CHAPTER 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.
 A credit



sale has three characteristics:
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 in


volume of credit sales
collection period
 Credit



receivable
policy
credit 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
Credit-granting Decision
10
Credit terms
11
 Credit
period
 Cash discount
Collection policy and procedures
12





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




Financial statement
Bank references
Trade references
Other sources
 Credit



Information
Investigation and Analysis
Analysis of credit file
Analysis of financial ratios
Analysis of business and its management
 Credit
Limit
 Collection Efforts
MONITORING RECEIVABLES
14
 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
Factoring and Short-term Financing
17
‘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.
 Factoring involves
Factoring and Bills Discounting
18
1.
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.
2.
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.
3.
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.
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.
 Factoring
helps the firm to save cost of credit
administration due to the scale of economics and
specialization.