receivables management

• accounts receivable


  consist of payments to be collected at a later date from when a sale is made
• trade credit


  by allowing customers to pay some time after they receive the goods or service
• why extend credit?

  extending credit stimulates the sales of a business
• associated costs in extending a credit

  1. cost of discount
  2. implicit cost to the customer
  3. administering an collection cost
  4. risk of bad debts
  5. carrying cost
• cost of discount


  customer that pays cash on delivery or within a specified time thereafter (called a discount period) gets a discount from the invoice price
• terms of payment


  the conditions under which the buyer has to pay the invoice
• the customer may receive a cash discount rate if the account is paid before the end of the discount period
• credit period


  the length of time for which the trade credit is granted, and no interest is charges on the outstanding amount until the credit period is over
• date of the invoice


  it is when the discount and credit periods begin
• trade credit


  the amount business owe to their suppliers
• trade credit creates an accounts payable on the books of the company while its recorded as an accounts receivable on the books of the supplier
• carrying cost


  the product of the opportunity cost by the amount invested in the account
• variable cost ratio


  reveals the total amount of variable expenses incurred by a business, stated as a proportion of its net sales
• variable expenses


  costs that change based on production volume
• Cost of administering and collecting the accounts


  Business owners and employees spend a lot of time tracking and managing accounts receivable.
• Risk of bad debts


  sales on open account terms carry an associated risk of non- payment. The longer the delay in paying an invoice, the more chances of it turning into bad debt
• 4 variables of credit policy

  1. credit period
  2. discounts
  3. credit standards
  4. collection policy
• credit period


  length of time buyers are given to pay for their purchases
• discounts


  price reductions given for early payment
• credit standards


  required financial strength of acceptable credit customers
• collection policy


  procedures used to collect past due accounts
• 5 C'S of credit analysis

  1. capacity
  2. character
  3. collateral
  4. conditions
  5. capital
• capacity


  ability of the customer to pay
• character


  willingness of the customer to pay debts
• collateral


  ability of creditors to collect on bad debts if the customerliquidates its assets
• conditions


  sensitivity of the customer’s ability to pay to underlyingeconomic and market factors
• capital


  additional means to repay the debt
• DAYS SALES OUTSTANDING RATIO


  represents the average length of time the firm must wait after making a sale before receiving cash
• DAYS SALES OUTSTANDING

  • also called the AVERAGE COLLECTION PERIOD