Page 294 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 13: Receivables Management

2. Ageing schedule: An important insight into the collection pattern of the preparation of Notes
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

Task ABC Company’s existing sales are 180 lakhs. It is currently extending a credit
period of ‘net 30 days’ to its customers. The company’s contribution to sales ratio is 20 per
cent and the cost of funds is 15 per cent. The company is contemplating to increase its sales
by 16 lakhs to be achieved by means of lengthening the existing period to ‘net 45 days’.
The bad debt loses on additional sales is expected to be 5 per cent. Should the company go
in for a policy change or not?

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