position.
Objective of Receivable Management
1. To Ensure an optimum level of receivables
2. To minimize bad debt losses
3. To maintain proper records of receivables
4. To boost up the sales volume
5. To Improve customer satisfaction
6. To face competition
7. To meet industry requirement
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How to Ensure Optimum Level of Receivables
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Process of Accounts Receivable Management
An Account receivable management process
involves the following:
1. Analysis of paying ability of the customers
2. Extending credit sales to them.
3. Monitoring any risk of non-payment or delay in
receiving the payments.
4. Maintaining good Customer relations
5. Addressing the complaints of the customers.
6. Keeping proper records
7. Recovering payments
8. Preventing any bad debts
9. Analyzing the process
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Significance of Receivables Management
1. Cash flow management
2. Sales optimization
3. Profit planning
4. Cost control and bad debts minimization
5. Business growth
6. Good customers relations
7. Good suppliers relations
8. Meeting industry requirement
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Benefits of Receivables Management
1. Better Cash Flow.
2. To manage our operations and expansion plans.
3. Lower Working Capital Requirements.
4. Lowered Interest cost
5. Optimum debtors minimizes bad debt losses.
6. Better Bargaining with Sellers.
7. To bargain effectively with Suppliers.
8. Stop profit leakages
9. Sales and profit management
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Basic Issues involved in Receivable Management
1. Getting paid within the agreed upon terms.
2. Actually getting paid or receiving empty promises from
customers.
3. How to maintain good customer relations with late paying
customers.
4. Having enough time to manage the collections process.
5. Actually reaching customers when trying to follow up.
6. Dealing with credit approvals and offering lines of credit.
7. Collecting from customers that appear to be failing.
8. Resolving payment disputes.
A solid credit collection strategy can help solve many of the above
problems in a relatively short period of time, but having the right
policy in place is crucial.
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Components of Credit Policy
1. Credit eligibility standards.
It means the type of customers to whom we can offer credit
sales.
2. Credit terms
It means period of credit and discounts on early payment
etc.
3 Clear documentation.
All the customers which are extended credit sales should be
properly documented so that a proper monitoring can be
possible.
4. Collections efforts or follow up
The customers which have been provided credit sales should
be approached timely to recover dues from them otherwise
these customers would delay payment and may result into
bad debts.
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(a) Debtors Turnover Ratio:
(b) Average Credit Period (in days):
(c) Debtors to Current Assets Debtors:
(d) Debtors to Total Assets Debtors:
(e) Bad Debts to Sales:
(f) Bad Debts to Debtors:
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Factoring Services
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Services provided by the factor
1. Finance
2. Collection of debts
3. Maintenance of debts
4. Protection of Credit Risk
5. Maintenance of debtors ledger
6. Debtors follow-up
7. Advisory services
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Advantages and Disadvantages of Factoring
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Numerical on credit policy
ABC Ltd. is making a sales of ₹16,00,000 and it extends a credit of 90
days. However, in order to overcome the financial difficulties, it is
considering to change the credit policy. The proposed terms of credit
and expected sales are given as under:
Policy Proposed Terms Expected Sales (₹)
1 75 days 15,00,000
2 60 days 14,50,000
3 45 days 14,25,000
4 30 days 13,50,000
5 15 days 13,00,000
The firm has a variable cost of 80% and fixed cost of ₹ 1,00,000. The
cost of capital is 15%. Evaluate different proposed policies and advice
which policy is the most beneficial. A year may be assumed to have
360 days.
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Solution:
Present Proposed Policies
Policy Policy-1 Policy-2 Policy-3 Policy-4 Policy-5
(90 days) (75 days) (60 days) (45 days) (30 days) (15 days)
Sales (₹) 16,00,000 15,00,000 14,50,000 14,25,000 13,50,000 13,00,000
Less VC @ 80% 12,80,000 12,00,000 11,60,000 11,40,000 10,80,000 10,40,000
Less FC 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
Profit (A) 2,20,000 2,00,000 1,90,000 1,85,000 1,70,000 1,60,000
Total cost (VC+FC) 13,80,000 13,00,000 12,60,000 12,40,000 11,80,000 11,40,000
Average Receivables at 3,45,000 2,70,833 2,10,000 1,55,000 98,333 47,500
cost (total cost x credit
period /360)
Cost of debtors @15% 51,750 40,625 31,500 23,250 14,750 7,125
(B)
Net Profit (A-B) 1,68,250 1,59,375 1,58,500 1,61,750 1,55,250 1,52,875
Conclusion: As we see, after a change in present credit policy, the maximum benefit is available
in policy-3 (₹ 161,750), hence, policy-3 is the most beneficial and can be adopted.
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Concluding Remarks
1. Receivables management simply means credit sales management.
2. While managing receivables the manager ensures optimum level of
receivables.
3. Optimacy of receivables comes when there is trade off between the
liquidity and profitability.
4. Both of the liquidity and profitability are affected by level of credit sales.
5. Benefits of credit sales are increase in sales and profits of organization.
6. If sales are offered without a proper policy then losses of bad debts on
account of defaults of payment from debtors are more.
7. If sales are restricted from the fear of bad debt losses then sales and
profits both are low.
8. In order to take the proper benefit of credit sales a proper credit policy
needs to be formulated.
9. In a proper credit policy considerations are given on the four aspects:
credit standards, credit terms, proper documentation and collection
efforts.
10. Factoring services are of great help in the management of receivables.
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