Receivables Management and Factoring

In This Module We Will Study:

Nature and Goals of Credit Policy Optimum Credit Policy

Credit Policy Variables

Credit Evaluation of Individual Accounts Monitoring Receivable

Summary of Key Concepts

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

Nature of Credit Policy

Investment in receivable volume of credit sales collection period Credit policy credit standards credit terms collection efforts

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

Goals of Credit Policy

Marketing tool Maximisation of
Costs & Benefits Profitability

sales Vs. incremental profit

production and selling costs administration costs bad-debt losses

Liquidity Tight Credit policy Loose

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

Optimum Credit Policy

Estimation of incremental

profit Estimation of incremental investment in receivable Estimation of incremental rate of return (IRR) Comparison of incremental rate of return with required rate of return (RRR) Optimum credit policy: IRR = RRR

Costs & Return (%) Marginal cost of capital

Marginal rate of return Tight Credit policy Loose

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

Credit Policy Variables

Credit standards
Credit analysis collection period default rate

character capacity condition capital collateral

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

Credit Policy Variables

customer categories

good accounts bad accounts marginal accounts ad hoc approach simple discriminant approach multiple discriminant approach

numerical credit scoring

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

Credit Policy Variables

Credit-Granting Decision
CREDIT GRANTING DECISION

NO CREDIT

GRANT CREDIT

PAYMENT RECEIVED BENEFIT PV OF FUTURE NET CASH FLOWS NO PAYOFF

PAYMENT NOT RECEIVED COST PV OF LOST INVESTMENT

NET PAYOFF PV OF (BENEFIT - COST)

Credit-granting Decision

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

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

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

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
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd. 10

Monitoring Receivable
Collection period Aging schedule

Collection experience matrix

Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.

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