CHAPTE R 28
RECEIVABLES MANAGEMENT AND FACTORING
LEARNING OBJECTIVES
2
Emphasize the need and goals of establishing a sound credit policy ? Show how an optimum credit policy can be established ? Explain the credit policy variables ? Indicate the credit procedure for and control of individual accounts ? Suggest methods of monitoring receivables ? Discuss the nature and costs and benefits of factoring
?
INTRODUCTION
3
? Trade
credit happens when a firm sells its products or services on credit and does not receive cash immediately. sale has three characteristics:
? A credit
?
First, it involves an element of risk that should be carefully analyzed. ? Second, it is based on economic value. ? Third, it implies futurity.
Nature of Credit Policy
4
? Investment
? volume
in receivable
of credit sales ? collection period
? Credit
? credit
policy
standards ? credit terms ? collection efforts
Goals of Credit Policy
5
? ?
Marketing tool Maximisation of sales Vs. incremental profit
? production
and selling
costs ? administration costs ? bad-debt losses
Optimum Credit Policy
6 ?
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
Costs of Credit Policy
?
?
?
?
Credit Policy Variables
7
? Credit
standards and analysis ? Credit terms ? Collection policy and procedures
Credit Standards
8
? Credit
standards are the criteria which a firm follows in selecting customers for the purpose of credit extension. ? The firm may have tight or loose credit standards.
? Credit
?
analysis
Average collection period (ACP) ? Default rate
Cont…
9
?
Customer categories
• • •
good accounts bad accounts marginal accounts
? Numerical
• • •
credit scoring
ad hoc approach simple discriminant approach multiple discriminant approach
10
Credit-granting Decision
Credit terms
11
? Credit period ? Cash discount
12
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
CREDIT EVALUATION OF INDIVIDUAL ACCOUNTS
13
? Credit
Information
? Financial
statement ? Bank references ? Trade references ? Other sources
? Credit
Investigation and Analysis
? Analysis
of credit file ? Analysis of financial ratios ? Analysis of business and its management
? Credit
Limit ? Collection Efforts
14
MONITORING RECEIVABLES
? Average
Collection Period ? Aging Schedule ? Collection Experience Matrix
FACTORING
15
?
Factoring may be defined as ‘a contract between the suppliers of goods/services and the factor under which
Factoring Services
16
? Credit administration ? Credit collection and protection ? Financial assistance ? Other
services
17
Factoring and Shortterm Financing
? Factoring involves ‘sale’ of
book debts. ? Factoring provides flexibility as regards credit facility to the client. ? Factoring is a unique mechanism which not only provides credit to the client but also undertakes the total management of client’s book debts.
18
Factoring and Bills Discounting
Bills discounting is a sort of borrowing while factoring is the efficient and specialized management of book debts along with enhancement of the client’s liquidity. The client has to undertake the collection of book debt. Bill discounting is always ‘with recourse’, and as such, the client is not protected from bad-debts. Bills discounting is not a convenient method for companies having large number of buyers with small amounts since it is quite inconvenient to draw a large number of bills.
1.
2.
3.
Types of Factoring
19
? Full
service non-recourse ? Full service recourse factoring ? Bulk/agency factoring ? Non-notification factoring
Advance factoring Maturity factoring
Costs of Factoring
20
? the
factoring commission or service fee ? the interest on advance granted by the factor to the firm.
Benefits of Factoring
21
? Factoring
provides specialized service in credit management, and thus, helps the firm’s management to concentrate on manufacturing and marketing. helps the firm to save cost of credit administration due to the scale of economics and specialization.
? Factoring
doc_816490166.ppt
RECEIVABLES MANAGEMENT AND FACTORING
LEARNING OBJECTIVES
2
Emphasize the need and goals of establishing a sound credit policy ? Show how an optimum credit policy can be established ? Explain the credit policy variables ? Indicate the credit procedure for and control of individual accounts ? Suggest methods of monitoring receivables ? Discuss the nature and costs and benefits of factoring
?
INTRODUCTION
3
? Trade
credit happens when a firm sells its products or services on credit and does not receive cash immediately. sale has three characteristics:
? A credit
?
First, it involves an element of risk that should be carefully analyzed. ? Second, it is based on economic value. ? Third, it implies futurity.
Nature of Credit Policy
4
? Investment
? volume
in receivable
of credit sales ? collection period
? Credit
? credit
policy
standards ? credit terms ? collection efforts
Goals of Credit Policy
5
? ?
Marketing tool Maximisation of sales Vs. incremental profit
? production
and selling
costs ? administration costs ? bad-debt losses
Optimum Credit Policy
6 ?
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
Costs of Credit Policy
?
?
?
?
Credit Policy Variables
7
? Credit
standards and analysis ? Credit terms ? Collection policy and procedures
Credit Standards
8
? Credit
standards are the criteria which a firm follows in selecting customers for the purpose of credit extension. ? The firm may have tight or loose credit standards.
? Credit
?
analysis
Average collection period (ACP) ? Default rate
Cont…
9
?
Customer categories
• • •
good accounts bad accounts marginal accounts
? Numerical
• • •
credit scoring
ad hoc approach simple discriminant approach multiple discriminant approach
10
Credit-granting Decision
Credit terms
11
? Credit period ? Cash discount
12
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
CREDIT EVALUATION OF INDIVIDUAL ACCOUNTS
13
? Credit
Information
? Financial
statement ? Bank references ? Trade references ? Other sources
? Credit
Investigation and Analysis
? Analysis
of credit file ? Analysis of financial ratios ? Analysis of business and its management
? Credit
Limit ? Collection Efforts
14
MONITORING RECEIVABLES
? Average
Collection Period ? Aging Schedule ? Collection Experience Matrix
FACTORING
15
?
Factoring may be defined as ‘a contract between the suppliers of goods/services and the factor under which
Factoring Services
16
? Credit administration ? Credit collection and protection ? Financial assistance ? Other
services
17
Factoring and Shortterm Financing
? Factoring involves ‘sale’ of
book debts. ? Factoring provides flexibility as regards credit facility to the client. ? Factoring is a unique mechanism which not only provides credit to the client but also undertakes the total management of client’s book debts.
18
Factoring and Bills Discounting
Bills discounting is a sort of borrowing while factoring is the efficient and specialized management of book debts along with enhancement of the client’s liquidity. The client has to undertake the collection of book debt. Bill discounting is always ‘with recourse’, and as such, the client is not protected from bad-debts. Bills discounting is not a convenient method for companies having large number of buyers with small amounts since it is quite inconvenient to draw a large number of bills.
1.
2.
3.
Types of Factoring
19
? Full
service non-recourse ? Full service recourse factoring ? Bulk/agency factoring ? Non-notification factoring
Advance factoring Maturity factoring
Costs of Factoring
20
? the
factoring commission or service fee ? the interest on advance granted by the factor to the firm.
Benefits of Factoring
21
? Factoring
provides specialized service in credit management, and thus, helps the firm’s management to concentrate on manufacturing and marketing. helps the firm to save cost of credit administration due to the scale of economics and specialization.
? Factoring
doc_816490166.ppt