Fin man 7 receivable management

1. MANAJEMEN PIUTANG

2. Topics Materials Covered arti penting investasi pada piutang prinsip pemberian kredit pengukuran efisiensi piutang anggaran pengumpulan piutang …… …… …… Please read each material before class and rehearse it after class MANAJEMEN PIUTANG

3. average collection period – the average length of time from a sale on credit until the payment becomes usable funds to the firm. The collection period consists of two parts: the time period from the sale until the customer mails payment, and the time from when the payment is mailed until the firm collects funds in its bank account. Accounts Receivable Management

4. Accounts Receivable Management: Changing Credit Standards The firm sometimes will change its credit standards to improve its returns and generate greater value for its owners. Effects of relaxation of Credit standards Variable Direction of change Effect on profit Sales volume Increase Positive Investment in accounts receivable Increase Negative Bad-debt expense Increase Negative

5. Key Ratios in Receivables Management Changing Credit Standards R eceivable Turnover = Net Sales Average Account Receivables Days Sales Uncollected = 365 Receivables Turnover Average Investment In accounts Receivables Total Variable Cost of annual Sales Turnover of Account Receivables = Turnover of Account Recevables 365 Average Collection Period =

6. Changing Credit Standards Example Dodd Tool, a manufacturer of lathe tools, is currently selling a product for $10/unit. Sales (all on credit) for last year were 60,000 units. The variable cost per unit is $6. The firm’s total fixed costs are $120,000. Dodd is currently contemplating a relaxation of credit standards that is anticipated to increase sales 5% to 63,000 units. It is also anticipated that the ACP will increase from 30 to 45 days, and that bad debt expenses will increase from 1% of sales to 2% of sales. The opportunity cost of tying funds up in receivables is 15%. Given this information, should Dodd relax its credit standards?

7. Additional Profit Contribution from Sales Analysis of Relaxing Credit Standards Additional Profit Contribution from Sales         Old Sales Level 60,000 Price/Unit $ 10 New Sales Level 63,000 Variable Cost/Unit $ 6 Increase in Sales 3,000 Contribution Margin/Unit $ 4 Additional Profit Contribution from Sales (sales incr x cost margin) $ 12,000        

8. Cost of marginal investment in A/R: Total variable cost of annual sales Under present plan: ($6 x 60,000 units) = $360,000 Under proposed plan: ($6 x 63,000 units) = $378,000 Turnover of account receivables Under present plan: 365 = 12.2 30 Under proposed plan: 365 = 8.1 45

9. Cost of marginal investment in A/R: Average investment in account receivables Under present plan: $ 360,000 = $ 29,508 12.2 Under proposed plan: $ 378,000 = $ 46,667 8.1 Average investment under proposed plan 46,667 - Average investment under present plan 29,508 Marginal investment in accounts receivables 17,159 x Required return on investment 0.15 Cost of marginal investment in A/R 2,574 Cost of Marginal Debts Under proposed plan: (0.02x$10/unitx63,000 units) = 12,600 Under present plan: (0.01 x $10/unitx60,000 units) = 6,000 Cost of marginal debts 6,600

10. Cost of marginal investment in A/R: Effects on Dodd Tool of a Relaxation of Credit Standards Aditional Profit contribution from sales [3,000 units x ($10-$6)] 12,000 Cost of marginal investment in A/R Under present plan: $ 360,000 46,667 12.2 Under proposed plan: $ 378,000 29,508 8.1 Marginal investment in A/R 17,159 Cost of marginal investment in A/R (0.15 x $17,159) (2,574) Cost of Marginal Debts Under proposed plan: (0.02x$10/unitx63,000 units) 12,600 Under present plan: (0.01 x $10/unitx60,000 units) 6,000 Cost of marginal debts (6,600) Net profit from implementation of proposed plan 21,174

11. Accounts Receivable Management Character: The applicant’s record of meeting past obligations . Capacity : The applicant’s ability to repay the requested credit . Capital : The applicant’s debt relative to equity. Collateral : The amount of assets the applicant has available for use in securing the credit. Conditions : Current general and industry-specific economic conditions. The Five C’ s of Credit

12. Finding the Optimum Level of Accounts Receivable Accounts Receivable represent your money sitting in someone else’s bank account. It earns you nothing! So, if the firm does grant credit, how do we minimize the impact on cash flow Firm’s credit policies must be reviewed and evaluate the impact of any proposed changes in policies based on the NPV of incremental cash flows due to the proposed changes

13. Sale are generally stated in the form X / Y, n Z This means that the customer can deduct X percentage if the account is paid within Y days; otherwise, the full amount must be paid within Z days. Example: 2/10 n 30 The company offers a 2% discount if the invoice is paid in 10 days. Otherwise, Balance due in 30 days. Account Receivable - Terms

14. Old Policy; 2/10, n30 35% of customers pay in 10 days 62% of customers pay in 30 days 3% of customers pay in 100 days ACP=(.35x10)+(.62x30)+(.03x100)=25.1 days New Policy; 2/10, n40 35%of customers pay in 10 days 60% of customers pay in 40 days 5% of customers pay in 100 days ACP=(.35x10)+(.60x40)+(.05x100)=32.5 days (If sales are $1M per day, this will cost $7.4M!) Average Collection Period - ACP

15. Analysis of Accts. Receivable Changes to Credit Policy Develop pro forma financial statements for each policy under consideration. Use the pro formas to estimate incremental cash flows by comparing forecasts to current policy cash flows. Use the incremental cash flows to estimate the NPV of each policy change. Choose the policy change that maximizes the value of the firm (highest NPV).

16. Example: ABC Corp is considering a credit policy change from offering no credit to offering 30 days credit with no discount Why might they do this? Increase sales Increase market share What costs will the firm incur as a result? Cost of carrying accounts receivable Potential increase in bad debts Credit analysis and collection costs Analysis of Accts. Receivable CHANGES

17. Analysis of Accts. Receivable Changes Assume the Net Incremental Cash Flows associated with ABC’s new credit policy are as follows: ( They lose one month of cash flow which they will have to borrow ) External financing (Init. Invest) = $28,000 t=0 Increase in sales = $30,000 Increase in COGS = $15,000 Increase in Bad Debts = $3,000 increase in Other Expenses = $5,000 Increase in Interest Expense = $500 Increase in Taxes = $2,600 Total Incr. Operating Cash Flow = $3,900/yr.

18. Analysis of Accts. Receivable Changes Calculate the NPV of the change (k = 12%): PV of the expected inflows of $3,900 per year from t = 0 to infinity (perpetuity) = $3,900/.12 = $32,500 NPV = PV of inflows - initial investment = $32,500 - $28,000 = $4,500 Since NPV > 0, ABC should undertake the credit policy change Note: If they keep the $28,000, cash flow at 12% = $3,360

19. Methods of Collection Send reminder letters. Make telephone calls. Send in big Gene Hire collection agencies. Sue the customer. Settle for a reduced amount. Write off the bill as a loss. Sell accounts receivable to factors. Most firms use some of the following: