1. Financial ManagementPresentation onDebtors or ReceivableManagementUnder GuidanceofMr.MahanteshKuri.Assistant ProfessorMBARani ChannammaUniversity, Belagavi.Presented By,Mr.NyamatAthani,Mr.Siddu JalliMBA 2nd SemesterRani ChannammaUniversity, Belagavi1 Receivables Management 27-Sep-14

2. CONTENTSMeaning of Receivables and its Management Objectives of R/M Credit Policy Credit Standard Credit Analysis Credit Terms Credit period Cash Discount Cash Discount Period Collection Policies Degree of Collection effort Types of Collection effort27-Sep-142Receivables Management 3. Receivables is defined as Debtowed to the firm by customers arising fromsale of Goods or Services in the ordinarycourse of business.When firm makes a sale of goodsor services and does not receive payment,the firm grants trade credit and createsaccounts receivable which could becollected before or when it becomes due,this process is called as ReceivableManagement27-Sep-14 Receivables Management 3 4. Objectives Trade off between benefits and cost ofextending the credit To promote the sale of goods and services To maximize the Profit of the firm To compete the competition To attract the Customers To collect the Receivables when it becomesdue.27-Sep-144Receivables Management 5. Credit PolicyCredit policy is one which provides theframework for the firm to determinewhether or not to extend credit to acustomer and how much credit to extend1. Credit Standard2. Credit Analysis3. Collection Cost4. Investments in R/M5. Bad Debt6. Sales Volume27-Sep-14 Receivables Management 5 6. Credit StandardsCredit standards are basiccriteria/minimum requirements forextending the credit to a customer.1. Credit ratings2. Credit references3. Average payment period4. Certain financial ratios.27-Sep-14 Receivables Management 6 7. CREDIT ANALYSISCredit analysis is the procedures forevaluating credit applicants, it includesgathering the credit information andanalyzing it.Information can beInternalExternalAgenciesFinancial statementsBank referencesTrade ReferencesAnalyses of the Information27-Sep-14 Receivables Management 7 8. CREDIT TERMSThe stipulations underwhich goods are sold on credit arereferred to as CREDIT TERMS.These relate to repayment of the amount under thecredit sale.1. Credit Period2. Cash Discount3. Cash Discount Period2/10 net 3027-Sep-148Receivables Management 9. Example:Gokak and company is currently operating as followsSelling products in Units ------------------- 30,000Selling product ----------------------------Rs 10 per unitVariable cost ----------------------------Rs 06 per unitFixed cost ----------------------------Rs 60,000Total cost per unit ----------------------------Rs 8 per unitAverage collection period ------------------- 30 daysPlanning to relax in credit periodCredit Period --------------------------- 45 daysExpected increase in sales ----------------- 15% increaseNo change in bad debt and Collection cost is negligible.It leads to increase in WC -----------------Rs 10,000The required rate on investment ------- 15%27-Sep-149Receivables Management 10. SOLUTION1. Cost of incremental investment in receivableProposed planNum of days in the year /Average collection period360/45 =8Present plan 360/30 =12Total cost of sales : num of unit *cost per unitPresent plan 30,000*8 =2,40,000Proposed plan (30,000*8)+(4,500*6) =26,7000Average investmentPresent plan =2,40,000/12 =20,000Proposed plan =2,67,000/8 =33,37527-Sep-14Receivables Management10 11. CONT . The cost of marginal investment in accountreceivableAverage investment with proposed plan 33,375-Less average investment with present plan 20,000Marginal investment 13,37515 per cent as required =13,375*15/100 =2,006.25Cost of working capital : 10,000*0.15 =1500(18,000 2,006 1,500 = 14,494)27-Sep-14Receivables Management11 12. Cash Discounts affect The sales volume will be increased Shorter collection period Negative impact on Profiteffect of increase in cash discountItem Direction of Change Effect on profitsSales volume Increases IncreasesAverage Collection Period Decreases IncreasesBad debts Decreases IncreasesProfit Decreases Decreases27-Sep-1412Receivables Management 13. Collection policiesReceivables Management 27-Sep-1413Collection Policy refers to theprocedures for collectingaccounts receivables when theyare due.These policy covers two aspects1. Degree of collection Effort2. Type of collection Efforts. 14. 27-Sep-14 14 Receivables ManagementDegree of collection policy refers to theintensity of collecting process. Either it can be Strict/Tight Lenient/Relaxed collection policyEffects of Tight Collection effortItem Direction of change Effects on ProfitBad Debts Decreases IncreasesAverage Collection Period Decreases IncreasesSales volume Decreases DecreasesCollection Expenditure Increases Decreases 15. This relates to the steps to betaken to collect over dues fromthe customers.LettersTelephone CallsPersonal visitsHelp of collection agenciesLegal action27-Sep-1415Receivables Management 16. ENJOY VisitReceivables Management 27-Sep-1416 Shrikant Ratan 17. Receivables Management 27-Sep-1417 18. Credit policyReceivables Management 27-Sep-1418OutletAt least two months toone year cashtransactionPersonal relationship 19. Credit termsReceivables Management 27-Sep-1419 One invoice is to be paid to execute nextinvoice 2% cash discount for cash transactionCollection of Dues 2 to 3% bad debts No legal action so far An extra employee is appointed to collect thedebt 20. 27-Sep-14 Receivables Management 20 21. Item Change in Direction Effect on ProfitsSales volume Increases IncreasesAverage collectionPeriodIncreases DecreasesBad Debts Increases DecreasesCollection cost Increases DecreasesInvestments inreceivablesIncreases Decreases4Receivables Management 27-Sep-14 21