Thursday, November 6, 2008

(16).WORKING CAPITAL MANAGEMENT-THE MANAGEMENT OF DEBTORS.

The Management Of Debtors.
Several factors shoud be considered by management when a policy for credit control is formulate these include:
  • The administration costs of debt collection
  • The procedures for controlling credit to individual customers & for debt collection
  • The amount of extra capital required to finance & extension of total credit.There are might be an increase in debtors,stock & creditors & the net increase in working capital must be financed
  • The cost of the additional finance required for any increased in the volume of debtors(or the saving from a reduction in debtors).This cost might be bank overdraft interest,or the cost of long term founds(serch as loal stock or equity)
  • Any savings or additional finance required for any increased in the volume of debtors (or the saving from a reduction in debtors) this cost might be bank overdraft interest or the cost of long term funds (serch us long stock or equity)
  • Any savings or additional expenses in operating the credit policy (for example: The extra work involved in pursuing slow payers)
  • The ways in which the credit policy could be implemented.For example ( 1)Credit could be eased by giving debtors a longer period in which to settle their accounts.The cost would be the resulting increase in debtors. (2)A discount could be offered for early payment.The cost would be the amount of the discount taken.
  • The effects of easing credit which might be (1) To encourage a higher proportion of bad debts. (2)An increase in sales volume.
Provided that the extra gross contribution from the incease in sales exceeds the increase in fixed cost expences.Bad debts discounts & the finance cost of an increase on working capital a policy torelax credit terms would be profitable.
Some of those factors involved incredit policy decitions will now be considererd in more detail.
The Debt Collection Policy.
The overall debt collections policy of the firm should be serch that the administrative costs & other costs incurred in debt collection do not exceed the benefits from incurring those costs.
Some extra spending on debt collection procedures might
  1. Reduce bad debt losses
  2. Reduce the average collections period, & therefore the cost of the investment in debtors.
Beyond a certain level of spending, however , addtional expenditurs of debt collection would not have enough effect on bad debts or on the average collection period to justify the extra administrative costs.
Debt Collection Procedures.
The three main areas which ought to be considered in connection with the control of debtors are;
  1. Paperwork .
  2. Debt collection.
  3. Credit control.
Sales paperwork should be dealt with promptly & accurately.
  • Invoices should be sentout immediately after delivery
  • Cheques should be carried out to ensure that invoices are accurate
  • The investing of queries & complaints & if appropriate,the issue of credit notes should be carried out promptly.
  • If pratical,monthly statement should be issued early so that old items on the statement might then be included in customers monthly settlements of bills.
Total Credit.
To determine whether it would be profitable to extend the level of total credit,it is necessary to assess;
  • The extra sales that a more generous credit policy would stimulate
  • The profitability of the extra sales
  • The extra length of the average debt collections period
  • The required rate of return on the investment in additional debtors.
Discount policies.
Varying the discount allowed for early payment of debt
  • Affects the average collection period
  • Affects the volume of demand (and possibly, therefore, indirectly affects bad debt losses)
To see whether the offer of a discount for early payment is financially worthwhile we must compare the cost of the discount with the benifit of a reduced investment in debtors.
Bad Debt Risk.
Different credit policies likely to have differing levels of bad debt risk.The higher turnover resulting from easier credit terms should be sufficiently profitable to exceed the cost of:
  • Bad debts ;&
  • The additional investment necessary to achieve the higher sales.

1 comment:

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