Receivables Management

Part I

Prepared by the faculty

 Receivable management is the process of making decisions relating to in-
vestment in trade debtors. Certain investment in receivables is necessary to
increase the sales and the profits of the firm. But at the same time invest-
ment in this asset involves cost consideration also.
Importance of Receivable Management

• Cash flow is always considered as the bloodline of any business organization. Badly man-
aged Receivables can break the company.
• Most of the companies that go bankrupt have Cash flow problems. Companies with a lack of
profit can survive, but a lack of cash flow is fatal.
• Working Capital is one of the costliest forms of capital. One of the ways of calculating work-
ing capital requirements can be defined as the difference between Sales and Receivables.
• A reliable and predictable Receivables will ensure steady cash flow management of the orga-
nization. Amounts receivables with no due dates are useless.
• List the key factors that can be varied in a firm's credit policy and understand the trade-
off between profitability and costs involved.
• Understand how the level of investment in accounts receivable is affected by the firm's
credit policies.
• Critically evaluate proposed changes in credit policy, including changes in credit stan-
dards, credit period, and cash discount.
• Describe possible sources of information on credit applicants and how you might use
the information to analyze a credit applicant.
Credit and Collection Policies
A credit collection policy is a document that includes “clear, written guidelines and terms conditions
for supplying goods on credit, customer qualification criteria, procedure for making collections,
and steps to be taken in case of customer delinquency”
Analyzing the Credit Applicant
Credit analysis is the process of evaluating an applicant's loan request or a corporation's debt issue to
determine the likelihood that the borrower will live up to his/her obligations. In other words, credit anal-
ysis is the method by which one calculates the creditworthiness of an individual or organization.
Inventory Management and Control
Inventory control is a method of regulating the inventory you have on hand in your warehouse. On
the other hand, inventory management is the activity of forecasting and replenishing inventory, fo-
cused on when to order stock, in what quantities and from which supplier.
CREDIT AND COLLECTION POLICIES OF THE FIRM

Quality of Length of
Trade Account Credit Period
(1) Average
Collection Period
(2) Bad-debt
Losses
Firm
Possible Cash Collection
Discount Program
CREDIT STANDARDS
Credit Standards -- The minimum quality of
credit worthiness of a credit applicant that is
acceptable to the firm.
Why lower the firm’s credit standards?
The financial manager should continually lower the
firm’s credit standards as long as profitability from
the change exceeds the extra costs generated by
the additional receivables.
 CREDIT STANDARDS

Costs arising from relaxing credit

standards
A larger credit department
Additional clerical work
Servicing additional accounts
Bad-debt losses
Opportunity costs
 CREDIT TERMS

Credit Terms -- Specify the length of time over

which credit is extended to a customer and the
discount, if any, given for early payment. For
example, “2/10, net 30.”

Credit Period -- The total length of time over

which credit is extended to a customer to pay a
bill. For example, “net 30” requires full
payment to the firm within 30 days from the
invoice date.
 SEASONAL DATING

Seasonal Dating -- Credit terms that encourage

the buyer of seasonal products to take delivery
before the peak sales period and to defer pay-
ment until after the peak sales period.

 Avoids carrying excess inventory and the associated

carrying costs.
 Accept dating if warehousing costs plus the required
return on investment in inventory exceeds the required
return on additional receivables.
Reference:

• Chapter 15 of Khan, M.Y. and Jain, P.K.,. 7th Edition. Financial Management: Text, Problems and
Cases.
• https://www.enjayworld.com/blog/definitive-guide-to-receivable-management/
• Principles Corporate Finance by Richard A. Brealey , Stewart C. Myers , Franklin Allen 
Any Questions??