Chapter - 28Receivables Management

and Factoring

2Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Topics

Nature and Goals of Credit Policy Optimum Credit Policy Credit Policy Variables Credit Evaluation of Individual Accounts Monitoring Receivable Summary of Key Concepts

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Nature of Credit Policy Investment in receivable

volume of credit sales collection period

Credit policy credit standards credit terms collection efforts

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Goals of Credit Policy Marketing tool Maximisation of

sales Vs. incremental profit production and

selling costs administration costs bad-debt losses

Profitability

Liquidity

Tight Creditpolicy

Loose

Costs & Benefits

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Optimum Credit Policy Estimation of incremental

profit Estimation of incremental

investment in receivable Estimation of incremental

rate of return (IRR) Comparison of incre-

mental rate of return with required rate of return (RRR)

Optimum credit policy: IRR = RRR

Marginal cost of capital

Marginal rate of return

Tight Creditpolicy

Loose

Costs & Return (%)

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Credit Policy Variables

Credit standards Credit analysis

collection period default rate

character capacity condition capital collateral

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Credit Policy Variables customer categories

good accounts bad accounts marginal accounts

numerical credit scoring ad hoc approach simple discriminant approach multiple discriminant approach

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Credit Policy Variables

Credit-Granting Decision

Credit-granting Decision

CREDIT GRANTINGDECISION

NO CREDIT GRANT CREDIT

PAYMENTRECEIVED

BENEFITPV OF FUTURE

NET CASHFLOWS

PAYMENTNOT RECEIVED

COSTPV OF LOST

INVESTMENT

NET PAYOFFPV OF

(BENEFIT - COST)

NO PAYOFF

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Credit Policy Variables Credit terms

credit period cash discount

Collection policy and procedures regularity of collections clarity of collection procedures responsibility for collection and follow-up case-by-case approach cash discount for prompt payment

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Credit Evaluation of Customers Credit information

financial statements bank references trade references

Credit investigation and analysis analysis of credit file financial analysis analysis of business and management

Credit limit Collection efforts

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Monitoring Receivable Collection period Aging schedule Collection experience matrix