Receivables Management  Credit period

 Cash discount
What is Receivables Management
 Cash discount period
 refers to the set of policies, procedures, and practices employed by a
Collection Policy
company with respect to managing sales offered on credit.
 It encompasses the evaluation of client credit worthiness and risk,  Correspondence
establishing sales terms and credit policies, and designing an appropriate  Telephone calls
receivables collection process.  Personal Visits
 Legal action etc.
Significance of Receivable Management
Performance Evaluation of Accounts Receivables Management
 Optimum investment in receivables
 Analyze credit worthiness of customers Widely used important tools are:
 Increase in Sales
 Accounts Receivable Turnover
 Increase in profits
 Days Sales Outstanding
 Maximize the value of firm
 Aging schedule
Role of Credit Management
Accounts Receivable Turnover
 Obtain Credit Information
 Measures the average number of times receivables are collected during a
 Analysis and evaluation of credit proposals
period. A high ratio is congruent with efficient receivables management,
 Setting up credit standards
and could indicate that the company’s credit and collection policies are
 Set up credit terms
sound.
 Credit granting decision
 Controlling account receivable AR Turnover = Credit Sales / Average Accounts Receivable
 Providing credit information to the top level management
 Example: Company’s total credit sales amounted to P3.6M for year
What is credit policy 2019. Its accounts receivable as of Dec 31 2019 is P400,000 and as of
Jan 31, 2019 is P200,000.
 Credit policy
o Compute the Accounts Receivable Turnover.
o Credit standards
o 3.6M / (400,000 +200,000)/2 = 12 times
o Credit terms
o Collection policy Days Sales Outstanding
Credit Standard – 5 C’s of credit  A ratio that measures the average length of time required to convert
receivables into cash receipts. Low ratios can indicate good receivables
 Character
management and collection policies since the company is translating its
 Capacity
receivables into cash efficiently.
 Capital
 Collateral DSO = Average receivable * Days in a year / Net credit Sales
 Condition
DSO = Days in a year / Receivable turnover

Credit Term
  Example: Company’s total credit sales amounted to P3.6M for year Suppose the following information was taken from the 2014 financial statements
2019. Its accounts receivable as of Dec 31 2019 is P400,000 and as of of FedEx Corporation, a major global transportation/delivery company.
Jan 31, 2019 is P200,000. Compute the DSO.
2014 2013
o DSO = Average receivable * Days in a year / Net credit Sales
o = (400,000+200,000/2) * 360 / 3.6M = 30 days
o DSO = Days in a year = 360/ 12 = 30 days Receivable
turnover
Aging Schedule
 This report tabulates the total amount of receivables outstanding for
each client, as well as their duration. When aggregated, it is a useful
assessment of receivables’ credit risk and collectability, and pinpoints
financially problematic clients.
Calculate the accounts receivable turnover and the average collection period for
2014 for FedEx. (Round answers to 2 decimal place. Use 365 days for
calculation.)
Answer- Sample Exercises:

Analyzing the change in credit policy Variables accounts receivable turnover = Sales/ Ave AR

 Calculation of investment in receivables: = 35,130 / (3453+4404)/2

 Investment in receivables = Production unit * Cost per unit / Days in a = 35,130 / 3,928.50
year
 Calculation of cost of carrying receivables: Cost of carrying variables = = 8.94 times average collection period = 365
Investment in receivables * Opportunity cost days / 8.94
 Calculation of bad debt losses: Bad debt losses = Annual credit sales * = 40.8 or 41 days
Bad debt rate
(Use 365 days for calculation for this example)

Sample Exercises