Receivables management Receivables means ‘debts owed to the firm by customers’. It arises when a firm sells its products or services on credit and does not receive cash immediately. It is essentially a marketing tool to promote sales and thereby increase profits. Granting credit and creating debtors amounts to blocking of the firm’s funds. Hence it needs a careful analysis and proper management.

Characteristics of receivables Blocking of funds Futurity Element of risk Based on economic value

Objective of receivables management To have a trade-off between benefits and costs associated with granting of credit

Benefits of granting credit Increased sales and anticipated profits

Costs associated with granting credit Collection cost Capital cost Delinquency cost Default cost.

Determinants of size of receivables Level of credit sales Credit policy Market conditions Collection efforts Paying habits of customers

Decision areas in receivables management Credit policies Credit terms Collection policies

Credit policies The credit policy of a firm provides a framework to determine whether or not to grant credit facility to a customer and how much credit to extend It involves

Dimensions of credit policy Credit standards criteria which a firm follows in selecting customers for the purpose of credit extension. A company may follow either tight/restrictive credit standard or loose/liberal credit standards. Tight credit standard would mean lower sales, lower receivables, lower collection costs and lower bad debt losses. On the contrary if the credit standards are loose, the firm may have larger sales, larger receivables, increased collection costs and risk of increase in bad debts.

Dimensions of credit policy Credit analysis is the second aspect of credit policy of a firm. It involves two steps namely obtaining credit information internal source external source analysing credit information. quantitative analysis qualitative analysis

Credit terms The stipulations under which the firm sells goods on credit to customers are called credit terms. The stipulations include Credit period Cash discount Cash discount period

Credit period The length of time for which credit is extended to customers is called the credit period. It affects the profitability as well as the cost of the firm. There will be a net increase in operating profit only when the cost of extended credit period is less than the incremental operating profit.

Cash discount It is the amount of reduction in payment offered to customers to induce them to pay their dues within a specified period of time, which is less than the normal credit period. This discount is expressed as a percentage of sales.

Cash discount period It refers to the duration during which the discount can be availed of. These terms are written in abbreviations, for eg. 2/10 net 30. This means that 2% discount will be granted if the customer pays within 10 days; if he does not avail the offer he must make payment within 30 days. If the customer does not pay within 30 days, he would be deemed to have defaulted. Cash discounts have an impact on sales, amount of receivables, bad debts and profit per unit.

Collection policies They refer to the procedures followed to collect the receivables, when, after the expiry of the credit period they become due. It involves two aspects namely Degree of effort to collect the overdues and Type of collection effort.