Receivables Management 323with the population of the state (12 lac approximately). The luxury beach resort hotels have very good
occupancy in the peak tourist season of October–March. Indian tourists and businesses account for the
business during the rest of the year. IRHL is the only 5-star luxury beach resort in north Goa. Other hotels/
resorts like Majorda Beach Resort, Goa Renaissance, The Leela Beach, etc., have similar facilities in south
Goa. With no other beach resort coming up in the vicinity in the near future, the company is uniquely placed
to face the competition from other beach resorts.
Credit facilitates sales. It is valuable to customers as it augments their resources. Accounts receivables
arise out of selling goods on credit to customers. The value of goods sold on credit appear as accounts receiv-
able under the current assets in the balance sheet at the end of the accounting year and appear as accounts
payable on the balance sheet of the customer. Many companies sell goods on credit. Given below is an
excerpt from the balance sheet of Reliance Industries Limited (RIL), which had Rs 601.42 crore in receivables
in 1996–97.
(1996–97; Rs crore)
Current assets
Interest accrued on investment 60.33
Inventories 1,085.36
Sundry debtors 601.42
Cash and bank balances 863.75
2,610.86In many companies receivables management is restricted to phone calls by clerks in the sales department,
or to customer enquiry by sales personnel. It is important to understand that a sale unpaid has an implicit cost.
If it costs 13 percent for a company to borrow; an unpaid sale of Rs 10 lac costs Rs 13,000 per annum in
interest expense or Rs 13/12 × Rs 10 lac per month. Yet, executives do not pay attention to receivables man-
agement. The reason is simple: sales executives focus on booking sales whereas credit information rests
with accounting personnel. They live in different worlds.
Motivations for Credit Sales
Three major motivating factors may be traced to the credit granting decision:
- Selling on credit usually induces customers to buy more. The growth in sales revenue is usually considered
a healthy situation. - As sales increase, profits generally increase as long as the benefit of granting credit exceeds costs.
- Credit sales could be a potential marketing tool. Other things remaining constant, credit terms could be
used to differentiate from competitors or match the industry norms.
This chapter has three sections: assessing credit risk, designing a credit policy and impact of extending
credit on profit.
Cost of Extending Credit
Three types of costs are involved in maintaining receivables: cost of financing receivables, administrative
and collection expenses, and bad debt losses.