Page 269 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 12: Receivables Management

Monitoring of Receivables Notes

1. Computation of average age of receivables: It involves computation of average collection
Accounts Receivable at time chosen
period as follows:
Average daily sales
2. Ageing schedule: An important insight into the collection pattern of the preparation of
their ageing schedule. In this, receivables are classified according to their age, say
1-30 days, 31-60 days, 61-90 days, 91-120 days and 121 days and above. This classification
helps the firm in its collection efforts and enables the management to have a closer control
over the quality of individual accounts. The agency schedule provides an effective method
of comparing the liquidity of receivables with the liquidity of receivables in the past as
well as that of another firm in the same industry. This comparison can be made periodically.
The ageing schedule provides a useful supplement to average collection period receivables/
sales analysis.
3. Collection programme:
(a) Monitoring the state of receivables

(b) Intimating to customers when due date approaches
(c) Telegraphic and telephone advice to customers on the due dates
(d) Threat of legal action on overdue accounts
(e) Legal action on overdue accounts.

4. Collection matrix: In order to correctly study the changes in the payment behaviour of
customer, it is helpful to look at the pattern of collections associated with credit sales. The
following table shows an illustrative collection matrix.

Example: The credit sales during the month of January are collected as follows:

10% in January (the month of sales), 42% in February (the first following month), 36% in March
(the second following month) and 12% in April (the third following month).
From the collection pattern, one can judge whether the collection is improving, stable or
deteriorating. A secondary benefit of such an analysis is that it provides a historical record of
collection percentage. That could be useful in projecting monthly receipts for each budgeting
period.
Collection Matrix

Percentage of receivables colleted Jan Feb March April May
during the Sales Sales Sales Sales Sales
Month of sales 10 14 13 15 9
First following month 42 35 38 40 35
Second following month 36 40 26 21 26
Third following month 12 11 23 19 25
Fourth following month 5 5

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