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1. Working capital management: management
of receivables
•Reference: Chapter 18, pages 660-673 (Textbook)
Dr. Reena Nayyar
Financial Management-2
PGDM 2023-25
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2. 2

3. Management of receivables
•Designing the credit policy variables:
•Setting the credit standards
•Deciding the credit limits
•Deciding the credit period
•Policy of cash discount
•Designing the collection policy
•Monitoring of the accounts receivables
•Identification of non-paying and slow paying customers
•Factoring services
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4. Credit evaluation (evaluating the creditworthiness
of the customers)
•Collecting credit related information from the customer:
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5. Sources of credit related information
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6. Sources of credit related information
•Financial statements
•Bank references
•Trade references
•Ratings offered by credit rating agencies
•Credit reports and/or credit scores from credit information
companies (CICs)
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7. Sources of credit related information…..
•Ratings offered by credit rating agencies:
•CRISIL (S&P, LLC),
•CARE (diversified shareholders),
•ICRA (Moody’s),
•Brickwork Rating (Canara Bank),
•India Rating and Research Pvt. Ltd (Fitch group)
•SMERA (SIDBI, Dun & Bradstreet India and leading banks in
India), an initiative of MoF and RBI
•Company specific ratings and instrument specific rating
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8. Interpreting creditworthiness through credit
ratings
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9. Credit rating scale of credit rating agencies in India
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Rating Scale Grade CRISILCAREICRAIRARBrickwork
Rating
Highest Safety
Investment
grade
AAA AAAAAAAAA AAA
High Safety AA AA AA AA AA
Adequate Safety A A A A A
Moderate Safety BBB BBBBBBBBB BBB
Moderate risk
Junk grade
BB BB BB BB BB
High risk B B B B B
Very high risk C C C C C
Default D D D D D

10. SMERA
•SMERA (SIDBI, Dun & Bradstreet India and leading banks in India), an
initiative of MoF and RBI
•SME Credit Rating is based on rigorous assessments of business &
financial risks and management evaluation.
•The rating is done on a scale of 1 (highest) to 8 (lowest)
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11. Sources of credit related information……
•Readymade credit reports on customer's creditworthiness/credit
scores from credit information companies (CICs):
•Dun and Bradstreet
•RBI issued license to following four companies to act as CICs in India
•Credit information bureau of India limited (CIBIL)
•Equifax
•High Mark
•Experian
•The agencies are administered by The Credit Information Companies
(Regulation) Act, 2005 and also by rules and regulations issued by the
Reserve Bank of India.
•Financial data of consumers and commercial entities from various lenders.
 
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12. Credit evaluation based upon five Cs
•Character (use trade references, past credit history)
•Capacity (financial ratios: liquidity, efficiency, profitability, analysis of
cash flow statement)
•Capital (solvency ratios: debt to equity, debt to capital, financial
leverage ratio)
•Collateral
•Conditions
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13. Defining credit policy variables based upon the
classification of customers
Rating of the
customer
Classification of
customers
AAA Prime
AA+ to AA Least risky
A+ to A Average risk
BBB+ to BBB- High risk
Below BBB- Highest risk
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Credit standard: To offer
credit to the customers
with credit rating from
AAA to A

14. Defining credit policy variables based upon the
classification of customers
Rating of the
customer
Classification of
customers
Credit limit (%
of credit sales
in total sales)
Credit period
AAA Prime 100% 90 days
AA+ to AA Least risky 75% 60 days
A+ to A Average risk 50% 45 days
BBB+ to BBB- High risk Nil Nil
Below BBB- Highest risk Nil Nil
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15. Defining credit policy variables based upon the
classification of customers
Rating of the
customer
Classification of
customers
Credit limit (%
of credit sales
in total sales)
Credit period
AAA Prime 100% 90 days
AA+ to AA Least risky 75% 60 days
A+ to A Average risk 50% 45 days
BBB+ to BBB- High risk Nil Nil
Below BBB- Highest risk Nil Nil
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16. Defining credit policy variables based upon the
classification of customers
Rating of
the
customer
Classification
of customers
Credit limit
(% of credit
sales in total
sales)
Credit periodCredit period
industry
AAA Prime 100% 90 days 80 days
AA+ to AALeast risky 75% 60 days 60 days
A+ to AAverage risk 50% 45 days 40 days
BBB+ to
BBB-
High risk Nil Nil
Below BBB-Highest risk Nil Nil
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17. Deciding the credit period
•What is the maximum time period for which the company
wants to extend credit to the customers.
•Is there any policy of cash discount?
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18. Understanding discount terms
•2/10, net 30
•1/10 EOM, net 60
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19. Understanding discount terms
•Determine the last date of payment with and without discount for the
following sale assuming it is a non-leap year:
•Date of sale: 15 January
•Term of sales: 1/10/eom, n/60
Answers:
With discount: 10
th
February
Without discount: 16
th
March
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20. Evaluating the changes in credit terms
•Q7 (from strict to liberal)
•Q15 (from liberal to strict)
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22. Q15
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24. Evaluating the change in the credit period
•An analysis of Orange Limited’s credit policy reveals that it is very loose in
terms of credit period. At present, the company is giving an extended
credit period of 45 days (industry average for ACP is 30 days) and this is
resulting into huge losses on account of bad debts.
•To overcome the problem, the CFO of the company has decided to shorten
the credit period from 45 days to 30 days so as to bring it equal to the
industry standards.
•The expected result of the policy would be as follows:
•Reduction in credit sales from 6 lac to 5 lac rupees,
•Reduction in bad debt losses and collection expenses from 4% to 2% and
2% to 1% respectively.
•The variable cost ratio is 80%, tax rate 40%, after tax cost of
funds/required ROR is 12%
•Evaluate the impact of the change on actual rate of return.24

