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5.1 Receivable Management

The document discusses objectives and techniques for managing accounts receivable, including costs associated with receivables, factors for determining receivables policies, and methods for credit monitoring. It addresses setting credit policies, terms, and standards as well as aging receivables and calculating average collection periods. The goal of receivables management is to collect payments as quickly as possible without damaging sales through aggressive collection practices.

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Joshua Cabinas
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635 views18 pages

5.1 Receivable Management

The document discusses objectives and techniques for managing accounts receivable, including costs associated with receivables, factors for determining receivables policies, and methods for credit monitoring. It addresses setting credit policies, terms, and standards as well as aging receivables and calculating average collection periods. The goal of receivables management is to collect payments as quickly as possible without damaging sales through aggressive collection practices.

Uploaded by

Joshua Cabinas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Receivables

Management
Working Capital Management
Objectives

Costs Associated with Receivables


Receivable
Manageme Two Aspects of AR Management

nt
Factors in Determining Receivables Policy

Techniques for Credit Monitoring


Objectives
of To collect accounts receivable as quickly as

Receivable possible without losing sales from high-


pressure collection techniques.

Manageme
nt
Collection Cost

Costs
Associated Opportunity Cost
with
Receivable Bad-Debt Losses/Default Cost
s
Carrying Cost
Two Aspects in AR Management

Setting the Credit Policy Credit Monitoring


Factors in Determining AR Policy

Credit selection and Credit terms Collection policy


standards
Credit
Selection
and
Credit Standards are the firm’s minimum
requirements for extending credit to a
customer.

Standard
s
Character
• This is determined by your credit score and credit history.

Capacity
• Based on your income and other financial obligations, will you be able to pay

The Five
back the loan?

C’s of
Collateral
• Do you have assets that can be claimed if you don’t make your payments?

Credit Capital
• This is determined by applicant’s debt relative to equity.

Conditions
• How do you intend to use the money?
Credit Credit terms are the terms of sale for
customers who have been extended credit

Terms by the firm.


Types of Discounts

TRADE DISCOUNT CASH DISCOUNT


Encourage bulk sales Encourage prompt payment
Not recorded in the books E.g. 2/10; n/30
Involves defining strategies on how the
company can collect from their credit

Credit customers.

Policy Two Types of Credit Policy


1. Lenient / Relaxed
2. Stringent/Strict
Credit Policy

Relax Policy Strict Policy

Factors Effect on Profitability Factors Effect on Profitability

High Sales Volume Positive Low Sales Volume Negative

High Investment in AR Negative Low Investment in AR Positive

High Bad debts Negative Low Bad Debts Positive


Credit Credit monitoring is the ongoing review of a
Monitorin firm’s accounts receivable to determine
whether customers are paying according to
the stated credit terms.

g
Techniques for Credit Monitoring

Aging Receivables Average Collection Period


Average • The time from the sale until the customer
mails the payment
Collectio • The time from when the payment is
mailed until the firm has the collected

n Period funds in its bank account


Aging of Accounts Receivable
The sales director of XYZ company suggests
that certain credit terms be modified. He
estimates that sales will increase by at least
20% and accounts receivable turnover will be
reduced to 8 times from the present turnover
of 10 times. Bad debts, now at 1% of sales will
increase to 1.5%. Sales before the proposed
changes is at P900,000. Variable cost ratio is

Sample
55% and desired rate of return is 20%. Fixed
expenses amount to P150,000.

Problem 1. How much is the increase in profit


contribution from the sales?
2. How much is the cost of marginal
investment in accounts receivable?
3. How much is the cost marginal bad debt?
4. What is the net effect of the change in
credit policy?
ABC Company offers branded designer prescription eyeglasses.
All sales are currently on credit and with no cash discount. The
firm is considering a 2 percent cash discount for payment
within 10 days. The firm’s current average collection period is
90 days, sales are 700 units per year, selling price is P250 per
unit, variable cost per unit is P187.5, and the average cost per
unit is P210. The firm expects that the change in credit terms
will result in a minor increase in sales of 15 units per year, that
75 percent of the sales will take the discount, and the average
collection period will drop to 72 days. Bad debt expense is

Sample negligible in the proposed policy. The firm’s bad debt expense
is currently 0.025 percent of sales. The firm’s required return
on equal-risk investments is 20 percent.

Problem 1. What is the marginal investment in accounts receivable


under the proposed plan?
2. What is the cost of marginal investment in accounts
receivable under the proposed plan?
3. What are the savings of marginal bad debts under the
proposed plan?
4. What is the cost of the marginal cash discount?
5. What is the net result of considering the 2% cash
discount?

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