Receivables Management

6 March 2014

Topics
Nature and Goals of Credit Policy Optimum Credit Policy Credit Policy Variables Credit Evaluation of Individual Accounts Monitoring Receivable Summary of Key Concepts
6 March 2014

Nature of Credit Policy

Investment in receivable
volume of credit sales collection period

Credit policy
credit standards credit terms collection efforts

6 March 2014

Goals of Credit Policy

Marketing tool Maximisation of sales Vs. incremental profit
production and selling costs administration costs bad-debt losses
Costs & Benefits Profitability

Liquidity Tight Credit policy Loose

6 March 2014

Optimum Credit Policy Estimation of

Costs & Return (%) Marginal cost of capital

incremental profit Estimation of incremental investment in receivable Estimation of incremental rate of return (IRR) Comparison of incremental rate of return with required rate of return (RRR) 2014 Optimum credit 6 March policy: IRR = RRR

Marginal rate of return Tight Credit policy Loose

Credit Policy Variables

Credit standards Credit analysis
collection period default rate
character capacity condition capital collateral

6 March 2014

Credit Policy Variables

customer categories
good accounts bad accounts marginal accounts

numerical credit scoring

ad hoc approach simple discriminant approach multiple discriminant approach

6 March 2014

Credit Policy Variables

Credit-Granting Decision
CREDIT GRANTING DECISION

NO CREDIT

GRANT CREDIT

PAYMENT RECEIVED BENEFIT PV OF FUTURE NET CASH FLOWS NO PAYOFF

PAYMENT NOT RECEIVED COST PV OF LOST INVESTMENT

NET PAYOFF PV OF (BENEFIT - COST)

Credit-granting Decision

6 March 2014

Credit Policy Variables

Credit terms
credit period cash discount

Collection policy and procedures

regularity of collections clarity of collection procedures responsibility for collection and follow-up case-by-case approach cash discount for prompt payment

6 March 2014

 Credit information
financial statements bank references trade references

Credit Evaluation of Customers

Credit investigation and analysis

analysis of credit file financial analysis analysis of business and management

Credit limit Collection efforts 6 March 2014