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Receivables is defined as the debt owed to the firm bycustomers arising from sales of goods and services inthe ordinary course of business.When a firm makes an ordinary sale of goods or services and does not receive payment ,the firm grantstrade credits and creates accounts receivable whichcould be collected in future.These are the claims of the firm against its customers &

form a part of its current assets.Receivables are also known as Account Receivables,Book debts, trade receivables etc

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P rocess of making decisions relating toinvestment in trade debtors.Objective of Receivables management is to

promote sales & profit until that point is reachedwhere the return on investment in further fundingof receivables is less than the cost of funds raisedto finance that additional funds.

Receivables Management is also called T radeCredit Management.

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Reach Sales potentialCompete with CompetitorsOptimize the return on investments on theassets

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Receivables

Inventory

Cash

OperatingCycle

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Achieving growth in sales and profit.

Meeting Competition.

Establish and communicate the credit policies.

Evaluation of customers and setting credit limits.

Ensure prompt and accurate billing.

Maintaining up-to-date records.

Initiate collection procedures on overdue accounts.

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LEVEL OF SA LE S: The most important factors indetermining the volume of Debtors is the level of credit sales.Others being constant ,more credit sales mean more Debtors andvice versa.

CR EDIT TE RMS: A change in credit terms will have adirect effects on Debtors.When credit terms are relaxed in leads to an increase in Debtors balance and vice versa.

CO LLE CTI ON PO LI CY: Collection policy of a firm alsohas some influences on the actual Debtors balance.Due to arelatively lax collection policy,customers do not meet their commitments on time.

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CAP IT AL COS T: It is the cost on the use of additional capital tosupport credit sales which alternatively could have been employedelsewhere.

CO LLE CTI ON COS T S: Administrative costs incurred incollecting the accounts receivable. Costs of additional steps to increasethe chances for eventful payment.

DELI NQU E NCY COS T S: Cost of financing the debtors for extended period, and cost of additional steps to collect over-due debtors.

DE FAU LT COS T S : Amounts which are to be written off as Bad-debts, which cannot be collected in spite of serious efforts .

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` Size of credit sales` Credit policies` Terms of trade` Expansion plans` Relations with profits` Credit collection efforts` Habits of customers

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` Credit period allowed` Effect of cost of goods sold` Forecasting expenses` Forecasting average collection period & discounts` Average size of recievables

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It is the determination of credit statandard and creditanalysis.The credit policy of a firm provides the frameworkto determine whether or not to extend credit to a

customer and how much credit to extend .The credit policy decision of a firm has following dimensions .A)CR EDIT S TAND AR D -It is the minimum requirement for

extending credit to a customer.

B )CR EDIT P E R IOD- P eriod allowed to the customers for making thepayments

C) CASH DI SCOUN T - It is allowed to expedite the collection of receivables.

D ) DI SCOUN T P E R IOD

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Following factors should be considered while deciding whether to relax creditcredit standards or not.

CO LLE CTI ON COS T- The implications of relaxed credit standardsare more credit,a large credit departments to service accounts receivable andincrease in collection cost while opposite in case of strict credit standards.

AVE RAG E CO LLE CTI ON P E R IOD- The extension of tradecredit to slow paying customers would results in a higher level of accountsreceivable and vice versa.

B AD DEBT EX P E NS E S - Bad debt can be expected to increase withrelaxation in credit standards and vice versa.

SA LE S V OL UME- Sales volume is expected to increase as standards arerelaxed,conversely tightening decreases sales.

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` Collecting credit information` Credit analysis` Credit decision` Financing Investment in Receivables & factoring

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The first step in credit analysis is obtaining the information which form thebasis for the evaluation of customers.The sources of information may be internal such as the historical paymentpattern of a customers,or may be external such as :

I)F INANC IAL S TATE ME NT S -The published financial statements such asbalance sheet and profit and loss account.

II)B ANK R E FE R E NC E S -The firms banker collects the necessaryinformation

from the applicants Bank.

III)T RA DE R E FE RE NC E S -Reputed Credit organization are approachedabout

the credit worthiness of proposed customers.

IV)CR EDIT B UR E AU R E POR T S -Credit Bureau reports from organizationwhich specializes in supplying credit information can also be utilized.

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The information collected from different sources are analyzed todetermine the credit worthiness of the applicant.The analysis shouldcover two aspects:

I)QUAN TIT ATIVE -The quantitative aspects is based on thefactual information available from the financial statements,the pastrecords of the firms and so on.

II)QUA LIT ATIVE- The qualitative judgement would cover aspects relating to the quality of management.

.

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Customers Evaluation-The 5 Cs-

CHARAC TE R - Reputation, Track Record

CAPAC IT Y- Ability to repay( earning capacity)

CAP IT AL - Financial P osition of the co.

COLL ATE RA L - The type and kind of assets pledged CON DITI ONS - Economic conditions & competitive

factors that may affect the profitability of the customers

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` Decision is to be taken that whether the credit is tobe extended & if yes then upto what level.

` If customers creditworthiness is above credit

standards , then there is no problem in takingdecision.` If decisions are difficult to made, then credit

should be compared with likely bad debt losses.

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` Collection policy can be lenient or strict.` Strict policy will involve more efforts on collection.` Lenient policy means less efforts on collecting

recievables.

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CO LLE CTI ON M ET HO D

Centralised / Decentralised collection systemP ost dated chequesP ay Orders / Bank draftsBills of Exchange

Lock box SystemDrop box SystemFactoringCollection staff/ agents

Debt collector Del Credere agentConcentration banking

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` Centralised / D ecentralised collection system

` Post dated cheques

` Pay Orders / B ank drafts

` B ills of E xchange

` L ock box System

` D rop box System

` Factoring

` Collection staff/ agents

` D ebt collector

` D el Credere agent

` Concentration banking

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Factoring is a financial servicedesigned to help firms to arrangetheir receivable better. Under atypical factoring arrangement afactor collects the accounts on duedates, effects payments to the firm

on these dates and also assumesthe credit risks associated with thecollection of the accounts.

Sometimes the factor provides anadvance against the values of

receivable taken over by it.In suchcases factoring serves as a source

of short - term finance for the firm.

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` Centralised / D ecentralised collection system

` Post dated cheques

` Pay Orders / B ank drafts

` B ills of E xchange

` L ock box System

` D rop box System

` Factoring

` Collection staff/ agents

` D ebt collector

` D el Credere agent

` Concentration banking

2 1

an agency, factor, or broker actingas an intermediary between sellersand buyers and guaranteeingpayment

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` INCR E AS ED SA LE S - The impact of liberal trade policy re sultin increased in sales volume.

` S T RE AMLI NE REVE NUE ALL OCA TI ON - To fitbusiness needs calculations are managed.

` E NHANC E PRO D UC TIVIT Y- The decrease in administrativecost enhances productivity.

` HEL PS IMPRO VE CUS T OME R SA TI SFAC TI ON -Enhances service level and increase retention with customizedinformation.