Swapnil Chavan Khuzema Kamri Khyati Mistry Husein Rangwala Shahnawaz Sorathia Brijesh Vishwakarma

03 12 20 28 36 42

 Accounts Receivable (sometimes called "receivables") are those amounts

owed to a company by its customers. Receivables are considered a business asset, ranked high in their ability to be converted into cash. - US Business Law/ Taxes

Money owed by customers (individuals or corporations) to another

entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year. - Investopedia

 Improve Cash Flow

Improve Cash Management

Deter Bad Debt

 Whether to offer credit depends on four factors: Your customers Your industry Typical transaction size Your financial situation All this factors relate to The Business Side

The Money Side

 Customer cash flow. Customer relation.

Logistics will be smoother

DIFFERENT TYPES OF COSTS ASSOCIATED

ADMINISTRATIVE COST: Administrative costs In form of salaries to clerks who maintain records of debtors, expenses on investigating the creditworthiness of debtors, etc. CAPITAL COST: Cost incurred in terms of interest (if financed from outside) or opportunity cost (if internal resourses they could have been put to some other use)

COLLECTION COST Cost incurred for collection of amounts at the appropriate time from the customers.
DEFAULTING COST: Amounts which have to written off as bad debts.

OBJECTIVES

Creating, presenting and collecting accounting receivables Establish and communicate the credit policies Evaluation of customers and setting credit limits Ensure prompt and accurate billing Maintaining up-to-date records Initiate collection procedures on overdue accounts

LIBERAL CREDIT

STIFF CREDIT

1. Pushes up the sales

1. Pushes down the sales

2. Higher incidence of Bad Debt

2. Less incidence of Bad Debt

3. Large investment in a/c receivable

3. Less investment in a/c receivable

4. Higher Cost Of Collection

4. Less Cost Of Collection

 Length of time the customer allowed to pay for their

purchases Does not grant Credit Zero

Longer Period of Credit
Increases sales Increases investment in a/c receivable

Shorter Period of Credit

Decreases sales Decreases investment in a/c receivable

Higher incidence of bad debt

Less incidence of bad debt

 Offer to customer in order to induce them to pay

promptly. Percentage Discount and period are reflected in Credit terms Ex. 5 / 10, net 45 Liberalized cash discount increases sales Reduces avg. collection period

Monitoring Receivable Sending Letters Telegraphic Advice Threat of Legal action (overdue) Legal Action

CREDIT GRANTING DECISION

DECISION- TREE APPROACH

The probability of receiving the payment or defaulting the payment by the customer.

The Rex company is considering offering credit to customer. The probability that the customer would pay is 0.9 and the probability that the customer would default is 0.1. The revenues form the sale would be 80,000 and the cost of sale would be 60,000.

If the customer pay, the company gets a profit of Rs.20,000 while it losses Rs.60,000 if he fails to pay.
13

CREDIT GRANTING DECISION

DECISION- TREE APPROACH
Credit Granting Decision : Decision tree Approach

Pay :
Prob = 0.9

Grant Do not The weighted net benefit is Rs.20,000 * 0.9 Rs.60,000 * 0.1 = 12,000. grant Hence it is preferable to grant credit as the weighted net benefit is positive.

Credit

Does not pay : Prob = 0.1

14

 Ending Total Receivables x Number of Days in Period

Analyzed / Credit Sales for Period Analyzed.

Credit Sales Jan Feb Mar Totals 3,400 3,600 3,900 10,900

A/R Balanc e 6,210 6,015 6,325

Current 31-60

61-90

90+

Totals

3,350 3,555 3,650

1,800 1,600 1,750

995 800 855

65 60 70 6,325

Beginning Receivables = 6,210 Credit Sales = 10,900 Ending Total Receivables = 6,325 Ending Current Receivables = 3,650 Period = 3 months (N)

STEPS IN CREDIT ANALYSIS FOLLOWED BY FMCG

Investigating the customer

Customer Evaluation- The 5 Cs

Character- Reputation, Track Record Capacity- Ability to repay( earning capacity)

(The working capital position and profitability)

Capital- Financial Position of the co. Collateral- The type and kind of assets pledged Conditions- Economic conditions & competitive factors that may
affect the profitability of the customer
18

Mission: The Credit Department will be responsible for gathering, investigating and evaluating all new accounts in order to keep a high quality of accounts receivable while selling to all customers that represent prudent credit risks.

Goals: To open and maintain as many credit accounts as possible while maintaining the following: 1. To maintain an average CEI above 80% 2. To maintain an average DSO below 40 days 3. To maintain 80% of A/R in current aging, 15% in 30 Days, 4% in 60 + and 1% in 90 +

 The granting of trade credit is a powerful selling aid, and is a fundamental

foundation upon which all trading relationships are built. The demand for trade credit requires: a sound operating procedure to cope with continuous sales volumes; capital to fund the waiting time (between sale and cash receipt) with a worthwhile return on the investment; and
regulation and enforcement, informally or by law, of credit agreements.

 Every function of a business plays a part in the life of a sale

and equally in the death of a sale, and therefore the debtors asset.

 A credit policy should start at the highest level, be agreed at all

levels, and be inclusive of all those areas of the business operation which leads to satisfying customer requirements. Every employee in the business should know: what the credit terms are; how and why they have been arrived at; and how, why and when they are implemented.

 The credit policy cannot be produced in isolation, without o o o o o o o

any reference to outside Influences or circumstances. Much has to be taken into account when developing a credit policy, including: the sellers strength in the market; the capital needed to finance sellers sales; the credit terms which the seller gets from his own suppliers; the range of customers (types and sizes); available net profit margins; any special arrangements, including longer terms and/or installments; competitive pressures i.e. what the others are doing;

o the type an nature of the goods supplied for example, the

o
o o o o o o o

shorter the life of the goods, the shorter the credit period should be (a buyer may lose interest in paying if the goods or services are long gone); the customers creditworthiness; the buyers own cash cycle if a buyer is retailing for cash, a sellers terms can be short but if his business process last for a long time, credit may be much longer; seasonal sales may be greater at specific times of the year; incentives to boost sales may include extra credit facilities; and the existence of any security for the credit exposure.

COLLECTION METHODS
Centralised / Decentralised collection

system

Post dated cheques Pay Orders / Bank drafts Bills of Exchange Drop box System Collection staff/ agents Debt collector Del Credere agent Concentration banking

26