DEBTORS MANAGEMENT

DEBTORS: IMPORTANT CONSTITUENT OF ASSET.

FIRMS GIVE CREDIT :-

a) To increase Sales –leading to increased profits.

b) To survive in the competitive market

DEBTORS MANAGEMENT

WHY DEBTORS SHOULD BE MANAGED: To optimise the return on investment of this asset. Larger the receivables, larger the working capital

requirement-leading to higher interest costs. Larger debtors-lead to difficulty in recovery-

leading to bad debt/losses. If debtors are low/restricted- sales may be

reduced-leading to reduced profits-threat of survival.

DEBTORS MANAGEMENTChoosing a debtor – the 5 C’s

• Character

• Capacity

• Capital

• Collateral

• Conditions(economic)

DEBTORS MANAGEMENT

EVALUATION OF CREDIT:-• Rating Agencies• Traditional approaches• Trade references• Bank references• Credit Bureau report• Published financial statements• Past experience• Salesman’s reports

DEBTORS MANAGEMENT

COLLECTION EFFORT:-

This involves a trade-off between the level of expenditure on one hand and reduction in bad debt losses & investments in debtors on the other.

DEBTORS MANAGEMENT

PROCEDURE FOR CREDIT COLLECTION:-Length of credit to be allowed.Procedure for follow-up of defaulters.Procedure for remindersProcedure for dealing with doubtful debtsExtent of legal actionHandling of the acccountCollection machinery

DEBTORS MANAGEMENT

CONTROL OF DEBTORS:-TRADITIONAL APPROACH:AGEING SCHEDULE TECHNIQUE:-( amount - % amount – No. of a/cs - % no. of a/cs)OUTSTANDING DAYS’ SALES TECHNIQUERATIO ANALYSISMODERN APPROACH:-PATTERN OF COLLECTIONS SCHEDULESFACTORING

DEBTORS MANAGEMENT DISCRIMINANT ANALYSIS TO EVALUATE

CREDIT RISK:RETURN ON NET WORTH

CURRENT RATIO

ACID TEST / QUICK RATIO(multiplied by a discriminant function)Say- 0.50 for RONW, 2 FOR C/RATIO, 1.5 FOR ATRSay= if D is greater than 20 , quality of Debtors is GOOD

Debtors ManagementDIMENSIONS IN DETERMINATION OF CREDIT POLICY

CREDIT PERIOD:INELASTIC DEMANDELASTIC DEMANDCUSTOMS & PRACTICECOMPETITORS’ POLICYAVAILABILITY OF FUNDCREDIT RISKCUSTOMER-CLASSIFICATION

CASH DISCOUNTSCREDIT STANDARDS

DEBTORS MANAGEMENT

CREDIT POLICY:

LENIENT POLICY:

a) More clients

b) Increase in sales

c) Higher bad-debts

d) High cost of carrying the debtors.

e) Higher prospects for profits

DEBTORS MANAGEMENTCREDIT POLICY:

STRINGENT POLICY

a) Decrease in sales

b) Lesser clients

c) Lesser bad debts

d) Low costs

e) Low profits

DEBTORS MANAGEMENT

IN CONCLUSION, DEBTORS MANAGEMENT INVOLVES A TRADE OFF BETWEEN PROFITS ON ADDITIONAL SALES THAT ARISE DUE TO EXTENDED CREDIT ON ONE HAND AND COST OF CARRYING THE DEBTORS ON THE OTHER.