Management of Receivables^233
Table 4: Analysis of Credit Terms Changing Credit Terms for Mitsui Corporation.a Before credit-related costs and taxes.
Collection Policy
When an account becomes delinquent, a firm can resort to a series of actions to try to
collect on the account. These actions include writing a letter, calling on the phone,
calling in person, using a collection agency, and legal action. The particular collection
procedures followed have a direct impact on bad-debt losses and the average collection
period. The firm has an obvious interest in reducing both bad-debt losses and the average
collection period, which lower total receivables and average collection period, which
lower total receivables and investment in receivables. In general, the more the firm
spends on collection, the lower its delinquency costs (bad-debt losses) and the cost of
maintaining excess receivables. However, the marginal productivity of collection
expenditures decline as the firm expends more and more.
The discussion on collection policy has assumed that sales are independent of collection
policy. Most firms recognise that instituting a very aggressive collection policy may be
very irritating for some customers who are frequently slow in paying. An aggressive
collection policy may therefore adversely affect sales. A second result of an aggressive
collection policy may be to force more customers to prefer taking the discounts. These
Present Plan G Plan H
(d) Increase in sales (%) 0% 5% 10%
(e) Increase in sales (Rs = 1 × Rs 36 crore) 0 Rs 1,800,000 Rs 3,600,000
(f) Margin on sales (%) 20% 20% 20%
(g) Marginal profits (Rs = 2×3)a 0 Rs 3,60,000 Rs 720,000
(h) Average collection period 20 days 31.5 days 42 days
(i) Daily sales Rs 100,000 Rs 105,000 Rs 110,000
(j) Total receivable Rs 2,000,000 Rs 3,307,500 Rs 4,620,000
(k) Increase in receivable 0 Rs 1,307,500 Rs 2,620,000
(l) Increase in investment costs (8×12%) 0 Rs 156,900 Rs 314,400
(m) Increase in bad debt losses (2 × x%) 0 Rs 18,000 Rs 72,000
(n) Sales with discount (Rs) 18,000,000 17,010,000 15,840,000
(o) Credit discounts (%) 2% 2.5% 2.5%
(p) Credit discounts (Rs = 11 × 12) 360,000 340,000 396,000
(q) Increase in discounts 0 19,800 36,000
(r) Increase in collection costs 0 10,000 30,000
(s) Increase in credit costs (9 + 10 + 14 +
15)0 165,100 452,400(t) Increase in profit (4 – 16) 0 194,900 267,600