ASSIGNMENT

Course Name- Advance Corporate Financial

Management
Module 3 – Receivables Management

[Link] Credit Management Through Credit Policy Variables?

The important dimensions of a firm’s credit policy are credit standards, credit period, cash
discount and collection effort. These variables are related and have a bearing on the level of
sales, bad debt loss, discounts taken by customers, and collection expenses.

i) Credit standards:
A firm has a wide range of choice in this respect. At one and of the spectrum, it may decide
not to extend credit to any customer, however strong his credit rating may be. At the other
end, it may decide to grand credit to all customers irrespective of their credit rating. Between
these two extreme positions lie several positions, often the more practical ones.

ii) Credit period:

The credit period refers to the length of time customers are allowed to pay for their
purchases. It generally varies from 15 days to 60 days. When a firm does not extend any
credit, the credit period would obviously be zero. If a firm allows 30 days, say, of credit, with
no discount to induce early payments, its credit terms are stated as “net 30”.

iii) Cash discount:

Firms generally offer cash discounts to induce customers to made prompt payments. The
percentage discount and the period during which it is available are reflected in the credit
terms. For example, credit terms of 2/10, net 30 mean that a discount of 2 per cent is offered
if the payment is made by the tenth day; otherwise, the full payment is due by the thirtieth
day.
Liberalizing the cash discount policy may mean that the discount percentage is increased
and/or the discount period are lengthened. Such an action tends to enhance sales (because the
discount is regarded as price reduction), reduce the average collection period (as customers
 pay promptly), and increase the cost of discount.

iv) Collection Effort:

The collection programmed of the firm, aimed at timely collection of receivables consisting
of – monitoring the state of receivables, dispatch of letters to customers whose due date is
approaching, telegraphic and telephonic advice to customers around the due date, threat of
legal action to overdue accounts and legal action against overdue accounts.

[Link] Example of Marginal Analysis in the Manufacturing Field?

When a manufacturer wishes to expand its operations, either by adding new product
lines or increasing the volume of goods produced from the current product line, a marginal
analysis of the costs and benefits is necessary. Some of the costs to be examined include,
but are not limited to, the cost of additional manufacturing equipment, any additional
employees needed to support an increase in output, large facilities for manufacturing or
storage of completed products, and as the cost of additional raw materials to produce the
goods. Once all of the costs are identified and estimated, these amounts are compared to
the estimated increase in sales attributed to the additional production. This analysis takes
the estimated increase in income and subtracts the estimated increase in costs. If the
increase in income outweighs the increase in cost, the expansion may be a wise
investment.
For example, consider a hat manufacturer. Each hat produced requires seventy-five cents
of plastic and fabric. Your hat factory incurs $100 dollars of fixed costs per month. If you
make 50 hats per month, then each hat incurs $2 of fixed costs. In this simple example, the
total cost per hat, including the plastic and fabric, would be $2.75 ($2.75 = $0.75 +
($100/50)). But, if you cranked up production volume and produced 100 hats per month,
then each hat would incur $1 dollar of fixed costs because fixed costs are spread out across
units of output. The total cost per hat would then drop to $1.75 ($1.75 = $0.75 +
($100/100)). In this situation, increasing production volume causes marginal costs to go
down.

[Link] Discriminate Analysis?

 Discriminant analysis is statistical technique used to classify observations into
nonoverlapping groups, based on scores on one or more quantitative predictor variables.
For example, a doctor could perform a discriminant analysis to identify patients at high or
low risk for stroke. The analysis might classify patients into high- or low-risk groups, based
on personal attributes (e.g., chololesterol level, body mass) and/or lifestyle behaviors (e.g.,
minutes of exercise per week, packs of cigarettes per day).

Two-Group Discriminant Analysis

A common research problem involves classifying observations into one of two groups,
based on two or more quantitative, predictor variables. When there are only two
classification groups, discriminant analysis is really just multiple regression, with a few
tweaks.
 The dependent variable is a dichotomous, categorical variable (i.e., a categorical
variable that can take on only two values).
 The dependent variable is expressed as a dummy variable (having values of 0 or 1).
 Observations are assigned to groups, based on whether the predicted score is closer to
0 or to 1.
 The regression equation is called the discriminant function.
 The efficacy of the discriminant function is measured by the proportion of correct
assignments.
The biggest difference between discriminant analysis and standard regression analysis is
the use of a categorical variable as a dependent variable. Other than that, the two-group
discriminant analysis is just like standard multiple regression analysis.
The key steps in the analysis are:
 Estimate regression coefficients.
 Define regression equation, which is the discriminant function.
 Assess the fit of the regression equation to the data.
 Assess the ability of the regression equation to correctly classify observations.
 Assess the relative importance of predictor variables.

