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Finance Receivable

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    Seminar on:

    receivablemanagement

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    PRESENTED BY;

    POOJA SHAH 11

    ADITI KULKARNI 12

    VAISHALI RANADE 13

    JHOTI KARANDE 20

    REHA JAIN 37

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    Meaning:

    Management of trade credit is commonly known as

    Management of Receivables. Receivables are one of the threeprimary components of working capital, the other beinginventory and cash, the other being inventory and cash.Receivables occupy second important place after inventoriesand thereby constitute a substantial portion of current assets inseveral firms.

    Definition:

    Receivables management is the process of makingdecisions relating to investment in trade debtors .

    Introduction

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    The objective of receivables management is to promote sales

    & profits until that point is reached where the return oninvestment in further funding receivables is less than the cost

    of funds raised to finance that additional credit.

    To take sound decisions as regards investment in debtors .

    Objectives ofReceivableManagement

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    Collection Cost

    Capital Cost

    Delinquency Cost

    Default Cost

    Costs

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    Increase in Sales

    Increase in profit

    Extra profit

    Benefits ofReceivable

    Management

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    The size of the receivable is determined by a number of

    factors. Some of the important factors are as follows:

    1.Level of sales:

    This is the most important factor in determining the size

    of accounts receivable.

    2. Credit policies:

    The term credit policy refers to those decision variables

    that influence the amount of trade credit, i.e., the investment

    in receivables.

    Factors affectingthe size of

    receivables

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    Expansion plan:

    when the company wants to expand its activity. It willhave to enter in to new market to attract the customers.

    Habits of customer:

    the paying habits of customer also affecting size of

    receivables.

    CONTINUED.

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    Forming of credit policy

    Executing the credit policy

    Formulating and executing collection policy

    Dimensions ofreceivablemanagement

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    Quality of credit standards: E.g.:-

    A firm having an annual opportunity cost of 15% iscontemplating installation of a lock box system at an annualcost of Rs. 300000. the system is expected to reduce mailing

    time by 4days & reduce clearing time by 3 days. If the firmcollects Rs. 400000 per day would you recommend thesystem?

    Formula:Gross saving = annual saving on account of reduction in float * opportunity cost

    Forming of

    credit policy

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    Reduction In Time = Mailing Time+ Clearing Time

    = 4+3

    =7 DaysCalculation Of Reduction In Float=

    Firm Collection*reduction Time

    = 400000*7

    Annual Saving On A/C OfReduction In Float =2800000/-

    Calculation:

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    Gross Saving= Annual Saving On Account Of Reduction In

    Float Opportunity Cost

    = 2800000*15%

    = 420000/-

    Net annual saving = gross value - annual cost of

    lock box system

    = 420000-300000

    = 120000/-

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    Executing is very important in credit policy which help in

    evaluation of credit & finding out credit worthiness.

    Collecting credit information:

    Credit analysis:

    Credit decision:Financing investment in receivable and factoring:

    Executingcredit policy

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    Credit terms literally mean the terms of payments of the

    receivables. While the custom of the market refers to the nature of

    credit terms & conditions offered by the firm . In short The credit termspecify how the credit will be offered , the rate of interest & cost of

    default etc.

    There are two important components of credit terms which are detailed

    below:-

    (A) Credit period

    (B) Cash discount terms

    Credit term

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    Collection policy refers to the procedures adopted by a firm

    (creditor) collect the amount of from its debtors when suchamount becomes due after the expiry of credit period.

    A collection policy should always emphasize promptness,regulating and systematization in collection efforts.

    The requirements of collection policy arises on account of thedefaulters .i.e. the customers not making the payments of receivables intime .

    Collection Policy

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    Steps ofcollection policy

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    The collection procedure:

    Once a decide to extend credit and define the term of creditsales it must develop the policy for dealing with slow paying

    customers.

    Monitoring of receivable: average collection period

    aging schedule

    Control ofreceivables

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    Credit period:

    It is the duration of time for which trade credit isextended. During this time the overdue amount must be paid

    by the customer.

    Cash discount term:

    its generally offered to customer to induce them to make a

    prompt payment.

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    Lines of credit:

    It refers to maximum amount of a particular customer mayhave as due to the firm at any time .

    Accounting Ratios :

    These are of two types1 Receivables turnover ratio

    2 Average collection period .

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    CONCLUSI

    ON

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