Components of Components of

Working CapitalWorking Capital

The main items of WC are:The main items of WC are:

CashCash

ReceivablesReceivables

InventoryInventory

CASH MANAGEMENTCASH MANAGEMENT Cash is the most important component of current Cash is the most important component of current

assetsassets It is the most liquid current asset It is the most liquid current asset It includes bankIt includes bank Other current assets such as receivables and Other current assets such as receivables and

inventory are converted into cash in the ordinary inventory are converted into cash in the ordinary course of business operationcourse of business operation

Cash means, in a narrow sense, currency, Cash means, in a narrow sense, currency, cheques, drafts and demand drafts in banks, but cheques, drafts and demand drafts in banks, but in broader sense, it includes near-cash assets in broader sense, it includes near-cash assets such as marketable securities, short term such as marketable securities, short term deposits also.deposits also.

Cash management means management of both Cash management means management of both cash and non-cash assetscash and non-cash assets

Motives of holding cashMotives of holding cash::

The cash, though a barren asset, is held by the The cash, though a barren asset, is held by the firms for the following motives:firms for the following motives:

Transaction motiveTransaction motive: Transaction motive : Transaction motive refers to the holding of cash to meet routine refers to the holding of cash to meet routine cash requirements. The business cash requirements. The business transactions result in both inflows and transactions result in both inflows and outflows of cash, which do not perfectly outflows of cash, which do not perfectly match. To meet a situation where the match. To meet a situation where the payment exceeds inflowspayment exceeds inflows, the firm should , the firm should keep cash balance by arranging for cash.keep cash balance by arranging for cash.

Precautionary motivePrecautionary motive: A firm has to keep cash : A firm has to keep cash balance to meet unexpected cash needs at short balance to meet unexpected cash needs at short notice as a result of flood, strike, increase in cost notice as a result of flood, strike, increase in cost of raw material, slow in collection, cancellation of of raw material, slow in collection, cancellation of orders etc. the precautionary motive implies the orders etc. the precautionary motive implies the need to hold cash to meet unpredictable need to hold cash to meet unpredictable situations.situations.

Speculative motiveSpeculative motive: A firm keeps cash balance : A firm keeps cash balance to take advantage of unexpected opportunities to take advantage of unexpected opportunities such as decline in the price of raw materials, such as decline in the price of raw materials, discount in the purchase etc. The speculative discount in the purchase etc. The speculative motive helps to take advantage of the motive helps to take advantage of the opportunities, which are outside the normal opportunities, which are outside the normal course of the business.course of the business.

Objectives of cash managementObjectives of cash management::The objective is to keep optimal cash The objective is to keep optimal cash

balance at all times.balance at all times.To meet the payment schedule a firm To meet the payment schedule a firm

should keep sufficient cash.should keep sufficient cash.Keeping adequate cash prevents Keeping adequate cash prevents

insolvency, develops good relation with insolvency, develops good relation with lenders and suppliers, help to take lenders and suppliers, help to take advantage of business opportunities and advantage of business opportunities and enable a firm to meet the contingenciesenable a firm to meet the contingencies

At the same time, a higher level of cash At the same time, a higher level of cash balance means high cost to the firm.balance means high cost to the firm.

Cash management strategies:Cash management strategies:

The cash management strategies can be The cash management strategies can be examined under four heads-examined under four heads-

To keep the minimum level of cashTo keep the minimum level of cashControlling inflow of cashControlling inflow of cashControlling outflow of cashControlling outflow of cashOptimal investment of surplus cashOptimal investment of surplus cash

To keep the minimum level of cashTo keep the minimum level of cash::To keep the minimum level of cash the To keep the minimum level of cash the

following aspects are to be examined-following aspects are to be examined-

1. Preparation of cash budget1. Preparation of cash budget::The prime objective of preparing cash The prime objective of preparing cash

budget is to know whether there is excess budget is to know whether there is excess of cash flow in a period. The following two of cash flow in a period. The following two elements are to be taken into elements are to be taken into consideration for preparing cash budget.consideration for preparing cash budget.

a. The first element is the selection of a a. The first element is the selection of a period. The cash flow should be projected period. The cash flow should be projected for the given period. Such period should for the given period. Such period should not be too short or too long.not be too short or too long.

b. The second element is the selection of b. The second element is the selection of factors for cash flow. Non-cash items factors for cash flow. Non-cash items should be carefully excluded.should be carefully excluded.

