Q&A on Receivable Management

 Here are 50 simple question and answer pairs based on the Receivables Management unit:

Receivables Management – 50 Q&A

  1. Q: What is receivables management?
    A: It is the process of managing amounts owed to a firm by its customers after credit sales.
  2. Q: Why is receivables management important?
    A: It helps maintain liquidity and profitability by ensuring timely collections.
  3. Q: What is trade credit?
    A: Credit extended by a seller to a buyer for goods/services sold.
  4. Q: What are credit sales?
    A: Sales made on the promise of future payment.
  5. Q: What are the objectives of receivables management?
    A: To maximize sales, minimize risk, and ensure timely recovery.
  6. Q: What is a credit policy?
    A: A set of guidelines for offering credit and collecting dues.
  7. Q: Name the components of credit policy.
    A: Credit standards, credit terms, and collection efforts.
  8. Q: What are credit standards?
    A: Criteria to evaluate a customer’s creditworthiness.
  9. Q: What is the credit period?
    A: The time allowed for customers to pay after a sale.
  10. Q: What is cash discount?
    A: A discount offered for early payment.
  11. Q: What is meant by collection policy?
    A: A plan for ensuring customers pay their dues on time.
  12. Q: What is the aging schedule?
    A: A report showing receivables based on the duration outstanding.
  13. Q: What is bad debt?
    A: An amount owed by a customer that is unlikely to be recovered.
  14. Q: What is the average collection period?
    A: The average number of days to collect receivables.
  15. Q: How is receivables turnover ratio calculated?
    A: Credit Sales ÷ Average Receivables.
  16. Q: What does a high receivables turnover ratio indicate?
    A: Efficient collection of receivables.
  17. Q: What is credit analysis?
    A: Evaluation of a customer’s ability to repay.
  18. Q: Name any one tool used in credit analysis.
    A: Credit scoring.
  19. Q: What is factoring?
    A: Selling receivables to a third party at a discount.
  20. Q: What is the impact of liberal credit policy?
    A: It increases sales but may delay cash flow.
  21. Q: What is the impact of strict credit policy?
    A: It reduces risk but may lower sales.
  22. Q: What is credit risk?
    A: The risk of non-payment by customers.
  23. Q: How can firms reduce credit risk?
    A: By proper credit screening and setting limits.
  24. Q: What is delinquent account?
    A: An account where payment is overdue.
  25. Q: What is provision for doubtful debts?
    A: An estimate of likely bad debts set aside in accounts.
  26. Q: What is letter of credit?
    A: A bank guarantee for payment to the seller.
  27. Q: What are the costs of maintaining receivables?
    A: Financing costs, collection costs, and bad debt losses.
  28. Q: How does receivables affect working capital?
    A: Higher receivables increase the need for working capital.
  29. Q: What is a credit limit?
    A: Maximum credit a firm will extend to a customer.
  30. Q: What is the purpose of sending reminders?
    A: To prompt customers to make payments.
  31. Q: Name a financial ratio related to receivables.
    A: Debtors turnover ratio.
  32. Q: What is liberal credit policy?
    A: A policy offering easy credit to boost sales.
  33. Q: What is strict credit policy?
    A: A conservative approach to reduce risk.
  34. Q: What is dunning?
    A: The process of communicating with customers to ensure payment.
  35. Q: What is the formula for average receivables?
    A: (Opening + Closing Receivables) ÷ 2
  36. Q: What is a collection agency?
    A: A third-party firm that recovers overdue payments.
  37. Q: What is the role of the finance manager in receivables?
    A: To design and monitor credit and collection policies.
  38. Q: How can technology help in receivables management?
    A: By automating invoicing, tracking dues, and sending reminders.
  39. Q: What is creditworthiness?
    A: A customer’s ability and willingness to pay.
  40. Q: What are early payment incentives?
    A: Discounts offered to customers for paying before the due date.
  41. Q: What is customer profiling?
    A: Analyzing customer behavior to assess credit risk.
  42. Q: What is the trade-off in receivables management?
    A: Between increased sales and delayed cash inflow.
  43. Q: What is financial distress due to receivables?
    A: Inability to meet obligations due to excess unpaid dues.
  44. Q: What is an invoice?
    A: A bill sent to a customer for payment.
  45. Q: How does inflation impact receivables?
    A: Reduces real value of payments received later.
  46. Q: What is receivable financing?
    A: Borrowing against receivables.
  47. Q: What is accounts receivable aging?
    A: Categorizing receivables by the length of time they’re due.
  48. Q: What is credit extension decision?
    A: Choosing whether or not to grant credit to a buyer.
  49. Q: What is overdue receivable?
    A: Payment not received by the due date.
  50. Q: Why do firms monitor receivables regularly?
    A: To ensure liquidity, minimize losses, and improve collections.

