FINMA 2000 / FINANCIAL MANAGEMENT

Prepared by: Ms. HAZEL JADE E. VILLAMAR

E-mail Address: _hazeljade.villamar@clsu2.edu.ph________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

FINMA 2000 / FINANCIAL MANAGEMENT

Module 14
RECEIVABLE AND INVENTORY MANAGEMENT

Overview

This course is designed to help the student understand our present

monetary standard including the structure of the Philippine financial system.
It teaches the student how our monetary and financial system works. It is
designed to teach students on the different kinds of financial markets and
their functions, the different kinds of mutual funds, the classifications of
options and types of options commonly traded over the counter.

I. Objectives

At the end of the module, the following are expected:

A. Define Receivable and Inventory Management.

B. Apply the techniques in inventory management to virtual problems.

C. Compute for the Economic Order Quantity and Reorder Point.

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II. Learning Activities

WHAT IS ACCOUNTS RECEIVABLE?

It refers to the credit granted by a businessman to his customers. It is normally

produced by credit Sales.

WHAT IS INVENTORY?

It refers to raw materials, goods in process, finished products, and factory/office

supplies. It is what is being purchase and sold in the normal operating cycle.

TWO ASPECTS OF ACCOUNTS RECEIVABLE

*Liquidity Aspect
It relates to the flow of funds from accounts receivable

*Profitability Aspect
It relates to both the rate of profits on sales and the rate of profits on the firm’s
investment on accounts receivable.

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METHODS OF PROJECTING CASH FLOWS FROM RECEIVABLES

Ad-hoc Method – predict accurately the timing of the cash receipts. It is commonly
used by experienced entities that know their accounts very well that the can produce
such accurate results.

Daily Sales Outstanding (DSO) – The most widely used method. This includes some
computations.

CONSIDERATIONS IN DETERMINING CREDIT RISK (THE C’S OF CREDIT)

Character
– refers to the inner nature of individual.
– It refers to the moral responsibility and complete honesty and integrity of the debtor.

Capacity
– Ability of the debtor to pay his debts when due.
a) Primary standards for measuring an individual’s capacity to pay are as follows:

 Education
 Training and technical competence
 Business Experience
 Business Ability
 Combination of attributes: (Technical competence and leadership)

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b) Secondary standards for measuring an individual’s capacity to pay are:

 Health
 Personal responsibilities
 Age
 Individual’s record of employment
 Management of Personal finances

Capital
 Refers to the financial condition of the applicant, and how much he is worth.

 What is left after deducting liabilities from assets is a person’s net worth.

FACTORS AFFECTING THE COST OF CREDIT

1. Cost of credit investigation

2. Cost of record keeping
3. Cost of overhead
4. Cost of collection
5. Cost of bad debts
6. Cost of money

SOURCES OF INFORMATION
a) Application form
b) Financial Statement of the Borrower
c) Personal interview
d) Mercantile Agency Services
 General mercantile agency
 Special mercantile agency
e) Credit Bureau

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Principal Sources of Information for Credit Bureau Files

1. Other Creditors of the Applicant
2. References Furnished by the Applicant
3. Public Records
4. Newspaper Items
5. Other Credit Bureaus
6. Field Investigator
7. Correspondents

Information that may be obtained from banks

1. Age of the account– frequent changes of banking connection may not make a
good impression.
2. A general statement on the relationship of the loans and deposit balances with
the bank, including information on how the account is carried out.
3. Whether the borrower is meeting his obligations to the banks on time.
4. Whether the drafts presented to the banks for payment are promptly honored by
the borrower.
5. Comment on the borrower’s financial statement, provided that he authorizes it
6. The bank’s opinion on the borrower’s reputation including the general reputation
he has in the locality.
7. In case of other banks, a request must be made on their general opinion
regarding the risks involved
8. A short summary of the history of the company.

