Receivables Management and Factoring
2Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
In This Module We Will Study:
Nature and Goals of Credit Policy Optimum Credit Policy Credit Policy Variables Credit Evaluation of Individual Accounts Monitoring Receivable Summary of Key Concepts
3Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Nature of Credit Policy Investment in receivable
volume of credit sales collection period
Credit policy credit standards credit terms collection efforts
4Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Goals of Credit Policy Marketing tool Maximisation of
sales Vs. incremental profit production and
selling costs administration costs bad-debt losses
Profitability
Liquidity
Tight Creditpolicy
Loose
Costs & Benefits
5Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Optimum Credit Policy Estimation of incremental
profit Estimation of incremental
investment in receivable Estimation of incremental
rate of return (IRR) Comparison of incre-
mental rate of return with required rate of return (RRR)
Optimum credit policy: IRR = RRR
Marginal cost of capital
Marginal rate of return
Tight Creditpolicy
Loose
Costs & Return (%)
6Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Credit Policy Variables
Credit standards Credit analysis
collection period default rate
character capacity condition capital collateral
7Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Credit Policy Variables customer categories
good accounts bad accounts marginal accounts
numerical credit scoring ad hoc approach simple discriminant approach multiple discriminant approach
8Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Credit Policy Variables
Credit-Granting Decision
Credit-granting Decision
CREDIT GRANTINGDECISION
NO CREDIT GRANT CREDIT
PAYMENTRECEIVED
BENEFITPV OF FUTURE
NET CASHFLOWS
PAYMENTNOT RECEIVED
COSTPV OF LOST
INVESTMENT
NET PAYOFFPV OF
(BENEFIT - COST)
NO PAYOFF
9Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Credit Policy Variables Credit terms
credit period cash discount
Collection policy and procedures regularity of collections clarity of collection procedures responsibility for collection and follow-up case-by-case approach cash discount for prompt payment
10Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Credit Evaluation of Customers Credit information
financial statements bank references trade references
Credit investigation and analysis analysis of credit file financial analysis analysis of business and management
Credit limit Collection efforts
11Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.
Monitoring Receivable Collection period Aging schedule Collection experience matrix
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