ACCOUNTS RECEIVABLE

MANAGEMENT
September 2, 2017

Group 6

Jonic Par
Kristine Raule

Group 6:
Accounts Receivable Management
 LEARNING OBJECTIVES
• AR Management Definition and Terms
• Importance of Accounts Receivable Management
• What is “DSO”?
• Significance And Purpose Of AR Management
• Key areas of AR Management
• Assessing Credit worthiness
• Collecting Cash
• Designing Sales and Credit Terms
• AR Flow Chart
• Sample of Actual AR management

Group 6:
Accounts Receivable Management
 Accounts receivable is defined as
“debt owed to the firm by customers arising
from sale of goods or services in the
ordinary course of business”.
 AR Management Definition and Terms
• Account Receivables Management refers to the set of policies, procedures, and
practices employed by a company with respect to managing sales offered on
credit.

• It encompasses the evaluation of client credit worthiness and risk, establishing

sales terms and credit policies, and designing an appropriate receivables collection
process.

• Accounts receivables are found on the balance sheet of a company, and are
considered a short-term asset.

• They are the one of the backbones of sales-generation, and thus must be managed
to ensure they are eventually translated into cash-flows.

• A company that fails to efficiently convert its receivables into cash can find itself in
a poor liquidity position, crippling its working capital and facing unpleasant
operational difficulties

Group 6:
Accounts Receivable Management
 Importance of AR Management
• Determining the customer’s credit rating in
advance
• Frequently scanning and monitoring customers
for credit risks
• Maintaining customer relations
• Detecting late payments in due time
• Detecting complaints in due time
• Reducing the total balance outstanding (DSO)
• Preventing any bad debt in receivables
outstanding
Group 6:
Accounts Receivable Management
 What is 'Days Sales Outstanding - DSO'

• Days sales outstanding (DSO) is a measure

of the average number of days that a
company takes to collect revenue after
a sales has been made. DSO is often
determined on a monthly, quarterly or annual
basis and can be calculated by dividing the
amount of accounts receivable during a given
period by the total value of credit sales during
the same period, and multiplying the result by
the number of days in the period measured

Group 6:
Accounts Receivable Management
 Daily Sales Outstanding
• The formula for calculating days sales outstanding can be represented
with the following formula:

• A low DSO value means that it takes a company fewer days to collect its
accounts receivable. A high DSO number shows that a company is selling
its product to customers on credit and taking longer to collect money.

Group 6:
Accounts Receivable Management
 Daily Sales Outstanding
For example, suppose that during the month of July, Company A made a total of $500,000 in credit sales and
had $350,000 in accounts receivable. There are 31 days in July, so Company A’s DSO for July can be calculated
as:

($350,000 / $500,000) x 31 = 0.7 x 31 = 21.7

With a DSO of 21.7, Company has a very short average turnaround in converting its receivables into cash.
Generally speaking, a DSO under 45 is considered low; however, what qualifies as a high or low DSO may often
vary depending on business type and structure.

For example, a DSO of 40 may still cause cash flow problems for a small or new business that has little
available capital. Because of the lower earnings that often accompany small or new businesses, such
businesses often rely on obtaining their accounts receivable quickly in order to cover ff:
• startup costs,
• wages,
• Overhead
• other expenses.
If they cannot collect payments quickly enough, they may struggle to meet these costs. On the other hand, a
DSO of 60 may cause few issues for a large and well-established corporation with high available capital. Though
the company could likely improve its earnings by reducing its DSO and thereby maximize its potential to
reinvest earnings, it is unlikely that the company will need to trim salaries or cut other costs in order to make
ends meet.
Group 6:
Accounts Receivable Management
 Significance And Purpose Of Receivable
Management
The basic purpose of firm's receivable management is to determine effective credit policy that increases
the efficiency of firm's credit and collection department and contributes to the maximization of value of
the firm. The specific purposes of receivable management are as follows:

1. To evaluate the creditworthiness of customers before granting or extending the credit.

2. To minimize the cost of investment in receivables.

3. To minimize the possible bad debt losses.

4. To formulate the credit terms in such a way that results into maximization of sales revenue and still
maintaining minimum investment in receivables.

