Monitoring the Debtors Techniques
1. Ratio Analysis for Control of Receivables:
The analysis of receivables can be done with the help of ratios given below for efficient management of debtors balances:
(a) Debtors Turnover Ratio:
Credit Sales / Average Debtors
(b) Average Credit Period (in days):
(Average Debtors / Credit Sales) * 365
(c) Debtors to Current Assets Debtors:
(Debtors / Current Assets) * 100
(d) Debtors to Total Assets Debtors:
(Debtors / Total Assets) * 100
(e) Bad Debts to Sales:
(Bad Debts / Sales) * 100
(f) Bad Debts to Debtors:
(Bad Debts / Debtors) * 100
The above formulae can be used to analyze the efficiency in management of receivables and to analyze the trend over a period of time.
Ageing Schedule:
The collection pattern is used to make the debtors’ ageing schedule. The total balances of all debtors are put into groups based on how old they are, or how long the money has been owed. The ageing schedule is useful for figuring out how liquid the company is, how good the credit control department is, how well receivables are being collected, how it compares to previous ageing schedules, etc.
The age of the debtors can be used to help figure out what to do about older debts. For better control over collecting receivables, an ageing schedule is made and looked at to find the amounts that are past due. The ageing schedule for receivables is made based on how long they have been overdue. For example, receivables that have been overdue for less than 30 days, 31–45 days, 46–60 days, 61–75 days, 76–90 days, more than 90 days, etc.
The debtors’ ageing schedule can be made by hand or on a computer. To make the schedule, you have to go back to the date when the invoice was made. The schedule is used to figure out which accounts are good, which ones are late, and which ones are giving trouble. The age schedule can also include information about individual accounts, accounts by region, accounts by type of business, etc.
2. ABC Analysis of Receivables:
The ABC analysis method was primarily designed for efficient inventory management. For the company with a large number of accounts, using the same strategy to manage the debtor’s balances will also provide positive results.
From the above table, it can be seen that only 20% of all accounts account for 70% of the total debtor balance. By closely reviewing these accounts and paying debts on time, one can increase the efficiency of debtor collection, as well as the firm’s liquidity, and avoid unnecessary blocking of funds that could be invested elsewhere to maximise return on investment. It also saves on administrative expenses to a considerable degree.
Although they are numerous, Category C debtor balances are quite little relative to the overall quantity of creditors and management focus shouldn’t be diverted to them. Category B debtor balances need minimal supervision. For effective debtor management, it also needs a little bit of care.
3. Discriminate Analysis and Credit Scoring:
Discriminate Analysis:
It is an important tool used for discriminating between good and bad accounts taking into account the readily available information from financial data relating to size of firm, acid test ratio, creditors payment period etc.
Credit Scoring:
It is a technique used in discriminating between good and bad accounts based on past repayment and default experience relating a particular customer. The credit scoring is given for each such customer and credit facility is extend if he exceeds the cut-off score.
4. Credit Utilization Report:
The total limit of credit offered to each customer and the extent to which it is utilized will be reviewed on periodical basis to observe the extent to which total limits being utilized. All this information is presented in a report form called ‘credit utilization report’.
An example of the report is given below:
This report will also contain the other information, such as day sales outstanding and so on. This report will reveal the following:
(a) The number of customers who might want more credit.
(b) The extent to which the company is exposed to debtors.
(c) The tightness of the credit policy.
(d) The degree of exposure to different customers.
5. Cost-Benefit Analysis of Collection Expenses:
A firm has to incur some routine costs like sending reminders, telephone expenses, expenses incurred for personal visits to customers’ places, commission and fees payable to collection agencies, legal expenses etc.
When the firm incurs more costs on collection of debts, there is likely to be less amount of debts turn into bad debts and vice versa. If the firm goes on increasing the cost of collection of debts, after- some point, there would not be further decrease of bad debts. The point is called ‘saturation point’ as shown in figure 16.1, if the firm incurs collection expenses beyond this point, cannot benefit the firm in reducing its bad-debt losses.
6. Measuring Day’s Sales in Terms of Debtors:
The total debtor represented by day’s sales is calculated in the following three ways:
Debtors Turnover Method:
The days sales in debtors ratio represents the length of the credit period taken by customers.
Count Back Method:
This method is based on the assumption that the debtors balance relating to the most current period sales.
Partial Month Period:
This method analyses each months sales and the unpaid portion. These are aggregated together to get days sales of debtors.
The partial month method not only provides the overall debtors ageing figure but also provides month-wise debtors outstanding.
