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Prepared By
Dr. Mahmoud Otaify
Accounts Receivables
Management
A/R Credit
Policy
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Terms of sale Credit
Analysis
Collection
Policy
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Credit period
Cash discount
& discount
period
Type of credit
instrument
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Low consumer
demand
credit period
Low cost, low
profitability, and
high
standardization
credit period
High credit risk
credit period
Small account
size
credit period
Competition
credit period
Customer
type
Varied
Basic Form: 2/10 net 45.
• 2% discount if paid in 10 days.
• Total amount due in 45 days if
discount is not taken.
Buy $500 worth of
merchandise with the
credit terms given above.
• Pay $500(1 − .02) = $490 if you
pay in 10 days.
• Pay $500 if you pay in 45 days.
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Finding the implied interest
rate when customers do not
take the discount.
Credit terms of 2/10 net 45
and $500 loan.
• $10 interest (= .02 × 500).
• Period rate = 10 / 490 = 2.0408%.
• Period = (45 − 10) = 35 days.
• 365 / 35 = 10.4286 periods per
year.
EAR = (1.020408)10.4286 − 1 =
23.45%.
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Invoice
Promissory Note
Commercial
Draft
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Time draft ‫ﻷجل‬ ‫=كمبيالة‬
not immediate.
When draft presented,
buyer “accepts” it.
• Indicates promise to pay.
• “Trade acceptance.”
Seller may keep or sell
acceptance.
Which customers should
receive credit?
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Collecting Credit
information
Determining
creditworthiness
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Financial
statements
Credit reports/past
payment history
Banks
Payment history
with the firm
Character = applicant’s record of meeting past obligations
Capacity = applicant’s ability to repay the requested credit
Capital = applicant’s debt relative to equity
Collateral = The amount of assets the applicant has available for use
in securing the credit.
Conditions = Current general and industry-specific economic conditions
and any unique conditions surrounding a specific transaction
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Credit scoring refers to the process of
calculating a numerical rating for a
customer based on information
collected; credit is then granted or
refused based on the result.
For example, a firm might rate a
customer on a scale of 1 (very poor) to
10 (very good) on each of the five Cs of
credit using all the information
available about the customer.
A credit score could then be calculated
based on the total.
From experience, a firm might choose
to grant credit only to customers with a
score above, say, 30.
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Credit
Monitoring
Collection
Effort
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3. CREDIT MONITORING
What
an ongoing review of the firm’s accounts receivable to determine
whether customers are paying according to the stated credit
terms.
Why
Slow payments are costly to a firm because they lengthen the
average collection period and thus increase the firm’s investment
in accounts receivable
How
Firms usually monitor the credits by:
• By watching the average collection period and
• By constructing an aging schedule for their accounts receivable
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3.1. Average collection period
What
the average number of days that credit sales are
outstanding
Components
the time from sale until the
customer places the
payment in the mail
the time to receive,
process, and collect the
payment
How =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
Average sales per day
What if
credit
terms of
net 30
actual collection
period is
significantly > 30
days
analyzing an
accounts receivable
problem is to “age”
the accounts
receivable
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3.2. Aging schedule
 The accounts receivable balance on the books of Dodd Tool on
December 31, 2015, was $200,000. The firm extends net 30-day
credit terms to its customers. The average collection period is
51.3-day
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Delinquency
letter
Telephone call
Collection
agency
Legal action
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