Ch 28

1. Chapter - 28
Receivables Management
and Factoring

2. 2Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Topics
Nature and Goals of Credit Policy
Optimum Credit Policy
Credit Policy Variables
Credit Evaluation of Individual Accounts
Monitoring Receivable
Summary of Key Concepts

3. 3Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Nature of Credit Policy
Investment in receivable
volume of credit sales
collection period
Credit policy
credit standards
credit terms
collection efforts

4. 4Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Goals of Credit Policy
Marketing tool
Maximisation of
sales Vs.
incremental profit
production and
selling costs
administration costs
bad-debt losses
Profitability
Liquidity
Tight Credit
policy
Loose
Costs & Benefits

5. 5Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Optimum Credit Policy
Estimation of incremental
profit
Estimation of incremental
investment in receivable
Estimation of incremental
rate of return (IRR)
Comparison of incre-
mental rate of return with
required rate of return
(RRR)
Optimum credit policy:
IRR = RRR
Marginal cost of capital
Marginal rate of return
Tight Credit
policy
Loose
Costs & Return (%)

6. 6Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Credit Policy Variables
Credit standards
Credit analysis
collection period
default rate
character
capacity
condition
capital
collateral

7. 7Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Credit Policy Variables
customer categories
good accounts
bad accounts
marginal accounts
numerical credit scoring
ad hoc approach
simple discriminant approach
multiple discriminant approach

8. 8Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Credit Policy Variables
Credit-Granting Decision
Credit-granting Decision
CREDIT GRANTING
DECISION
NO CREDIT GRANT CREDIT
PAYMENT
RECEIVED
BENEFIT
PV OF FUTURE
NET CASH
FLOWS
PAYMENT
NOT RECEIVED
COST
PV OF LOST
INVESTMENT
NET PAYOFF
PV OF
(BENEFIT - COST)
NO PAYOFF

9. 9Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
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

10. 10Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
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

11. 11Financial Management, Ninth
Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
Monitoring Receivable
Collection period
Aging schedule
Collection experience matrix