2. Purpose of Receivables
• The objective of receivables management is to promote
sales and profits until that point is reached where the
returns that the company gets from funding of
receivables is less than the cost that the company has to
incur in order to fund these receivables.
• Purpose is:
– To increase total sales
– To increase profits, because it results in increased sales and
volume
– To meet increased competition
3. Cost of Maintaining Receivables
• Additional funds requirement for the company –
interest or opportunity cost
• Administrative cost
• Collection costs
• Defaulting costs
4. Factors influencing the Size of
Receivables
• Size of credit sale
• Credit policies
• Terms of trade
• Expansion plans
• Relation with profits
• Credit collection effort
• Habits of customers
5. Credit Policy
• Credit policy encompasses the policy of a company in
respect of credit standards adopted, the period over
which credit is extended to customers, any incentive in
the form of cash discount offered, as also the period
over which discount can be utilized by the customers
and the collection effort made by the company.
• Various variables are:
– Credit standards
– Credit period
– Cash discount
– Collection program
6. Credit Evaluation
• Check credit worthiness of customers:
– Character
– Capacity
– Collateral
• Ratios
Current ratio
Quick ratio
Average payment period
Average collection period
Capital structure ratio
Return on equity
• Obtaining bank references
• Firm’s experience