25. Evaluating the change in the credit period
•Exxon Ltd.
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26. Evaluating the change in the credit period
•Exxon Ltd.
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34. Evaluating the discount decision
•Home Assignment: Sagar company
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35. Evaluating the discount decision
•Q6 from textbook
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37. Evaluating the discount decision
•Home Assignment: Addidas case, Practice question on Reva Ltd and
Ani limited
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38. Practice questions from textbook
•ST1 to ST3
•Q1-Q15
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39. Designing the collection policy
•Identify the paying behavior of the receivables:
•Compare the stated/benchmark credit period with actual credit
period
•Aging schedule
•Accounts Receivables Collection Matrix
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40. Aging schedule
Age of Account receivables (in
days)
Percentage of outstanding
receivables
Outstanding amount (in
rupees)
0-25 50 200000
26-35 25 100000
36-45 12.5 50000
46-60 7.5 30000
Above 60 5.0 20000
100 400000
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Stated /benchmark credit period = 25 days

41. Accounts Receivables Collection Matrix
Percentage of receivables/credit
sales collected during the
January
Sales
February
Sales
March
Sales
April
Sales
May
Sales
Month of Sale 13 14 15 12 10
First following month 39 30 40 40 30
Second following month 30 39 15 24 21
Third following month 12 10 20 10 24
Fourth following month - - - 2 4
Not collected at all 6 7 10 12 11
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42. Designing the collection policy
•Giving extra time
•On 27 March 2020, the
 RBI  announced a loan moratorium scheme, allowing
lending institutions to grant a temporary relief to borrowers for payment of
installments of term loans falling due between 1 March 2020 to 31 May 2020,
to the next three months, that is to June 1, 2020 to August 31, 2020 .
 
•Later, the moratorium period was extended for another three months, that is
to September 1, 2020 to November 30, 2020 .
•Forcing recovery
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43. Designing the collection policy
•Whether company wants to take help of professional agencies
namely ‘Factors’
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45. Factoring
•Factoring is a mechanism of converting the credit sales into cash sales
by selling/assigning the accounts receivables to institutes who
specializes in management of receivables and are called factors
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46. Process of factoring
The Client (Seller) sells goods to the buyer and
prepares invoice with a notation that debt due on
account of this invoice is assigned to and must be
paid to the Factor (Financial Intermediary).
The Client (Seller) submits invoice copy with
Delivery Challan, to the factor, showing receipt of
goods by buyer.

47. Process of factoring…..
The Factor, after scrutiny of these papers, allows
payment (usually upto 80% of invoice value). The
balance is retained as Retention Money (Margin
Money). This is also called Factor Reserve.
Once the invoice is honored by the buyer on due
date, the Retention Money credited to the Client’s
Account.
Till the payment of bills, the Factor follows up the
payment and sends regular statements to the
Client.

48. Services offered by factors
1.Financial assistance
2.Managing receivable:
•Credit administration and monitoring
•Credit collection
3.Other services:
•Information on creditworthiness of the prospective buyers
•Financial counselling to the seller
•Financing the purchase of inventory by the seller
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49. Charges for factoring services

Cost of Factoring = factoring commission + finance cost comprising
of interest charges on partial payment
Factoring commission vary as per size of transaction, financial
strength of the customer (buyer) but usually ranges from 0.50% to
1.50% value of receivables purchased or invoice value (globally). In
India, 2.5% to 3%.
Commission is collected up-front.
For making immediate part payment, interest is charged. Interest is
higher than rate of interest charged on working capital finance by
banks.

50. Factoring services in India
•Came into being in 1991 on the recommendation of
C S Kalyan Sundaram committee constituted by RBI.
•Initially banks permitted to offer factoring services
through their subsidiaries.
•Initially factoring services started by SBI bank and
Canara Bank through their subsidiaries namely, SBI
Factors &
 Commercial Services Private Limited
and
CanBank Factors limited.
•Factoring Act in 2011 gave legal framework required
for the growth of factoring services in India.
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51. Factoring services in India…..
•SBI Factors and
 Commercial Services Private Limited
•Canbank Factors Limited
•Hongkong & Shanghai Banking Corporation Limited
•Reliance Capital Limited
•Penta Consulting Private Limited
•Export Credit Guarantee Corporation of India Limited
•Drip Capital Services India
•Shree Shyam Financial Services
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52. Thank you!
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