Depending on the term for reimbursement of the cost of the supplied products, the sale can be carried out in one of three ways:
- 1) prepayment (the goods are paid in full or in part before being transferred by the seller) - the seller has an account payable to the buyer;
- 2) payment for cash (the goods are paid in full at the time of the transfer of the goods, i.e. there is a kind of exchange of goods for money) - the proceeds immediately take the form of cash in this case, the buyer's debt to the seller does not arise;
- 3) payment on credit (the goods are paid for after a certain time after its transfer to the buyer) - the seller has a receivable from the buyer to him.
In the conditions of growing competition, non-price competitive factors come to the fore in the competitive struggle. These factors also include the provision to the buyer of preferential terms of payment - deferment, as a result of which the seller's revenue takes the form of the buyer's obligation to the seller - receivables.
The conditions under which the seller grants a deferred payment to the buyer (commercial credit) are determined by the following main factors:
- 1) grace period - when determining the maximum allowable period, it should be taken into account that with an increase in the grace period, the level of financial risk increases;
- 2) buyer's creditworthiness the seller must analyze the financial condition of the buyer, evaluating, in particular, his ability to pay off this obligation; the level of creditworthiness determines, firstly, the very possibility of granting a deferred payment, and secondly, the maximum allowable amount of debt;
- 3) level of provision for doubtful debts - such reserves act as a source for covering losses from unpaid receivables; the maximum allowable amount of the reserve is determined by the financial potential of the seller, and the threshold limit of the risk of the buyer's solvency is determined from the maximum allowable value (in other words: the more the company can afford to lose, the lower will be the allowable level of solvency for buyers to whom it agrees to provide a deferral);
- 4) payment collection systems - the influence of this factor is largely similar to the previous one: the more powerful the collection system the seller can afford, the wider the circle of buyers who are granted a delay; and vice versa, if the seller's financial capacity does not allow him to have a special collection service, it is advisable to grant a delay only to buyers with a "good credit history". The payment collection system usually includes: procedures for interacting with debtors in case of violation of payment terms; development of criteria and monitoring of indicators of payment discipline; methods of punishment of dishonest contractors.
There are two types of commercial loans:
- 1) commodity credit - a deferred payment for products is provided to an economic entity;
- 2) consumer credit - deferred payment is provided to individuals when they purchase goods, works, services.
The main difference between the forms of commercial credit is the level of risk.
The main purpose of the receivables management system (as well as other asset management systems of the company) is to increase the efficiency of the use of working capital; Her tasks usually include:
- – acceleration of cash turnover in settlements;
- - stimulation of sales and, as a result, acceleration of the turnover of stocks of finished products in the warehouse;
- – maintaining an acceptable level of financial risk (there is a rule according to which the risk of non-repayment of receivables is directly proportional to the period of deferment).
The central place in the receivables management system is the definition of its acceptable (or appropriate) level. At the same time, the level of receivables is understood as its share in the total amount of current assets, determined by the formula:
Since receivables are funds temporarily diverted from circulation, the KDZ ratio has a very definite meaning, showing the share of current assets diverted (therefore, it is sometimes called the diversion ratio of current assets into receivables).
One of the most important factors determining the level of receivables (and at the same time - the level of efficiency of the receivables management system) is the turnover of receivables. It is analyzed according to the following indicators:
- - the time of turnover of receivables (average collection period), which determines the contribution of receivables to the actual duration of the financial and general operating cycle of the organization (see formula 2.28);
- - the rate of turnover of funds invested in receivables (see formula 2.27).
The next factor that determines the level of receivables (more precisely, the factor that determines the need for mandatory and careful management of this level) is the quality of receivables. The quality of receivables is usually assessed by the following indicators:
a) the coefficient of consolidation of receivables () - shows how much funds are diverted into debits
torskuyu indebtedness on a permanent basis per 1 rub. proceeds from the sale of products:
b) overdue receivables ratio () - shows the share of overdue debts in the total amount of receivables:
(5.7)
η) average age of overdue debt (AAD):
(5.8)
The next factor determining the level of receivables (in the sense of the expediency of the existing level) is the economic effect of diverting current assets into receivables. This effect can be calculated in two ways:
a) in absolute terms:
(5.9)
where Pribyldz is the company's additional profit received from an increase in the volume of sales of products by providing buyers with a deferred payment; Current costsdz - current costs of the company associated with the organization of lending to customers and debt collection; Financial losses DZ - the amount of direct financial losses from non-repayment of debt by buyers;
b) in relative form:
The absolute effect makes it possible to assess the feasibility of diverting funds into accounts receivable in general: if the value of the indicator is negative, it is generally inappropriate to grant a deferral to buyers. At the same time, it is very difficult to assess the acceptable level of receivables by the indicator, since it is not directly related to the amount of receivables itself.