2. Unpredictable discrepancies2. Unpredictable discrepancies: : A certain portion of cash balance is to be A certain portion of cash balance is to be

kept to meet unpredictable discrepancies kept to meet unpredictable discrepancies such as strikes, riots, floods etc.such as strikes, riots, floods etc.

3. Short cost3. Short cost: : The cash budget reveals periods of cash The cash budget reveals periods of cash

shortages. In addition, there may be unexpected shortages. In addition, there may be unexpected short falls. short falls. The cost incurred as a result of The cost incurred as a result of shortage of cash is called the short costshortage of cash is called the short cost . This . This includes, brokerage to raise cash, commitment includes, brokerage to raise cash, commitment charges to loan, higher bank charges, penal charges to loan, higher bank charges, penal rates by banks, etc.rates by banks, etc.

4. Availability of other sources of funds4. Availability of other sources of funds:: The availability of external sources to obtain The availability of external sources to obtain

funds on short notice enables a firm to maintain funds on short notice enables a firm to maintain smaller amount of cash balance. Further, the smaller amount of cash balance. Further, the level of cash balance is determined by the level of cash balance is determined by the relationship of a company with its banks.relationship of a company with its banks.

To control inflow of cashTo control inflow of cash::To control the inflow of cash the following points are To control the inflow of cash the following points are

worth to be noted:worth to be noted: Preventing fraudulent diversion of cash receiptsPreventing fraudulent diversion of cash receipts Speed-up the collectionSpeed-up the collection Proper internal system to prevent defalcations of cashProper internal system to prevent defalcations of cash The following techniques may be adopted for speedier The following techniques may be adopted for speedier

collection of cash:collection of cash: Concentration bankingConcentration banking – have a number of collection – have a number of collection

centres and open bank accounts in each collection centres and open bank accounts in each collection centre and direct the bank to transfer the proceeds to centre and direct the bank to transfer the proceeds to HOHO

Lock box systemLock box system – hire a post office box and direct the – hire a post office box and direct the local bank to collect the cheques and transfer the local bank to collect the cheques and transfer the proceeds to HOproceeds to HO

Control over cash outflowsControl over cash outflows: : The control over cash inflows aims at maximum The control over cash inflows aims at maximum

acceleration of collections whereas the control acceleration of collections whereas the control over cash outflows tries to slow down the over cash outflows tries to slow down the disbursement as much as possible without disbursement as much as possible without affecting the credit standing of the firm. The affecting the credit standing of the firm. The combination of these two result in maximum combination of these two result in maximum availability of fundsavailability of funds

MethodsMethods::Do not make the payments early i.e. before the Do not make the payments early i.e. before the

due datedue dateAll payments should be made by the HO from a All payments should be made by the HO from a

centralised disbursementcentralised disbursement

Float – means the amount of money tied up in Float – means the amount of money tied up in cheques that have been written but not cheques that have been written but not presented for paymentpresented for payment

Methods of floatMethods of float:: The firm may issue a cheque away from the The firm may issue a cheque away from the

creditor’s bankcreditor’s bank Analyse the time lag in issue and encashment Analyse the time lag in issue and encashment

and arrange fund accordinglyand arrange fund accordingly But, playing float involves high amount of riskBut, playing float involves high amount of risk

Investing surplus cashInvesting surplus cash: :

Surplus cash is the amount in excess of the Surplus cash is the amount in excess of the firm’s normal cash requirement. This involves firm’s normal cash requirement. This involves – –

Determination of the amount of surplus cash Determination of the amount of surplus cash andand

Determination of the channels of investmentDetermination of the channels of investmentKeep the safety level of cash and go for Keep the safety level of cash and go for

investment of the balance amountinvestment of the balance amountWhile make the investment keep always in While make the investment keep always in

mind the security, liquidity, yield and maturitymind the security, liquidity, yield and maturity

Cash management models:Cash management models:

Baumol ModelBaumol Model:: Suggested by William J Baumol, similar to the EOQ in Suggested by William J Baumol, similar to the EOQ in

inventory control.inventory control. According to this model, According to this model, optimum cash level is that optimum cash level is that

level of cash where the carrying costs and level of cash where the carrying costs and transactions costs are minimumtransactions costs are minimum..

