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Management of

Current Assets
RECEIVABLES

2
Receivable Management

Objectives The objective of the


firm’s accounts
receivable policy is to
encourage the sales and
gain additional
customers by extending
credit. 3
Responsibilities of Financial Officer

 To evaluate the pertinent cost and benefits


related to credit extension
 To finance the firm’s investment in
accounts receivable
 Implement the firm’s chosen credit policy
 To enforce collection
4
Components of Receivable Management

Credit
Management

Collection
Management 5
Cycles of Receivable Management
CREDIT CYCLE
Credit
Standards
Credit system Credit
assessment policies

Credit Credit
approval evaluation
6
Cycles of Receivable Management
COLLECTION CYCLE
Delivery of
Merchandise
Collection Billing policies

Aging of Accounts
Collection
receivable
policies
Receivable
7
portfolio
analysis
Credit Management

▪ Credit Standards
- the criteria that
determine which
customers will be
granted credit and how
much
8
Factors to consider in establishing
credit standards

Five C’s of Credit


▪ Character ▪ Collateral
▪ Capacity ▪ Conditions
▪ Capital

9
Credit Management

▪ Credit Terms
-the length of credit
terms if stretched
generally results to an
increase in product
demand but also an
increase in the cost of
financing it. 10
Cost and Benefits of a credit extension policy

Cash discounts
Credit and collection costs
Bad debt losses
Financing costs
11
Aids in analyzing Receivables

Ratio of receivables to net credit


sales
Receivable turnover
Average collection period
Aging of accounts
12
Summary

Trade-offs in CREDIT
POLICIES 13
Credit Policy Trade-offs
Cycles of Receivable Management
Benefit Cost
Relaxation of credit a. Increase in sales a. Increase in credit
standards
COLLECTION CYCLE processing costs
and total contribution
margin
Delivery of b. Increase in
Merchandise collection costs
c. Higher defaults
Collection Billing policies
costs
d. Higher capital
cost
Aging of
Lengthening of credit a. Increase in sales a. Higher
Accounts Collection policiescapital cost
period receivable and total contribution
margin
14
Receivable
portfolio analysis
Credit Policy Trade-offs
Cycles of Receivable Management
Benefit Cost
Granting cash a. Increase in sales a. Lesser profit
discount COLLECTION
and total CYCLE
contribution
Delivery of
margin
Merchandise
b. Opportunity
Collection income on lower Billing policies
investment in
receivable
Intensified collection
Aging of a. Lower defaults a. Higher collection
efforts Accounts costs Collection policies
expenses
receivable b. Lower cost of
capital 15
Receivable
portfolio analysis
1. Relaxation of Credit Policy
Relaxation of Credit Standards
2. Change of Credit Terms
Lengthening and shortening of
credit period
3. Change of Credit Terms
Granting cash discounts
4. Intensified Collection
Efforts
Marginal or
Incremental Analysis
of Credit Policy

Definition
20
What is the rule?

1. Incremental
profit contribution
Incremental Cost ; Then accept the
change in credit
policy

2. Incremental
profit contribution Incremental Cost ; Then reject the
change in credit
policy

3. Incremental
profit contribution
Incremental Cost
; Then be indifferent
to the change in
credit policy 21
Summary

Trade-offs in Collection
Policies 22
THAT’S ALL
FOLKS,
THANK YOU! 23

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