Corporate Finance

Receivables Management 
 329

period from 30 days to 45 days, with the objective of increasing sales, involves additional investment in
receivables. Some customers may not pay dues resulting in bad debt losses. So an analysis of the credit
policy essentially involves comparison of incremental benefits and incremental costs of the new policy.
Initially, we will treat the four variables as independent and ascertain their impact on profit. Once the impact
of altering any of these variables is clear, we would be in a better position to understand their combined
impact.

CREDIT PERIOD

Lengthening the credit period will generally induce new customers to buy. Existing customers may increase
their offtake. The increase in credit period requires additional investment in receivables. There will be an
increase in profits due to increase in sales. There may or may not be additional bad debt losses depending on
the creditworthiness of new customers. If we assume that fixed costs have already been recovered or no
additional fixed costs will be incurred, each rupee of sales contributes to the recovery of variable cost and
profit. Consider the data given here:

Current sales = Rs 100 crore

(ACPo) Credit period = 30 days

Cost of capital = 15 percent

(ACPn) Proposed credit period = 45 days

Anticipated increase in sales = 10 percent = Rs 10 crore

Contribution/sales = 0.2

Additional profit on new sales = new sales × C/S ratio

= Rs 10 × 0.2 crore

= Rs 2 crore (i)

Increase in receivable on existing sales:

360

(ACPn–ACPo)×current sales

= 15/360 × 100 crore

= Rs 4.2 crore (ii)

Investment in receivable on new sales:

=

Sales

Variable cost

New receivables×

=

Sales

Variable cost

360

45

New sales ××

But, V/S = (1 – C/S)

= Rs 8.0

360

45

10 crore ××

= Rs 1 crore (iii)