5. To minimize the cost of running credit and collection department.

6. To maintain a trade off between costs and benefits associated to credit policy.

Group 6:
Accounts Receivable Management
 KEY AREAS OF ACCOUNTS RECEIVABLE MANAGEMENT

• Before a company grants credit to a customer it should ensure, as

far as possible, that the customer is worthy of that credit and that
bad debts will not result. Checks should continue to be carried out
on existing customers as a company would like to have early
warning of any problems which may be developing. This is
especially true for key customers of the company.
• Once the decision has been taken to grant credit, then suitable
credit terms must be set and the receivables that arise must be
monitored efficiently if the costs of giving credit are to be kept
under control.
• A key area of the management of accounts receivable is the final
collection of cash from customers. Any company must have a
rigorous system to ensure that all customers pay in a timely fashion
as, without this, the level of receivables and the cost of financing
these receivables will inevitably rise, as will the risk and cost of bad
debts.
Group 6:
Accounts Receivable Management
 ASSESSING CREDITWORTHINESS
• bank reference
• trade reference
• credit rating/reference agency
• financial statements
• information from the financial media
• visit

Group 6:
Accounts Receivable Management
 COLLECTING CASH
• monthly statements
• chasing letters
• chasing phone calls
• personal approach
• stopping supplies
• legal action
• external debt collection agency

Group 6:
Accounts Receivable Management
 Benefits of AR Management
• Increase Sales – Providing goods or services
on credit expand sales by retaining old
customer and attracting new customers.
• Market Share Increased - When the firm is
able to retain old customer and attracting new
customer automatically market share will
increased.
• Increase Profit - increased sales , leads to an
increased profit
Group 6:
Accounts Receivable Management
 Distributor AR Flow Chart
Customer
Order

Provide Check AR
Invoice copy Due AR must
for another AR be settled

Deliver Goods Payment of AR

Group 6:
Accounts Receivable Management
PROJECTED GSV FOR FY 17-18 255,234,813

DISCOUNT TO ABSOLUTE PAYMENT FY 16-17 Actual Absolute

Channel % Contribution FY 17-18 Plan FY 16-17 Actual STT
TRADE DISCOUNT TERMS Discount
Supermarkets 48% 123,233,586.31 2.76% 3,403,587 5.97 111,604,660 3,082,408
Grocery 10% 25,716,188.58 3.05% 784,247 1.11 25,258,015 770,275
Wholesaler 3% 7,025,339.00 2.88% 202,423 0.71 5,871,425 169,175
Public Market 13% 33,727,909.28 1.74% 588,038 0.19 26,489,556 461,839
Sari-Sari Stores 27% 70,161,683.84 1.26% 885,913 0.04 62,098,605 784,102
TOTAL 102% 259,864,707.00 2.28% 5,267,799 8.01 231,322,260.72 5,267,798.74
Payment Terms Grid
Account Type Terms (Days) % control Wtd Terms
Supermarket 7 34.47% 2.41
Supermarket 15 2.15% 0.32
Supermarket 21 0.00% -
Supermarket 30 10.77% 3.23
Groceries 7 6.72% 0.47
Groceries 15 2.83% 0.42
Groceries 21 0.00% -
Groceries 30 0.71% 0.21
Wholesalers 0 1.49% -
Wholesalers 7 6.27% 0.44
Wholesalers 15 1.19% 0.18
Wholesalers 21 0.00% -
Wholesalers 30 0.30% 0.09
Market Stalls 0 12.42% -
Market Stalls 7 0.04% 0.00
Market Stalls 15 1.23% 0.18
Sari-Sari Stores 0 19.10% -
Sari-Sari Stores 7 0.02% 0.00
Sari-Sari Stores 15 0.28% 0.04
Group 6: WTD TOTAL 100% 8.01

Accounts Receivable Management

Group 6:
Accounts Receivable Management