How does a debtor arise? Would you like to buy my goods? I am unable to pay now and so I will not buy.
How does a debtor arise? You can buy the goods and pay after 30 days. OK. In that case, I will take the goods. Click to continue When you make sale on credit, you give rise to a debtor.
At the end of 30 days… 30 days have passed and I have come to collect the money. I am having cash flow issues. Can I pay you later? Click to continue SHOULD YOU ACCEPT?
What are the implications? If you had collected the money… The company would have deposited it into the bank and saved on interest. Click to continue
How much interest? For a debtor amount of Rs. 1,00,000, the per day interest comes to 1,00,000 X 15% X 1/365 = Rs. 41 If the company has a turnover of Rs. 100 crores, for each day that it does not collect the debtor, it loses Rs. 4,11,000
And, that isn’t all… Not collecting the debt on time risks it becoming a bad debt. Typically, companies have 2% of sales as bad debts. For a 100 crore company, this comes to Rs. 2 crore in a year.
In Short… It is not a simple decision to say, ‘yes, the customer can pay later’. You have to consider the implications in terms of: a.Lost interest b.Bad debts Click to continue
Finally… We sell on credit to give an incentive to the customer to buy. We should collect on the due date to minimize our losses.
Quiz!!! To test your understanding… Click to continue