Corporate Finance

Receivables Management 
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payment is made within the specified period. For instance, 2/10 Net 30 implies that 2 percent discount is

offered if payment is made on or before ten days; otherwise the payment is due in 30 days. The benefit of

receiving early payment outweighs the cost of cash discount offered. In other words, the consideration in

offering the cash discount is the financing cost saved on the 20 days against the cost of cash discount.

BACK TO FABR: COLLECTION PROCEDURE IN

THE HOTEL INDUSTRY

Hotels generate revenue from the following sources:

• Room rent


• Restaurants


• Room service


• Miscellaneous services like:
  — Laundry
  — Telephone/fax
  — Taxi hire
  — Health club
  — Shop
  — Conference

Rooms are reserved on behalf of the guests by travel agents or companies. Very few guests come directly
to the hotel. The guests who come through various sources get different rates, depending on the packages
offered to them by different travel agents/companies and by FABR’s offices in Mumbai. When a guest
checks out, a copy of the bill is presented. The bill is sent for collection to the concerned party depending on
the mode of payment already decided (travel agent/company and check/credit card). Credit for the rooms is
given to almost everyone. Cash sales form around 25 percent of the total income.
Restaurants are where the hotel guests can pay either in cash or by credit card.
Room service is almost similar to that offered in restaurants with respect to its collection process.
If any bill is a credit bill it is sent to the credit section of the accounts department where it is checked for
any discrepancy. This usually takes about one to three days. All the bills are sent by courier for collection. By
the time the bill reaches the party for payment it takes around four to five days, from the time the guest
checked out. Credit sales account for a large chunk of total sales of FABR, similar to any other business. On
an average the company has around 75–85 percent of total sales as credit sales. There are some 400+ custom-
ers of different categories (airlines, conferences, companies, travel agents, etc.) who constitute the debtor list.

Assessing Credit Risk

In competitive markets it might not be possible to confine to AAA rated customers. If all companies fight for

a limited number of high creditworthy customers, who will sell to those who come under the risky category?

We need to define risk parameters and conditions under which a company can trade with these marginal

customers. Sound assessment of credit risk leads to fair assessment of probability of loss and the follow-up

action required. Companies spend a great deal of time and money in follow-up activities. These efforts can

be saved if one knows what one is getting into. This point is rarely appreciated or adequately reflected in the