Carrying costsCarrying costs – refers to the cost of holding cash – – refers to the cost of holding cash – i.e. the opportunity cost i.e. the opportunity cost

Transaction costsTransaction costs – refers to the cost involved in – refers to the cost involved in getting the marketable securities converted into cash getting the marketable securities converted into cash such as clerical, brokerage, registration etcsuch as clerical, brokerage, registration etc

There is inverse relationship between There is inverse relationship between these two cost and the optimum level these two cost and the optimum level means the point where these two costs means the point where these two costs are equalare equal

Formula: C=Formula: C= 2U x P2U x P SS

Where, C = Optimum cash balanceWhere, C = Optimum cash balanceU = Annual or monthly cash U = Annual or monthly cash

disbursementsdisbursementsP = Fixed cost per transaction andP = Fixed cost per transaction andS = Opportunity cost of one rupee p.a.S = Opportunity cost of one rupee p.a.

Miller Orr modelMiller Orr model: : According to this model, the net cash flow is According to this model, the net cash flow is

completely stochastic or random.completely stochastic or random. This model lays down three control limits,This model lays down three control limits,1.An upper limit (h)1.An upper limit (h)2.A lower limit (o) and 2.A lower limit (o) and 3.A return point (z)3.A return point (z)

When cash balance reaches the upper limit ‘h’, a transfer of When cash balance reaches the upper limit ‘h’, a transfer of ‘h – z’ is effected to marketable securities and ‘h – z’ is effected to marketable securities and

When cash balance reaches the lower limit ‘o’, a transfer When cash balance reaches the lower limit ‘o’, a transfer equal ‘z-o’ from marketable securities to cash is made.equal ‘z-o’ from marketable securities to cash is made.

When cash balance stays between the upper limit and lower When cash balance stays between the upper limit and lower limit, no transfer is effectedlimit, no transfer is effected

Both the limits are fixed based on opportunity cost of Both the limits are fixed based on opportunity cost of holding cash, degree of fluctuation in cash balance holding cash, degree of fluctuation in cash balance and fixed cost associated with security transactionsand fixed cost associated with security transactions

H H

zz oo

The optimal value of z, the return point for securities The optimal value of z, the return point for securities transactions, can be determined by the following transactions, can be determined by the following formula:formula:

3b 3b 22 Z = 3 Z = 3 4i 4i Where, b = fixed cost associated with a security Where, b = fixed cost associated with a security

transactiontransaction 2 = variance of daily cash flows2 = variance of daily cash flows I = interest rate per day on marketable securitiesI = interest rate per day on marketable securities

Management of inventoriesManagement of inventories Inventories are goods held for eventual sale by a firm. Inventories are goods held for eventual sale by a firm.

Inventories are thus one of the major elements, which help Inventories are thus one of the major elements, which help the firm in obtaining the desired level of sales.the firm in obtaining the desired level of sales.

Kinds of inventoriesKinds of inventories:: Raw materialsRaw materials: goods not yet been committed to production : goods not yet been committed to production

in a manufacturing firm consists of basic raw materials or in a manufacturing firm consists of basic raw materials or finished components.finished components.

Work-in-progressWork-in-progress: This includes those materials which have : This includes those materials which have been committed to production process but not yet been been committed to production process but not yet been completedcompleted

Finished goodsFinished goods: These are completely produced products : These are completely produced products awaiting for sale. They are the final output of the production awaiting for sale. They are the final output of the production process after inspection in a manufacturing firm and in retail process after inspection in a manufacturing firm and in retail and wholesale merchandise, it is referred to as and wholesale merchandise, it is referred to as merchandise merchandise inventoryinventory..

The level of inventory differ depending upon the nature of The level of inventory differ depending upon the nature of business, time, type of inventory, availability of facilities etc.business, time, type of inventory, availability of facilities etc.

Benefits of holding inventoriesBenefits of holding inventories::Avoiding losses of salesAvoiding losses of salesAvailing quantity discountsAvailing quantity discountsReducing ordering costReducing ordering costAchieving efficient production runs, Achieving efficient production runs,

thereby reducing the set up coststhereby reducing the set up costsRisks and costs associated with Risks and costs associated with

inventories such as inventories such as Price declinePrice declineProduct deteriorationProduct deteriorationObsolescenceObsolescence

Management of inventoryManagement of inventory Good inventory management is good financial Good inventory management is good financial

managementmanagement Inventories constitute a major element of total Inventories constitute a major element of total

