Receivable Management

Lesson Objectives: At the end of the topic, the students are
expected to:
1.Discriminate the credit selection process and the
quantitative procedure for evaluating changes in credit
standards;
2.Evaluate cash discount changes, credit terms, and credit
monitoring in improving firm’s performance;
3.Compute accounts receivable that could be freed from the
operations.
4.Appreciate how accounts receivable policies help the
management in improving their profitability
5.Make decisions involving accounts receivable management.
Accounts Receivable
Anything that represent collections.
There are two general classes of receivables,

namely;
1. Trade receivables refer to claims arising
from the sale of merchandise or services in
the ordinary course of business operations.
2. Non-trade receivables represent claims
arising from sources other than the sale of
merchandise or services in the ordinary
course of business.
Accounts Receivable
Factors Affecting the Size of Receivables
1. Term of the sale. It is a common expectation that
the longer the term of the sale, the higher the level of
the accounts receivable.
2. Paying practices of the customers. Firms with
customers whose habit is to prolong payments are
expected to have a higher level of receivables.
3. Collection policies. Firms with lenient collection
policy have higher levels of receivables than firms
with stricter collection policy
4. Volume of credit sales. Firms that grant most on
credit sales have a higher level of receivables.
Receivable Management
It is the process of determining, handling and
administering accounts receivable related to sales,
and credit policies.
Trade Credit – terms of the sale
GUM Corporation sells on terms of net/30. Its accounts

are on the average 30 days past due. Annual credit sales
are P150, 000. What is the average account receivable?
Answer:
60 x P150,000 = P25,000
360
The cost of a given product is 45 percent of selling price,
and carrying cost is 10 percent of selling price. On
average, accounts are paid 60 days subsequent to the
sale date. Sales average P120,000 per month. What is
the investment on receivable?
Answer:
Accounts Receivable
2 months x 120,000 = P240,000
Investment on receivables
P240,000 x (0.45 + 0.10) = P132,000
 A company has accounts receivable of P900,000. The
average manufacturing cost is 45 percent of the sales price.
The before-tax profit margin is 12 percent. The carrying
cost of inventory is 5 percent of selling price. The sales
commission is 10 percent. What is the investment in the
accounts receivable?
Answer: Manufacturing cost P405,000

Carrying cost 45,000
Sales commission 90,000
Investment in accounts receivable P540,000
If JKL company’s credit sales are P180,000, the
collection period is 90 days, and the cost is 75
percent of sales price, what is a) the average accounts
receivable balance and b) the investment in accounts
receivable; and average investment in accounts
receivable?
a. 180,000/360 x 90 = P 45,000
b. P180,000 x 0.75 = P 135,000
c. P45,000 x 0.75 = P 33,750
Firms invest in accounts receivable through trade credits
for the following purposes;
1. To increase the current sales volume.
2. To retain the current sales.
Costs Associated to Trade Credits

1. Bad debt expense. Bad Debts.doc
2. Variable and fixed cost. V and F Cost.docx
3. Cash discount. Cash discount is normally given to
entice prompt payment of obligations. Cash
Discount.doc
Credit Policy
Components of a Credit Policy
1. Terms of the sale
2. Credit standards
3. Collection policy
Terms of the Sale
(Credit Term)
Relaxing Credit Terms Example
Shortening Credit Period with Discount Offering

Example
Credit Standards
1.Character
2.Capacity
3.Capital
4.Conditions
5.Collateral
Sources of Credit Information
1. Financial statements. Financial ratios like liquidity
ratio, asset utilization ratio and profitability ratio could
give an initial impression about the company whom we
would like to know.
2. Credit rating agencies. These credit rating agencies sell
information to subscribers containing credit performance
of different companies from different industries.
3. Commercial Banks. As a form of service to their
clientele, banks are also giving credit information to their
customers.
4. Trade checking. Trade checking could be done by asking
the prospective customer about their list of suppliers.
Collection Policy
Collection policy refers to guidelines on how receivables are
handled in terms of monitoring and collection.
Collection Policy
Tight Lax
Sales Low High
Accounts Receivable Low High
Bad Debts Low High
Liquidity High Low
Evaluating Receivables
Management
1. Financial Ratios
2. Aging of Receivables
3. Bank Collections
Desired Level of Receivables
NCS x Required collection period

360

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Lesson Objectives: At the end of the topic, the students are

There are two general classes of receivables,

Trade Credit – terms of the sale

GUM Corporation sells on terms of net/30. Its accounts

Answer: Manufacturing cost P405,000

Costs Associated to Trade Credits

Shortening Credit Period with Discount Offering

NCS x Required collection period

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