Recmgmt

Receivables Management
Receivable management is aims to promote

sales & profits until that point is reached
where the returns that the company gets from
funding of receivables is less than the cost that
the company has to incur in order to fund these
receivables.
Objectives of receivable management
 Creating,preserving & collecting A.R.
 Determining & communicating credit policies
 Credit evaluation of customers
 Prompt & accurate billing
 Maintaining up-to-date records of A.R.
 Collection procedures on overdue accounts
 Increased sales,profitability & market share
Cost of maintaining receivables
 Cost of capital blocked in receivables
 Administrative costs
 Collection costs
 Delinquency costs I.e.costs incurred on
overdue A.R.
 Defaulting costs
Receivables Management – How?
1. Formulation of credit policy
2. Credit evaluation
3. Monitoring receivables
1.Formulation of credit policy
 Credit policy encompasses the policy of a
company w.r.t.:
 Credit standards adopted
 Credit period extended to customers
 Amount of cash discount & period
 Collection program
• The credit policy followed is influenced by the

practices followed by the industry.
Formulation of credit policy
 Optimum credit policy is a trade-off between:
 Increased credit sales leading to increased
profits (Incremental Benefit)&
 The cost of increased receivables in the form
of cost of funds locked in receivables & loss
due to incidence of bad-debts (Incremental
cost).
2.Credit Evaluation
 It refers to assessing the creditworthiness of a
customer before granting credit to him.
 The first step is to obtain credit information

about the customer through internal & external
sources.
5 C model for credit evaluation
 Character
 Capacity
 Collateral
 Conditions
 Capital (Liquidity position)
Sources of credit information
 Annual reports of the company
 Obtaining bank references/trade references
 Credit bureaus
 Firm’s experience
3.Monitoring receivables
 Monitoring the payment of receivables is an
important aspect.
 Measures employed:
 Days sales outstanding
 Ageing Schedule
 Collection Matrix
Days Sales outstanding
 The average number of days sales outstanding
is done at the end of the month or quarter.
 DSO = A.R. at the end of time chosen
Average daily sales
 If DSO are within pre-specified norm then the
status of receivables are regarded under control
 If it is higher then it calls for improvement if
collection policy as they are slow
DSO - Example
Month Sales A.R. Month Sales A.R.
Jan 230 390 July 200 340
Feb 245 500 Aug 200 360
Mar 250 520 Sept 220 360
Apr 150 310 Oct 200 460
May 150 300 Nov 225 360
June 180 320 Dec 230 315
DSO example
Quarter Avg. collection period
First 520 = 65 days
(230+245+250) / 90
Second 320 = 61 days

(150+150+180) / 91
Third 360 = 53 days

(200+200+220) / 92
Fourth 315 = 44 days

(200+225+230) / 92
Ageing Schedule
 It depicts the age-wise distribution of A.R. at a
given time.
Age 0-30 31-60 61-90 Total
Customer
A 2 3 .5 5.5
B 1.5 1.5 1.5 4.5
C .5 - .1 .6
D .5 - - .5
Total 4.5 4.5 2.1 11.1

Ageing Schedule(contd.)
 The actual ageing schedule of a firm is
compared with a standard ageing schedule to
judge the efficiency of receivable
management.
 A greater proportion of receivables in higher
age group,compared to the stadard,indicates
need for improvement in A.R. management.
Collection Matrix
 DSO & Ageing are popular traditional measures for
monitoring receivables.
 However they suffer the limitation that they are
influenced not only by payment behaviour but also
sales pattern (increasing or decreasing sales)
 Collection matrix studies the changes in the payment
behaviour of customers by depicting the pattern of
collections associated with credit sales.
 It indicates whether the collection is improving,
stable or deteriorating.
 It is also useful for projecting cash inflows based on
historical records of collections
Collection matrix example
% collection January February March
during:
Month of sales 15 13 10
First following 42 31 42
month
Second 21 26 26
following month
Third following 22 25 12
month

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Receivables Management

Receivable management is aims to promote

• The credit policy followed is influenced by the

 The first step is to obtain credit information

Second 320 = 61 days

Third 360 = 53 days

Fourth 315 = 44 days

B 1.5 1.5 1.5 4.5

Total 4.5 4.5 2.1 11.1

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