WC hence inventory involve costsWC hence inventory involve costsInventory management coversInventory management covers:-:- Fixation of minimum and maximum levelsFixation of minimum and maximum levels Determining the size of inventory to be carriedDetermining the size of inventory to be carried Deciding about the issue price policyDeciding about the issue price policy Setting up receipt and inspection procedureSetting up receipt and inspection procedure Determining the EOQDetermining the EOQ Providing proper storage facilitiesProviding proper storage facilities Keeping check on obsolescence and setting up Keeping check on obsolescence and setting up

effective information system with regard to effective information system with regard to inventoriesinventories

However, management of inventories from the finance However, management of inventories from the finance manager point of view involves manager point of view involves twotwo basic problems: basic problems:

1.Maintaining a sufficient large size of inventory for 1.Maintaining a sufficient large size of inventory for efficient and smooth production and sales operationefficient and smooth production and sales operation

2.Maintaining a minimum investment in inventories to 2.Maintaining a minimum investment in inventories to minimise the direct/indirect costs associated with minimise the direct/indirect costs associated with holding inventories to maximise profitabilityholding inventories to maximise profitability

High inventory means high High inventory means high interest cost and high interest cost and high storage costsstorage costs

Low inventory means Low inventory means interruption in productioninterruption in production schedule resulting in underutilization of capacity and schedule resulting in underutilization of capacity and lower saleslower sales

So, the objective is to hold So, the objective is to hold optimum optimum inventoryinventory to ensure:- to ensure:-

Continuous sufficient stock of raw Continuous sufficient stock of raw materials in periods of short supplymaterials in periods of short supply

Sufficient stock of raw materials in periods Sufficient stock of raw materials in periods of short supplyof short supply

Sufficient stock of finished goods for Sufficient stock of finished goods for smooth sales smooth sales

Minimum carrying costsMinimum carrying costs Investment in inventories at the optimum Investment in inventories at the optimum

levellevel

Techniques of inventory managementTechniques of inventory managementEconomic Order quantityEconomic Order quantity EOQ refers to the size of the order which gives EOQ refers to the size of the order which gives

maximum economy in purchasing any item of raw maximum economy in purchasing any item of raw material or finished product after taking into material or finished product after taking into consideration of the following costsconsideration of the following costs

Ordering costOrdering cost – It is the cost of placing an order – It is the cost of placing an order and securing supplies. It varies from time to time and securing supplies. It varies from time to time depending upon the orders placed and the number depending upon the orders placed and the number of items ordered. The more frequent the placing of of items ordered. The more frequent the placing of orders and few the quantity in each order, greater orders and few the quantity in each order, greater the ordering cost and v.v.the ordering cost and v.v.

Inventory carrying costInventory carrying cost – It is the cost of keeping – It is the cost of keeping items in stock, includes interest on investment, items in stock, includes interest on investment, obsolescence losses, store-keeping cost, insurance obsolescence losses, store-keeping cost, insurance premium etc. The larger the volume of inventory, premium etc. The larger the volume of inventory, higher the ICChigher the ICC

As the ordering cost or the cost of acquiring As the ordering cost or the cost of acquiring decreases while the cost of holding increases decreases while the cost of holding increases with every increase in the quantity of purchase with every increase in the quantity of purchase lot. A balance is therefore stuck between the two lot. A balance is therefore stuck between the two opposing factors and the economic ordering opposing factors and the economic ordering quantity is determined at a level for which the quantity is determined at a level for which the aggregate of two cost is the aggregate of two cost is the minimumminimum

2UP2UP EOQ = EOQ = CS CS Where, U = Quantity(units) purchased in a year or Where, U = Quantity(units) purchased in a year or

monthmonth P = Cost of placing an orderP = Cost of placing an order S = Percentage of storage cost and S = Percentage of storage cost and

carrying cost carrying cost C = Cost per unit of materialC = Cost per unit of material

AssumptionsAssumptions:: The firm knows with certainty the annual usage The firm knows with certainty the annual usage

or demand of the particular item of inventoriesor demand of the particular item of inventories The rate at which the firm uses the inventories or The rate at which the firm uses the inventories or

makes sales is constant throughout the yearmakes sales is constant throughout the year The orders for replenishment of inventory are The orders for replenishment of inventory are

placed exactly when inventories reach at zero placed exactly when inventories reach at zero levellevel

The above assumptions may also be called as The above assumptions may also be called as limitations of EOQ model.limitations of EOQ model. There is every likelihood of a discrepancy between There is every likelihood of a discrepancy between

actual and estimated demand for a particular item of actual and estimated demand for a particular item of inventoryinventory

The assumptions as to constant usage or sale of The assumptions as to constant usage or sale of inventories are also of doubtful validity.inventories are also of doubtful validity.