[Link] Limitations of Marginal Analysis?

 Marginal analysis derives from the economic theory of marginalism—the idea that
human actors make decisions on the margin. Underlying marginalism is another concept:
the subjective theory of value. Marginalism is sometimes criticized as one of the "fuzzier"
areas of economics, as much of what is proposed is hard to accurately measure, such as an
individual consumers' marginal utility.
Also, marginalism relies on the assumption of (near) perfect markets, which do not exist
in the practical world. Still, the core ideas of marginalism are generally accepted by most
economic schools of thought and are still used by businesses and consumers to make
choices and substitute goods.
Modern marginalism approaches now include the effects of psychology or those areas
that now encompass behavioral economics. Reconciling neoclassic economic principles
and marginalism with the evolving body of behavioral economics is one of the exciting
emerging areas of contemporary economics.
Since marginalism implies subjectivity in valuation, economic actors make marginal
decisions based on how valuable they are in the ex-ante sense. This means marginal
decisions might later be deemed regrettable or mistaken ex-post. This can be demonstrated
in a cost-benefit scenario. A company might make the decision to build a new plant
because it anticipates, ex-ante, the future revenues provided by the new plant to exceed the
costs of building it. If the company later discovers that the plant operates at a loss, then it
mistakenly calculated the cost-benefit analysis.
That said, inaccurate calculations reflect inaccuracies in cost-benefit assumptions and
measurements. Predictive marginal analysis is limited to human understanding and reason.
When marginal analysis is applied reflectively, however, it can be more reliable and
accurate

[Link] short note, Control of Accounts Receivables?

 Controls over accounts receivable really begin with the initial creation of a
customer invoice, since you must minimize several issues during the creation
of accounts receivable before you can have a comprehensive set of controls
over this key asset. Controls then span the proper maintenance of accounts
receivable, and their elimination through either payments from customers or
the generation of credit memos.
The key controls to consider are:
 Require credit approval prior to shipment: You will have problems
collecting accounts receivable if an order is shipped to a customer with a
bad credit rating. Therefore, require the signed approval of the credit
department on all sales orders over a certain dollar amount.
 Verify contract terms: If there are unusual payment terms, verify them
before creating an invoice. Otherwise, accounts receivable will contain
invoices that customers refuse to pay.
 Proofread invoices: If an invoice for a large-dollar amount contains an
error, the customer may hold up payment until you send a revised
invoice. Consider requiring the proofreading of larger invoices to
mitigate this problem.
 Authorize credit memos: People who have access to incoming customer
payments could intercept incoming cash and then create a credit memo
to cover their tracks. One step in the prevention of this problem is to
require the formal approval of a manager for credit memos, which are
then verified at a later date by the internal audit staff. Do not take this
control to extremes and require approval for extremely small credit
memos - allow the accounting staff to create small ones without
approval, just to clean up small remaining account balances.
 Restrict access to the billing software: As just noted, someone could
intercept incoming payments from customers and hide the theft with a
credit memo. You should password-protect access to the billing
software to prevent the illicit generation of credit memos.
 Segregate duties: As just noted, no one should be able to handle
incoming customer payments and create credit memos, or else they will
be able to take the money and cover their tracks with credit memos.
Therefore, assign these tasks to different people.
 Review accounts receivable journal entries: Accounts receivable
 transactions almost always go through a sales journal in the accounting
software that generates its own accounting entries. Therefore, there
should almost never be a manual journal entry in the accounts
receivable account. You should investigate these entries carefully.
 Audit invoice packets: After invoices are completed, there should be a
packet on file that contains the sales order, credit authorization, bill of
lading, and an invoice copy. The internal audit staff should review a
selection of these packets to verify that the billing clerk properly
reviewed all of the supporting paperwork and correctly generated an
invoice.
 Match billings to shipping log: It is possible that items will be shipped
without a corresponding invoice, or vice versa. To detect these
situations, have the internal audit staff compare billings to the shipping
log, and investigate any differences.
 Audit the application of cash receipts: The accounting staff may
incorrectly apply cash receipts to open invoices, perhaps not even
applying them to the accounts of the correct customers. Have the
internal audit staff periodically trace a selection of cash receipts to
customer invoices to verify proper cash application.