For the purposes of managing the level of receivables, a relative KEDZ indicator is used, which in its meaning is very similar to profitability indicators.
Another important factor determining the level of receivables is the forms of payment used by the company in relation to settlements with customers. There are the following forms of payment:
- - settlements by payment orders;
- - settlements under a letter of credit;
- - settlements by checks;
- – Settlements for collection (payment claims or collection orders);
- - settlements by mutual offset of claims;
- - settlements by bills.
The first four forms are varieties of non-cash payments and their use in the Russian Federation is regulated by the Regulations on the rules for the transfer of funds, approved by the Bank of Russia dated June 19, 2012 No. 383-P. Settlement settlements are governed by the general provisions of civil law. The circulation of bills of exchange is regulated by Federal Law No. 48-FZ of March 11, 1997 "On promissory notes and bills of exchange".
Cashless payments, regardless of the form of their implementation, do not have a significant impact on the level of receivables. The difference between them lies in the technique of performing calculations, due to which the speed of calculations for different forms changes. This fact affects the rate of turnover of receivables, but with long delays, such an impact is negligible (for example, you can not take into account the acceleration of settlements by one day, provided that the seller provides the buyer with a delay of three months).
Settlement settlements lead to a significant reduction in the level of receivables, since in this case there is a mutual compensation of accounts payable and receivables. However, this form of settlement can be used only in a limited number of cases (there must be mutual obligations of counterparties to each other).
Bill settlements also have a significant impact on the level of receivables due to the fact that they are considered by the organization as short-term financial investments (in this case, we do not consider bills issued for long periods). Thus, formally, according to accounting data, the level of receivables is reduced. However, unlike mutual offsets, the decrease does not occur due to a reduction in the amount of debt to the company from third parties, but due to the "masking" of this debt by another accounting item. Thus, when carrying out bill settlements, the analysis of receivables must necessarily be carried out taking into account debts on bills, otherwise the amounts of real debts of buyers will be underestimated.
As mentioned above, the source of receivables is a commercial loan. Therefore, one of the most important tasks of the receivables management system is to determine the maximum allowable value of a commercial loan. This value is determined by setting a quota for the amount of receivables (calculated in any convenient way, for example, based on the maximum allowable share of receivables in the structure of current assets or otherwise). Further, the planned value of a commercial loan can be calculated according to the following scheme.
- 1. Determining the acceptable range of buyers who can be granted a deferred payment (taking into account, in particular, the level of risk), and the required amount of credit.
- 2. Determination of the required amount of financial resources invested in receivables to secure a commercial loan. When calculating this amount, it is advisable to take into account:
- - planned volumes of sales of products on credit;
- - the average period for granting a deferred payment;
- - the average period of delay in payments based on the results of the analysis of receivables in previous periods;
- - the ratio of the cost and price of products sold on credit.
The calculation of the required amount of financial resources invested in accounts receivable can be made using the following formula:
(5.11)
where ORC is the planned volume of sales of products on credit.
3. Analysis of the admissibility of the estimated level of receivables obtained at the previous stage according to the formula 5.11. If the financial capabilities of the company do not allow investing the estimated amount in full, then it is necessary to change either the terms of the loan or the planned volume of sales of products on credit (or both input factors together).
The possible value of a commercial loan can be expanded through the use of a mechanism discounts. The discount is one of the essential conditions for granting a deferred payment. Its purpose:
- 1) reducing financial risk by reducing the grace period;
- 2) acceleration of receivables turnover.
