Corporate Finance

Receivables Management 
 327

For the purposes of monitoring, the data available in the aging schedule could be converted into measures
of effectiveness of credit policy like average collection period and Days Sales Outstanding (DSO).
If the company has annual sales of Rs 486 lac, average daily sales is (486/365) 1.33 lac.

DSO in May = 35/1.33 = 26.3 days

DSO in June = 40/1.33 = 30 days

If DSO is within the normal limits specified by the company, the situation is considered normal. Otherwise,
follow up action needs to be taken. A variant of DSO, the Average Collection Period (ACP), measures the
average number of days required to realize cash.

ACP = (Proportion of customers taking cash discount × Discount period)

+ (Proportion of customers not taking cash discount × Credit period)

Thus, under a 1/10 Net 30 credit policy, if 30 percent customers take discount, ACP

= (0.3 × 10 + 0.7 × 30) = 24 days

The ACP for Fort Aguada Beach Resort, for the period 1992–97, is shown in Exhibit 17.1.

Exhibit 17.1 Average collection period for Fort Aguada Beach Resort

Particulars 31/03/92 31/03/93 31/03/94 31/03/95 31/03/96 31/03/97

Sales (Rs in lacs) 882 1,074 1,302 1,290 1,727 1,799
Credit sales
(Rs in lacs) 661 805 977 968 1,295 1,349
Receivables
(Rs in lacs) 223 241 328 226 324 304
ACP (No. of days) 122 108 121 84 90 81

The ACP has come down from 122 days in 1992, to 81 days in 1997; which suggests that collection has
improved over the years. But when compared with the target of 30 days, the ACP is still too high. FABR uses
the aging schedule to control receivables. The aging schedule is prepared every month and used for follow-
up. Exhibit 17.2 presents the aging schedule for 1996 and 1997.

Exhibit 17.2 Aging schedule

(in Rs) Percentage value

31/03/1996 31/03/97 31/03/96 31/03/97

<=30 13,581,047 13,074,259 40 44
30<CP<=60 8,108,420 7,216,717 24 24
60<CP<=90 6,491,036 4,014,079 19 13
90<CP<=120 566,552 1,333,748 5 4
120<CP<=150 980,771 1,665,463 6 6
150<CP<=180 670,612 327,987 2 1
180<CP<=360 252,287 45,630 1 0
360<CP 720,733 2,347,151 5 8
Total 34,371,458 30,025,034