2. Determination of reorder level2. Determination of reorder level Reorder level is that level of inventory at which the Reorder level is that level of inventory at which the

firm should place an order to firm should place an order to replenish the replenish the inventoryinventory. In case, the order is placed at this level, . In case, the order is placed at this level, the new goods will arrive before the firm runs out of the new goods will arrive before the firm runs out of goods to sell.goods to sell.

In order to determine reorder level, information is In order to determine reorder level, information is required about two things – required about two things – a. the lead time and a. the lead time and

b. the usage timeb. the usage time Lead time: It is the normal time taken in receiving Lead time: It is the normal time taken in receiving

the delivery of inventory after the order has been the delivery of inventory after the order has been placed placed

Usage time: It is the rate at which the consumption Usage time: It is the rate at which the consumption took place, either daily or weekly etc.took place, either daily or weekly etc.

Reorder level = Average usage x Lead timeReorder level = Average usage x Lead time

3. Safety stock3. Safety stock The reorder level is computed presuming that there The reorder level is computed presuming that there

is no uncertainty regarding the usage as well as is no uncertainty regarding the usage as well as the lead time. However in actual practice, it is the lead time. However in actual practice, it is almost impossible to correctly predict both of them. almost impossible to correctly predict both of them. The actual usage and the lead time may be The actual usage and the lead time may be different from the normal usage and/or normal lead different from the normal usage and/or normal lead time. In order to guard against such a contingency, time. In order to guard against such a contingency, the firm maintains a safety stock – the firm maintains a safety stock – the minimum of the minimum of buffer stock as a cushion against possible increase buffer stock as a cushion against possible increase in usage or delay in delivery time.in usage or delay in delivery time.

The level of safety stock can be worked out with The level of safety stock can be worked out with the following formula:the following formula:

Safety stock = Average usage x period of Safety Safety stock = Average usage x period of Safety stockstock

If the firm maintains safety stock, then the If the firm maintains safety stock, then the ROL = Lead time x Average usage + Safety stockROL = Lead time x Average usage + Safety stock

Accounts receivable managementAccounts receivable management Accounts receivable (also popularly known as Accounts receivable (also popularly known as

receivablesreceivables) constitute a significant portion of the ) constitute a significant portion of the total current assets of the business next after total current assets of the business next after inventories. They are a direct consequence of ‘trade inventories. They are a direct consequence of ‘trade credit’ which has become an essential marketing tool credit’ which has become an essential marketing tool in modern business.in modern business.

Receivables created in books when goods or Receivables created in books when goods or services are sold on credit. services are sold on credit.

Usually, the credit sales are made on open account Usually, the credit sales are made on open account which means that no formal acknowledgements of which means that no formal acknowledgements of debt obligations are taken from the buyer except the debt obligations are taken from the buyer except the PO, shipping documents, despatch statement etc.PO, shipping documents, despatch statement etc.

Meaning:Meaning: Receivables are asset accounts Receivables are asset accounts representing amounts owned to the firm as a result of representing amounts owned to the firm as a result of sale of goods/sale of goods/services in the ordinary course of services in the ordinary course of business.business.

The objective of such a facility is to allow the customer The objective of such a facility is to allow the customer a reasonable period of time in which they can pay for a reasonable period of time in which they can pay for the goods purchased by them.the goods purchased by them.

Meaning of receivable managementMeaning of receivable management Receivables as a result of - trade credit – push up Receivables as a result of - trade credit – push up

sales – to push up profit.sales – to push up profit. Credit sales leads to blocking of funds – therefore Credit sales leads to blocking of funds – therefore

additional funds are required for the operating needs additional funds are required for the operating needs resulting in additional costs in the form of interest.resulting in additional costs in the form of interest.

Increase in trade credits results in bad debts.Increase in trade credits results in bad debts. Management of accounts receivables, therefore, is Management of accounts receivables, therefore, is

defined as defined as the process of making decisions relating the process of making decisions relating to the investment of funds in this asset, which will to the investment of funds in this asset, which will result in maximising the overall return on the result in maximising the overall return on the investment of the firm.investment of the firm.

Therefore, the objective of receivable management is Therefore, the objective of receivable management is to to promote sales and profits until that point is promote sales and profits until that point is reached where the return on investment in further reached where the return on investment in further funding of receivables is less than the cost of the funding of receivables is less than the cost of the funds raised to finance that additional credit. i.e. funds raised to finance that additional credit. i.e. the cost of capitalthe cost of capital..

