Receivables Management

and Factoring
Nature of Credit Policy

 Investment in receivable
– volume of credit sales
– collection period
 Credit policy
– credit standards
– credit terms
– collection efforts
Goals of Credit Policy

 Marketing tool
 Maximisation of sales Vs.
incremental profit
– production and selling costs
– administration costs
– bad-debt losses
 Optimum Credit Policy

 Estimation of incremental profit

 Estimation of incremental investment in
receivable
 Credit Policy Variables
 Credit standards
 Credit analysis
– collection period
– default rate
• character
• capacity
• condition
• capital
• collateral
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
Credit Evaluation of Customers
 Credit information
– financial statements
– bank references
– trade references
 Credit investigation and analysis
– analysis of credit file
– financial analysis
– analysis of business and management
 Credit limit
 Collection efforts
 Monitoring Receivable

 Collection period
 Aging schedule
 Collection experience matrix
Inventory Management
 Nature of Inventory
 Stocks of manufactured products
and the material that make up the
product.
 Components:
– raw materials
– work-in-process
– finished goods
– stores and spares (supplies)
Need for Inventories

 Transaction motive
 Precautionary motive
 Speculative motive
Objectives of Inventory
Management
 Ensure a continuous supply of raw materials to
facilitate uninterrupted production
 Maintain sufficient stock of raw materials in
periods of short supply and anticipate price
changes
 Maintain sufficient finished goods inventory for
smooth sales operations and efficient customer
service
 Control inventory investment by maintaining
optimum inventory
 Inventory Management
Techniques
 Economic order quantity (EOQ)
– ordering costs: requisitioning, order placing,
transportation, receiving, inspecting and
storing, administration
– carrying costs: warehousing, handling, clerical
and staff, insurance, depreciation and
obsolescence
– ordering and carrying costs trade-off:
2AO
EOQ =
c
 Inventory Management
Techniques
 Reorder point under certainty
– lead time
– average usage
Reorder point = Lead time x average usage
 Reorder point under uncertainty
– safety stock
Reorder point = (Lead time x average usage)
+ safety stock
 Inventory Investment Analysis
 Estimation of incremental operating profit
 Estimation of incremental investment in
inventory
 Estimation of the incremental rate of
return (IRR)
 Comparison of the incremental rate of
return with the required rate of return
(RRR)
 Optimum inventory:
IRR = RRR
 Selective Inventory Control
 ABC analysis
– classify inventory into three categories
according to value
– control by importance and exception:
maximum attention to “A” items
 Inventory Management Process
 Explicitly state the inventory policy
 Create an inventory monitoring cell
 Management group for controlling purchases
 Periodic meetings between purchase, materials
planning and production executives
 Monthly reviews of total inventory at
plant/corporate level
 Detail inventory control to the total budgeting
system
 Identify critical inventory items for closer
scrutiny
Cash Management
 Cash Management

 Cash management is concerned with

the managing of:
– cash flows into and out of the firm,
– cash flows within the firm, and
– cash balances held by the firm at a point of
time by financing deficit or investing
surplus cash
 Facets of Cash Management
 Cash planning
 Managing the cash flows
 Optimum cash level
 Investing surplus cash
Motives for Holding Cash

 The transactions motive

 The precautionary motive
 The speculative motive
 Cash Planning
 Cash planning is a technique to plan
and control the use of cash.
 Cash Forecasting and Budgeting
– Cash budget is the most significant device
to plan for and control cash receipts and
payments.
– Cash forecasts are needed to prepare cash
budgets.
Managing Cash Collections and
Disbursements
 Accelerating Cash Collections
– Decentralised Collections
– Lock-box System
 Controlling Disbursements
– Disbursement or Payment Float
Investing Surplus Cash in
Marketable Securities

 Selecting Investment Opportunities:

– safety,
– Maturity, and
– marketability.
Short-term Investment
Opportunities:
– Treasury bills
– Commercial papers
– Certificates of deposits
– Bank deposits
– Inter-corporate deposits
– Money market mutual funds