RECEIVABLES MANAGEMENT 1

RECEIVABLES MANAGEMENT 1 - Transcript

RECEIVABLES MANAGEMENT

Receivables

are the debt owned to the company by its customers arising out of sale of goods and services in ordinary course of business

OBJECTIVES OF RM
To

increase total sales To increase total profits To meet increasing competition OR it is to promote sales and profits while keeping in mind that various cost associated with it should not exceed its benefits

COSTS








Collection Cost Administrative cost incurred in collecting receivables Capital Cost Cost on the use of additional capital to support credit sales which could have been alternatively employed somewhere else Delinquency Cost Cost arising out of failure of customers to pay on due date Default Cost Over dues that cannot be recovered

BEFEFITS
Increased

sales and Anticipated Profits

FORMULATION OF CREDIT POLICY
Credit

policy is determination of credit standards and credit analysis It includes various variables like


Credit Standards Credit Period Cash Discount Collection Program

CREDIT STANDARDS
These

are basic criteria or minimum requirement for extending credit to a customer Customers are rated as High Good Fair and Limited Say if a firm is extending credit to its High and Good rated customers it is foregoing profit from sales to Fair Limited

Brush Up
Variable

Cost Fixed Cost Contribution and Variable ratio Note In all problems it is assumed that all fixed costs are recovered from existing sales and total contribution from new sales will be additional profits

EXERCISE Credit Standards
Existing

sales of Y Co is Rs 2 Crore Current customers are with High and Good Ratings Sale will go up by Rs 24 Lakhs if Co extend credit sales to Fair rated customers also Average Collection Period ACP is likely to be 45 days and bad debts on new sales will be 10 Contribution to sales ratio CSR is 20 and Cost of funds COF are 15

P S 1 V K I Bn S Where P Change in profit S Change in sales Increase in Sales V Variable Cost K Cost of Funds Bn Bad debt Loss ratio on new sales I Increase in Receivables Investment calculated as S 360 ACP V

CREDIT PERIOD
It

is length of time allowed for customers to pay their purchases P S 1 V K I Bn S where I So 360 ACPn ACPo S 360 ACPn V



Existing sales of a Co is Rs 180 lakh It is currently extending credit to its customers of net 30 days CSR is 20 and Cost of Capital is 15 The company is contemplating to increase its sales by Rs 16 lakh to be achieved by means of lengthening the existing period to net 45 days The bad debt losses on additional sales is expected to be 5 Should company go for Policy Change or not

CASH DISCOUNT
It is offered to induce customers to pay prompt payment Now P will be P S 1 V K I DIS DIS pn So S dn po So dn where pn proportion of discount sales after liberalizing So Sales before liberalizing old sales dn new discount percentage do old discount percentage