Page 169 - DMGT409Basic Financial Management

Basic Financial Management

Notes Questions

1. What consideration he should take into account, while revising the credit policy of a
company?

2. Advice Dr. Bhatt how he should deal with the circumstances?
3. Define factoring. Briefly discuss the services provided by a factor.

4. What are the various types of factoring?
5. Distinguish between factoring and bill fi nancing.
6. Briefly discuss the appraisal technique followed by a factor.

7. What are the benefits, limitations and constraints of factoring in India?
8. Write a short note on international factoring.

9.7 Summary

Accounts Receivables occupy an important position in the structure of current assets of a
fi rm.

The term receivable is defined as debt owed to the firm by customers arising from sale of

goods or services in the ordinary course of business.
The management of accounts receivables is not cost free. It involves cost and its association
with accounts receivables results in: Opportunity Cost/Capital Cost, Collection Cost, and
Bad Debts.

Liberal credit policy is that policy where the seller sells goods on very liberal credit terms
and standards, which increase in sales, higher profi ts.
Stringent credit policy seller sells goods on credit on a highly selective basis only, which
reduces bad losses, sound liquidity position.
Firms should follow optimum credit policy that lies between lenient and stringent credit
policy.
Optimum credit policy occurs at point where there is a trade off between liquidity and
profi tability.
Collection policies may be divided into two categories – strict/rigorous, and lenient/lax
collection policy.

9.8 Keywords

Collection Policy: It is the procedures passed to collect amount receivables, when they become
due.

Credit Terms: It means the stipulations under which goods or services are sold on credit.
Credit Standards: It refers to the minimum criteria for the extension of credit to a customer.
Lenient Credit Policy: It is that policy where the seller sells goods on very liberal credit terms
and standards.

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.

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