Purpose of receivablesPurpose of receivables:: Achieving growth in salesAchieving growth in sales Increasing profitsIncreasing profits Meeting competitionMeeting competition

Cost of maintaining receivablesCost of maintaining receivables:: Capital costs – when funds blocked in Capital costs – when funds blocked in

receivables means raising of additional funds to receivables means raising of additional funds to meet other cash out flows, resulting in additional meet other cash out flows, resulting in additional capital costscapital costs

Administrative costsAdministrative costs Collection costs – a. additional operating costs Collection costs – a. additional operating costs

for maintaining records etc and b. credit for maintaining records etc and b. credit information about debtorsinformation about debtors

Defaulting costs – bad debtsDefaulting costs – bad debts Delinquency costs – costs due to non-payment Delinquency costs – costs due to non-payment

in time – sending remainders, getting legal in time – sending remainders, getting legal opinion etcopinion etc

Receivable management policiesReceivable management policies::The receivable management has three The receivable management has three

areas:areas:Credit policiesCredit policiesCredit termsCredit termsCollection policiesCollection policies

Credit policiesCredit policies::

The credit policy is based on:The credit policy is based on:Credit standards and Credit standards and Credit analysisCredit analysis

Credit standards: Refers to the basic Credit standards: Refers to the basic consideration for the extension of credit facilities consideration for the extension of credit facilities to the customers.to the customers.If the standards are high, the If the standards are high, the sales and receivables are less and v.v.sales and receivables are less and v.v.

The credit standards are fixed by the factors The credit standards are fixed by the factors such as:such as: Collection costs such as operating costs such as Collection costs such as operating costs such as

maintaining records, staffing, bad debts, legal charges maintaining records, staffing, bad debts, legal charges etc – are semi variable – a portion can be controlled.etc – are semi variable – a portion can be controlled.

Average collection period – the time gap between the Average collection period – the time gap between the availing of credit and repayment – longer period availing of credit and repayment – longer period means idle investment.means idle investment.

Credit ratings – the integrity of the customersCredit ratings – the integrity of the customers Financial ratios such as debt collection period, liquid Financial ratios such as debt collection period, liquid

and current asset ratios, CA to total assets etcand current asset ratios, CA to total assets etc

Credit analysis: The credit analysis is Credit analysis: The credit analysis is usually done in two steps:usually done in two steps:

Obtaining credit information – from internal Obtaining credit information – from internal or external sources. Usually the internal or external sources. Usually the internal sources are supplemented by the external sources are supplemented by the external sources of information such as financial sources of information such as financial statements, bank references, trade statements, bank references, trade references and specialist credit bureau references and specialist credit bureau reports.reports.

Analysis of credit information – by using Analysis of credit information – by using quantitative and qualitative techniques and quantitative and qualitative techniques and compare with the firm’s credit policies.compare with the firm’s credit policies.

Credit TermsCredit Terms:: After establishing good credit policy the After establishing good credit policy the

concern should design its credit terms. Credit terms concern should design its credit terms. Credit terms mean the principles listed for extending credit mean the principles listed for extending credit facilities to the customers. It contains three elements:facilities to the customers. It contains three elements:

Credit periodCredit period Cash discountCash discount Cash discount periodCash discount period The credit period is highly flexible and vary The credit period is highly flexible and vary

depending upon the nature of business, nature of depending upon the nature of business, nature of customers, competition, inventory policy etc. Further, customers, competition, inventory policy etc. Further, an earlier period is fixed to avail some concessions an earlier period is fixed to avail some concessions by the customers in the form of cash discounts vary by the customers in the form of cash discounts vary from 1 – 2.5 %. The cash discount is a loss, but from 1 – 2.5 %. The cash discount is a loss, but ensures prompt payments and better turn over of ensures prompt payments and better turn over of cash.cash.

Collection policiesCollection policies:: The collection policies are the procedure to be The collection policies are the procedure to be

followed in collecting the receivable after the followed in collecting the receivable after the expiry of collection period. The collection policy expiry of collection period. The collection policy can be liberal or strict based on the cost-benefit can be liberal or strict based on the cost-benefit analysis.analysis.

The collection procedure should be fixed, for an The collection procedure should be fixed, for an efficient receivable management.efficient receivable management.

The receivable can be collected through,The receivable can be collected through, Sending remindersSending reminders Personal contactsPersonal contacts Collection agenciesCollection agencies Legal action as last resortLegal action as last resort