Page 274 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Gupta told the loan officer that he had monitored his firm’s financial status closely and
that he had financial reports prepared every six months. He said that the would send a
copy to the bank. In addition, he was willing to file a personal financial statement with the
bank.
Question

Prepare your recommendation on Agarwal Cast Company.
12.5 Summary

 Receivable is defined as debt owed to the firm by customers arising sale of goods or
services in the ordinary course of business.

 The three crucial decision areas in receivable management are (a) credit policies (b) credit
terms and (c) collection policies.Credit Policies involves a trade-off between profits on
additional sales that arise due to credit being extended on the one hand and cost of carrying
the receivables and bad debt losses on the other.
 Credit terms have three components which are Credit period, Cash discount and Cash
discount period.
 The collection cost of the firm has to work in a manner that it does not create too much
resentment amongst the customer
 Factoring is a collection and finance service designed to improve the cash flow position of
the sellers by converting sales invoices into ready cash.

 Factoring offers a very flexible mode of cash generation against the receivables.
 Credit management is difficult task for managers that operate internationally because
international operations typically expose a firm to exchange rate risk.

12.6 Keywords

Collection Policy: It is the procedures passed to collect amount receivables, when they become
due.
Credit Standards: It refers to the minimum criteria for the extension of credit to a customer.

Credit Terms: It means the stipulations under which goods or services are sold on credit.
Receivables: It is defined as debt owed to the firm by customers arising from sale of goods or
services in the ordinary course of business.

Receivables Management: It involves decision areas: credit standards, credit period, cash discounts
and collection procedures.

12.7 Review Questions

1. Explain the objectives of credit polity of/or firm. What are the elements of a credit policy?

2. What are the techniques of control of receivables? Explain the “Ageing Schedule”.
3. Who do you mean by factoring? Explain the benefits of factoring.
4. Why are a firm’s regular credit terms typically conform to those of its industry?
5. What are the basic trade-offs in a tightening of credit standards?

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