refers to the set of policies, procedures, and
practices employed by a company with respect
to managing sales offered on credit.
Itencompasses the evaluation of client credit
worthiness and risk, establishing sales terms
and credit policies, and designing an
appropriate receivables collection process.
Significance of Receivable Management
Optimum investment in receivables
Analyze credit worthiness of customers
Increase in Sales
Increase in profits
Maximize the value of firm
Obtain Credit Information
Analysis and evaluation of credit proposals
Setting up credit standards
Set up credit terms
Credit granting decision
Controlling account receivable
Providing credit information to the top level
management
Credit policy
Credit standards
Credit terms
Collection policy
Character
Capacity
Capital
Collateral
Condition
Credit period
Cash discount
Cash discount period
Correspondence
Telephone calls
Personal Visits
Legal action etc.
Performance Evaluation of Accounts
Receivables Management
Widely used important tools are:
1. Accounts Receivable Turnover
2. Days Sales Outstanding
3. Aging schedule
Measures the average number of times
receivables are collected during a period. A
high ratio is congruent with efficient
receivables management, and could indicate
that the company’s credit and collection
policies are sound.
Credit Sales
AR Turnover =
Average Accounts Receivable
Example: Company’s total credit sales amounted
to P3.6M for year 2019. Its accounts receivable
as of Dec 31 2019 is P400,000 and as of Jan 31,
2019 is P200,000. Compute the Accounts
Receivable Turnover.
Credit Sales
AR Turnover =
Average Accounts Receivable
= 3.6M / (400,000 +200,000)/2
= 12 times
A ratio that measures the average length of time
required to convert receivables into cash receipts.
Low ratios can indicate good receivables
management and collection policies since the
company is translating its receivables into cash
efficiently.
DSO = Average receivable * Days in a year
Net credit Sales
DSO = Days in a year
Receivable turnover
Example: Company’s total credit sales amounted to
P3.6M for year 2019. Its accounts receivable as of
Dec 31 2019 is P400,000 and as of Jan 31, 2019 is
P200,000. Compute the DSO.
DSO = Average receivable * Days in a year
Net credit Sales
= (400,000+200,000/2) * 360 = 30 days
3.6M
DSO = Days in a year = 360/ 12 = 30 days
Receivable turnover
This report tabulates the total amount of receivables outstanding for each
client, as well as their duration. When aggregated, it is a useful assessment
of receivables’ credit risk and collectability, and pinpoints financially
problematic clients.
Example:
Age of Customer A Customer B
Account
(Days) Value of account % of total value Value of account % of total value
0-10 P 1,400,000 70% P 900,000 45%
11-30 600,000 30 500,000 25
31-45 0 0 300,000 15
46-60 0 0 200,000 10
Over 60 0 0 100,000 5
Total P 2,000,000 100% P 2,000,000 100%
receivables
Calculation of investment in receivables:
Investment in receivables = Production unit * Cost per unit
Days in a year
Calculation of cost of carrying receivables:
Cost of carrying variables = Investment in receivables * Opportunity cost
Calculation of bad debt losses:
Bad debt losses = Annual credit sales * Bad debt rate
Sample Exercises:
Suppose the following information was taken from the 2014 financial
statements of FedEx Corporation, a major global transportation/delivery
company.
2014 2013
Calculate the accounts receivable turnover and the average collection
period for 2014 for FedEx. (Round answers to 2 decimal place. Use 365
days for calculation.)
Answer- Sample Exercises:
2014 2013
accounts receivable turnover = Sales/ Ave AR
= 35,130 / (3453+4404)/2
= 35,130 / 3,928.50
= 8.94 times
average collection period = 365 days / 8.94
= 40.8 or 41 days
(Use 365 days for calculation for this example)