RECEIVABLE MANAGEMENT NMIMS EMBA

Corporate Finance I
TEAM MEMBERS

ASHISH CHAMANKAR SWATI SAHASRABUDHE

(80118160007) (80118160037)

NEHAL THAKKAR CANDICE DSOUZA

(80118160021) (80118170004)

AMIT PANDEY NAVIN KUMAR

(80118140042) (80118160021)
WHAT IS ACCOUNT RECEIVABLE?
Account Receivable are the money receivable in some future date for credit sales of
goods or services at present. They are component of Current Assets.

Cash

Receivables Raw
Material
Cycle of
Operations

Finished Inventory
Goods
RECEIVABLE MANAGEMENT
Managing Receivables consists of the following four Credit Policy Variables

Credit Standard Credit Period Discount Policy Collection Effort

CREDIT STANDARD
Can we give more flexibility to our customers?

Customer Type Credit Standard Customer Type Credit Standard

A Unlimited (45-90 days) A Unlimited (45-90 days)
B Limited (within 30 days) B Unlimited (45-90 days)
C No Credit (0 days) C Limited (within 30 days)

Only if .
= > 0

{Incremental Approach is positive}

CREDIT PERIOD
Can you offer long period of credit ?

0th day 45th day 60th day

DISCOUNT POLICY
Can we make paying early more attractive, by offering more discount?

1 2
, net 30 , net 30
10 10

Normal credit period

Pay in 10 days and get, 1% discount

COLLECTION EFFORT
Collection effort is the administrative
cost incurred in collecting receivables
from the customers to whom credit
sales have been made. Used for
Granting Decisions.
DECISION APPROACH Using Problems Solution
Approach
Cost of Capital Contribution / Variable Cost Bad Debt / Discounts Average Collection
Ratio Period

COMMON INFORMATION Available for Decisions

INCREMENTAL BENEFIT FORMULA
Contribution to my profit

Loss due to Bad Debt / Discount

Cost Incurred due to expected increase in Investment

PROBLEM
The present sales of ABC ltd are 50 lacs. The company classifies its customer under three
credit categories A, B and C. The company extends unlimited credit to category A, limited
credit to category B and no credit to category C. As a result of this credit policy the company
is foregoing sales to the extend to 5 lacs to customer in category B and 10 lacs to customers
in category C.
The company is considering the adoption of a more liberal credit policy according to which
category B customers will be provided with unlimited credit and customers in category C will
be provided with limited credit.
Such relaxation would increase the sales by 10 lacs on which bad debt losses will be 8%.
The contribution margin ration (P/V) is 15%. Average collection period is 60 days. Cost of
capital = 21%.
What will be the effect of relaxation of credit policy on the gross profit of the company?
AVAILABLE INFORMATION
= 10,00,000

= 8% 0.08

= = 15% (0.15)


= = 100 15% = 85% (0.85)

= 0.21

= 60
SOLUTION
=

10,00,000 0.85 60
= (10,00,000 x 0.15) (10,00,000 x 0.08) 0.21 ( )
360

= 1,50,000 80,000 0.21 (1,41,667)

= 70,000 - 29,750
= 40, 250

Since, .
.
PROBLEM
The present credit terms of Taj Company are 1/10, net 30. Its sales are 1.2 crores,
its average collection period is 24 days, its variable cost to sales ratio is 0.80, and its
cost of funds is 15%. The proportion of sales on which customers currently take
discount is 0.3. Taj Company is considering relaxing its discount terms to 2/10 net 30.
Such relaxation is expected to increase the sales by 12 lacs reduce the average
collection period to 16 days, and increase the proportion of discount sales to 0.7.
What will be the effect of relaxing the discount policy on gross profit?
AVAILABLE INFORMATION
1 2
, net 30 , net 30
10 10

Sales = 1,20,00,000 Sales = 12,00,000

Average Collection Period* = 16 days
= 0.20

*(0.70 x 10 + 0.30 x 30) = 7 + 9 = 16
= 0.80

K = 0.15
Average Collection Period* = 24 days
*(0.30 x 10 + 0.70 x 30) = 3 + 21 = 24
SOLUTION
= +

= ( Sales x Contribution Ratio)

= (12,00,000 x 0.20) = 2,40,000

= = (Expected Sales x Expected %Customers Availing Discount x Proposed Discount)

(Old Sales x Current %Customers Availing Discount x Current Discount)

= = (1,32,00,000 x 0.70 x 0.02) (1,20,00,000 x 0.30 x 0.01)

= 1,84,800- 36,000 = 1,48,800

SOLUTION (CONTINUED)

= (Savings in Investment Additional Benefit)

(1,20,00,000 8) (12,00,000 0.8 16)

=
350 360

= 2, 66, 666 42,667

= 2,23,999

= 0.15 2,23,999 = 33,600

SOLUTION (CONTINUED)

= 2,40,000 (1,48,800 - 33,600)

= 2,40,000 1,15,200

= 1,24,800

Since, .
2
, 30.
10
REMEMBER
We use Contribution Ratio to calculate the Benefit
We use Cost of Sales in computation of Increase in Investment to remove the profit.
THANK YOU Team E