Information that is not obtained from the Banks

1. The exact amount of the depositor’s account
2. Details of loans outstanding
3. Information concerning the customer’s financial status

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IMPORTANCE OF CREDIT LIMIT

 To avoid reviewing the customer’s account file each time an order is received.
 Credit limits may be changes from time to time depending on new conditions and
additional information received about the customer.

Ways of Establishing Credit Limits for new debtors

1. Income– credit limits are mainly based on the income of the borrower.
2. Arbitrary Limits– test periods are established wherein random credit limits are set
up for new customers.
3. Credit Investigation– the credit man should make his own credit investigation on
his customers.
4. Recommendations obtained from mercantile Agencies for Credit Limits– a credit
man can avail of information established by some special mercantile agencies in
determining the credit limit to be given to a customer.
5. Adopting other Supplier’s Credit Limit– it is important that suppliers check on the
highest recent credit given to new customer with other suppliers in the same line
of business.
6. Using “Net Worth” and “Net Working Capital” as credit limits– some suppliers
giving credit to small buyers frequently give these new customers a credit limit
determined by taking a certain percentage from 5,10, or 15% of the customer’s
net worth.

WAYS OF WATCHING ACCOUNTS

1. Customer’s Ledger Card– first source of information about the status of any
account.
2. Aging Accounts– this refer to the classification of accounts receivable according
to the time they have been outstanding.

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VARIOUS STAGES IN COLLECTION PROCEDURE

1. Reminder Stage– it is important to remind the customer that his account is

past due and that he has to pay his account.
 Reminder Techniques
a) Sending the Duplicate Statement or Invoice
b) Sending an Aged Statement and Reminder
c) Sending a Letter
d) Sending a Printed Card
e) Attaching a sticker on the bill
2. Follow-up Stage– this is often done when the customer fails to account even
after reminders have been sent.
3. Follow-up techniques
4. Follow-up letter
5. Follow-up by telephone
6. Follow-up by telegram
7. Follow-up by Registered letters
8. Follow-up by Personal calls
9. Drastic Action- If the credit man fails to collect an overdue account through
reminders and follow-ups, the collection manager must resort must resort to
drastic action.
 Kinds of Drastic Techniques
a) Collection by draft
b) Collection through lawyer

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RELATION OF INVENTORIES AND ACCOUNTS RECEIVABLE

There is close relationship between inventories and accounts receivables.

Account receivables will depend on the amount of the inventory that the firm can tie up
on this. When inventories are sold they either become cash or accounts receivables
which when collected can be ultimately converted into cash.

INVENTORY MANAGEMENT TECHNIQUES

1. Economic Order Quantity (EOQ)– this take into consideration various

operating and financial costs to determine the order quantity to minimize the
total inventory cost.
a) Order cost– fixed cost in placing or receiving an order.
b) Carrying cost– variable cost per unit of handling the inventory for a
specified number of days.
c) Total Cost– sum of the order cost and variable cost

2. Reorder Point– the firm should determine when to place an order once it has
determined its economic order quantity.
Reorder Point = Lead Time in number of days x daily usage

Number of order per year=

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3. ABC System- firms divide the inventory in groups A, B, and C.

4. Real Line Method– some companies place a red line in the bin where they keep
their inventory.
5. Material Requirement Planning (MRP) System– system used by firms to
determine when to order, and how much to order and the priorities to be made
in ordering materials.
6. Just In Time (JIT) System– the purpose of this is to reduce the inventory
investment to the minimum.

Some Problems encountered in applying the EOQ formula

1. EOQ requires the following estimates which may be difficult to obtain.
1. Annual Sales
2. Ordering costs
3. Purchasing price
4. Cost of Carrying the inventory
2. Inventory is not always used at a constant rate and the constant usage
assumption is implied in EOQ formula.

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REFERENCE:
Laman, et.al.(2014). Financial System, Market & Management The Basics. Manila,
Philippines: GIC Enterprises & Co.,INC.

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