1. Describe the major terms of payment in practice.

  • Cash on Delivery (COD): Payment made at the time of delivery.
  • Advance Payment: Full/partial payment before goods are shipped.
  • Net Terms (e.g., Net 30): Full payment due within a specified period (e.g., 30 days).
  • Discount Terms (e.g., 2/10, Net 30): 2% discount if paid within 10 days; full due in 30.
  • Installment Terms: Payment in regular intervals.

2. What are the important dimensions of a firm’s credit period?

  • Length of Credit Period: Time allowed to customers to pay.
  • Discount Terms: Incentives for early payment.
  • Grace Period: Extra time offered without penalty.
  • Penalties for Delay: Charges or interest for overdue payments.

3. Consequences of Lengthening vs Shortening the Credit Period:

  • Lengthening:
    • ↑ Sales volume
    • ↑ Receivables & risk of bad debts
    • ↓ Cash flow
  • Shortening:
    • ↓ Sales to credit-sensitive customers
    • ↑ Liquidity and lower risk
    • Better working capital management

4. Effects of Liberal vs Stiff Credit Standards:

  • Liberal:
    • ↑ Sales and market penetration
    • ↑ Risk of defaults and bad debts
  • Stiff:
    • ↓ Sales growth
    • ↓ Risk of non-payment, better cash flow

5. Effects of Liberalizing the Cash Discount Policy:

  • Encourages early payments
  • Improves cash flow
  • May reduce profit margins
  • Increases administrative costs if not managed properly

6. Simple Risk Classification System & Rationale:

  • Class A: Excellent credit history, low risk
  • Class B: Moderate risk, pay regularly but sometimes delayed
  • Class C: High risk, history of defaults
    Rationale: Helps in targeting credit limits and monitoring collection efforts accordingly.

7. Analyzing Credit Granting Decision After Creditworthiness Assessment:

  • Compare customer’s credit score with firm’s minimum benchmark
  • Evaluate past payment behavior and references
  • Determine exposure limit
  • Align decision with company’s credit policy

8. Benefits and Costs of Credit Extension & Combining for Credit Policy:

  • Benefits:
    • Boost in sales
    • Increased customer loyalty
  • Costs:
    • Risk of bad debts
    • Collection costs
    • Opportunity cost of tied-up funds
      Balance: Using cost-benefit analysis and breakeven approach to set optimal credit terms.

9. Role of Credit Terms and Credit Standards in Credit Policy:

  • Credit Terms: Influence payment speed and customer satisfaction
  • Credit Standards: Define the level of risk the firm is willing to accept
    Both shape customer selection, sales volume, and cash flow management.

10. Objectives of Collection Policy & How to Establish It:

  • Objectives:
    • Minimize bad debts
    • Maximize timely collections
    • Maintain customer goodwill
      Establishment: Based on customer risk category, industry norms, and firm’s cash needs.

11. Effect of Situations on Receivables:

a. Interest Rate Increases: ↓ Demand, ↓ credit sales → ↓ receivables
b. Recession: ↑ defaults, ↓ sales → ↑ overdue receivables
c. Rising Costs: Tighter cash flows → ↑ reliance on credit → ↑ receivables
d. Change to 3/10, Net 30: More incentive → ↑ early payment → ↓ receivables

13. When Criticism of Increased Bad Debts & Collection Period May Be Unjustified:

  • If sales volume and profitability have significantly increased
  • New markets/customers are being developed
  • Firm has strategic reasons for lenient credit to gain market share

14. Credit and Collection Procedures for Individual Accounts:

  • Maintain detailed customer credit profiles
  • Use credit scoring systems
  • Set individual credit limits
  • Issue timely invoices and reminders
  • Escalate overdue accounts with follow-ups or legal action

15. What are Non-Performing Assets (NPAs)? Reasons for Growing NPAs:

  • NPA: A loan/advance where interest or installment is overdue >90 days.
  • Reasons:
    • Poor credit appraisal
    • Economic slowdown
    • Wilful default
    • Political interference
    • Delay in legal proceedings

16. Main Provisions for NPAs & Suggestions to Reduce Them:

  • Provisions: Banks must set aside a % of loan value as provision based on asset classification.
  • Suggestions:
    • Strengthen credit appraisal
    • Early warning systems
    • Speed up recovery via DRTs, SARFAESI
    • One-time settlement schemes

17. Short Notes:

i) Debt Recovery Tribunals (DRTs):
Special courts established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to expedite recovery of bad debts.

ii) Indian Bankruptcy Code (IBC):
A unified insolvency law (2016) providing a time-bound process for resolving insolvency of corporates, LLPs, and individuals.

iii) Securitization:
Process of pooling loans and selling them as securities to investors, often used to manage NPAs and improve liquidity.

iv) SARFAESI Act:
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, enables banks to recover assets without court intervention.

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