Financial Management

Receivables Management Click to edit Master subtitle style

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Receivables management

The term receivables is defined as debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business. receivable represent an extension of credit to customers, allowing them a reasonable period of time in which to pay for the goods received.
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Accounts

Cost and benefits of credit sales

Costs Benefits Collection sales Increased cost Capital cost Increased profitability Delinquency cost Increased customer Default

loyalty

cost

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Credit policy
Under

credit policy Managers have to take two important decisions or not to extend credit ? much credit to be extend ?

Weather How

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How much credit to be extended ?

Depends

upon Credit standards. cost

Collection Average Level Level

collection period

of bad debt losses of sale

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Credit components
Sales

Profit
Bad

Debts

Profit
Average

collection period Profit

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Example : Star electronics

Following Sales:

is the details of star electronics 30,000 units at Rs 10 per cost per unit is Rs .6 unit

Variable Average Total

cost per unit, 30,000 units, is Rs 8. fixed cost is Rs 60,000. Average 5/24/12 collection period 30

Marginal profit
Perticulars (A)Current Plan: 1.Sales revenue (30,000 units Rs 10) 2.Less: Costs: (a)Variable (30,000 Rs 6) (b)Fixed 3.Profits from sales (1) (b) Proposed Plan: 1.Sales revenue (34500* 10) Amount Amount 3,00,000 1,80,000 60,000 2,40,000 60,000

Rs 3,45,000 2.Less: Costs: (a)Variable (34500*6) 2,07,000 (b)Fixed 60,000 2,67,000 3.Profits from sales (@) 78,000 5/24/12 Incremental Cash flow from proposed 18000

Marginal investments in Receivables

Turnover of Accounts receivables of days/ Average collection period : 360/30 = 12 times 360/45 = 8 times

Number Present

Proposed: Total

cost of Assets of units cost per unit : 30,000 Rs 8 = Rs 2,40,000

Number Present

Proposed

: = (30,000 Rs 8) + (4,500 Rs 6) =2,67,000 investments in accounts 5/24/12 receivables

Average

Marginal investments in Receivables

Average

33,375

investments with proposed plan

Rs

Less

average investment with present plan Rs20,000 investments Rs13,375 cost of marginal investment 13375 *.15 = 2006.25 of working capital Rs10000*.15 = 1500 benefit from relaxed standard incremental cost + cost

Marginal

Opportunity Rs

Cost Net

Incremental 5/24/12 profit

Cash flows of credit

Credit Sale

Check mailed

Check deposite d

Cash Available

Cash Collection period Accounts receivable period

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Cash flow from credit

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Total cost of grating credit

Carrying costs

Required return on receivables Losses from bad debts Costs of managing credit and collections

Shortage

costs

Lost sales due to a restrictive credit policy

Total

cost curve

Sum of carrying costs and shortage costs Optimal credit policy is where the total cost curve is minimized
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Terms of sale
Basic

Form: 2/10 net 45

2% discount if paid in 10 days Full amount in 45 days if no discount is taken

Buy

$500 worth of merchandise with the credit terms given above

Pay $500(1 - .02) = $490 if you pay in 10 days Pay $500 if you pay in 45 days
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Finding implied interest rate

Implied

interest rate is the return company earns when customers do not take the discount.
terms of 2/10 net 45

Credit

Period rate = 2 / 98 = 2.0408% Period = (45 10) = 35 days 365 / 35 = 10.4286 total periods in a year
EAR = (1.020408)10.4286 1 = 23.45 %
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In class exercise
Calculate

the implied interest rate for 2/10 net 30

Period rate = 2 / 98 = 2.0408%

Period = (30 10) = 20 days 365 / 20 = 18.25 total periods in a year

EAR = (1.020408)18.25 1 = 44.58 %

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Credit analysis
Process

credit

of deciding which customers receive information

Gathering

Financial statements Credit reports Banks Payment history with the firm

Determining

Creditworthiness

5 Cs of Credit Credit Scoring

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Credit information
Financial Credit

statements

reports with customers payment history to other firms history with the

Banks Payment

company

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5cs of credit
Character Capacity

willingness to meet financial obligations ability to meet financial obligations out of operating cash flows financial reserves assets pledged as

Capital

Collateral

security
Conditions

general economic 5/24/12 conditions related to customers

Collection policy
Monitoring

receivables

Keep an eye on average collection period relative to your credit terms Use an aging schedule to determine percentage of payments that are being made late

Collection

policy

Delinquency letter Telephone call Collection agency Legal action

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