Receivable_Management_ghhghhUh4LX7DPNe.pptx

Receivable

1. RECEIVABLE MANAGEMENT

2. MEANING AND OBJECTIVE Management of receivables refers to planning and controlling of 'debt' owed to the firm from customers on account of credit sales. It is also known as trade credit management. The basic objective of management of receivables (debtors) is to optimise the return on investment on these assets . Large amounts are tied up in receivables, there are chances of bad debts and there will be cost of collection of debts. On the contrary, if the investment in receivables is low, the sales may be restricted, since the competitors may offer more liberal terms . Therefore, management of receivables is an important issue and requires proper policies and their implementation.

3. OBJECTIVES Monitor and Improve Cash Flow Minimizes bad debt losses Avoids invoice disputes Boost sales volume Improve customer satisfaction Helps in facing competition

4. ASPECTS OF MANAGEMENT OF DEBTORS Credit Policy: The credit policy is to be determined. It involves a trade-off between the profits on additional sales that arise due to credit being extended on the one hand and the cost of carrying those debtors and bad debt losses on the other. This seeks to decide credit period, cash discount, and other relevant matters. Credit Analysis: This requires the finance manager to determine as to how risky it is to advance credit to a particular party. Control of Receivable: This requires the finance manager to follow up with debtors and decide about a suitable credit collection policy. It involves both the laying down of credit policies and the execution of such policies.

5. COSTS OF RECEIVABLES COST OF FINANCING: Credit sales delay the time of sales realization & therefore the time gap between incurring the cost & the sales realization is extended. This results in the blocking of funds for a longer period. The firm on the other hand has to arrange funds to meet its own obligations towards payment to the supplier, employees, etc., and these funds are to be procured at some explicit or implicit cost. This is known as the cost of financing the receivables. ADMINISTRATIVE COST : A firm will also be required to incur various costs in order to maintain the record of credit customers both before the credit sales as well as after the credit sales. COST OF DEFAULT BY THE CUSTOMER: If there is a default by the customer & the receivables become partly or wholly, unrealizable, then this amount is known as bad debt, and also becomes a cost to the firm.

6. BENEFITS OF RECEIVABLES INCREASE IN SALES: Most firms sell goods on credit, either because of trade customs or other conditions. The sales can be further increased by liberalizing the credit terms. This will attract more customers to the firm resulting in higher sales & growth of the firm. INCREASE IN PROFITS : Increase in sales help the firm to increase its operating profit. EXTRA PROFIT: Sometimes, the firm makes the credit sales higher than the usual cash selling price. This brings an opportunity for the firm to make an extra profit over & above the normal profit.

7. FACTORS UNDER THE CONTROL OF THE FINANCE MANAGER Supervising the administration of credit . Contribute to top management decisions relating to the best credit policies of the firm . Deciding the criteria for selection of credit applications . Speed up the conversion of receivables into cash with aggressive collection policy.

8. FINANCING RECEIVABLES Pledging Factoring

9. APPROACHES TO EVALUATION OF CREDIT POLICIES

10. Q1 - PRACTICE PROBLEM

11. PRACTICE PROBLEM - SOLUTION

12. Q2 - PRACTICE PROBLEM

13. PRACTICE PROBLEM - SOLUTION

14. Reference book – Financial Management Theory & Practice by Prasanna Chandra Additional Reference material – Uploaded