The disadvantage of the discount mechanism is the decrease in profit due to the reduction in the sale price by the amount of the discount provided. Thus, the main task of managing receivables through the discount mechanism is to find a reasonable compromise between the desire to obtain a given profit and the desire to collect receivables as soon as possible (in order to reduce the level of financial risk).
There are two main types of discounts:
- 1) fixed - the amount of the discount and the corresponding payment term are uniquely determined (for example, if you pay a month ahead of time, the discount will be 5%; or if you pay within seven days after the purchase, a 10% discount is provided);
- 2) floating - the relationship between the deferral period and the discount amount is determined, so the discount changes daily in the range from zero (payment within the period established by the contract) to the maximum value (payment at the time of purchase or immediately after it); this method is more complex in calculations and is used in cases where it is economically feasible to "fight" for each day of the reduction of the grace period.
The planned amount of commercial credit under discount conditions is determined in the same way as shown earlier, but when calculating the indicator Indz, the average term for reducing the grace period and the average level of price reduction due to the application of the discount are taken into account.
One of the important methods of receivables management is refinancing, i.e. accelerated transfer of receivables into highly liquid forms of current assets - cash and highly liquid short-term securities (for more details on refinancing, see paragraph 8.2).
An important component of the receivables management system are reserves for doubtful and bad debts, which are an internal way to insure the risks of non-repayment of receivables. To justify the amount of the reserve, an analysis is made of the amount and composition of bad debts, which should be divided into two categories:
- 1) doubtful debt - characterized by a high and extremely high (but not 100%) risk of non-repayment of the debt: for example, the buyer-debtor has temporary solvency problems, and at the moment it is not clear whether he will be able to solve these problems or be declared bankrupt;
- 2) bad debt - the risk of non-receipt tends to 100%: for example, the debtor "disappeared" (changed its legal address and bank details, and the company does not have information about where to look for it) or the debtor has no money and is not expected - bankruptcy is in progress .
Reserves for doubtful and bad debts usually take the form of a special fund (or a system of such funds, for example, in banking), where, based on the results of an inventory of accounts receivable, deductions are periodically made from the company's profits. The disadvantage of creating such a reserve is a decrease in profit by the amount of the corresponding deductions. However, the advantage is that the write-off of losses in the form of uncollectible debt is made at the expense of the reserve amount, without affecting the company's profit. As a result, the company has a stable (albeit lower) profit that is not subject to fluctuations due to losses from uncollected debt.
The most time-consuming moment in the general scheme for determining the amount of the reserve is the determination of the share of deductions to the reserve for each category of bad debts. This problem can be solved in various ways, including the construction of mathematical models. However, if possible, the share of deductions is determined on the basis of an analysis of data from previous periods. For example, if on average for previous years it is known that 10% of doubtful debts with a delay of 30 to 60 days were subsequently written off as a loss, then the share of deductions to the reserve for this category should be 10% of the inventory value of the debt.
In this case, the cost symbolizes the costs, i.e. the outgoing cash flows of the company, and the price - income, i.e. incoming cash flows. Thus, the ratio of price and cost in general can be interpreted as the ratio of incoming and outgoing cash flows. In general, when managing accounts receivable, it is important to remember that it is nothing more than a transfer of part of the incoming cash flow to the future.
Any enterprise in the structure of current assets has accounts receivable, the size of which is often impressive. Competition and the desire to increase the volume of sales of products are forced to use a commodity (commercial) loan, that is, to sell their products with a deferred payment. However, an excessive desire to expand the sales market using this method of sales can provoke an uncontrolled increase in receivables and a decrease in liquidity. At the same time, the enterprise itself risks becoming insolvent due to a shortage of funds. After all, he has his own obligations to suppliers of goods and services.
For an enterprise, the provision of an interest-free commodity loan to buyers is justified only when the benefit from sales with deferred payment will be at least as much as the cost of such a loan. Controlling and managing receivables can relieve a company of these problems, and thus increase economic viability in a complex business world.
By itself, accounts receivable has not only negative aspects, but also positive ones. Its presence indicates the attractiveness and competitiveness of products, allows you to attract buyers, including those experiencing financial difficulties. However, the shortage of funds, the diversion of financial resources of the enterprise and the risks of bad receivables significantly outweigh this scale.
The main task of managers is to build such a decision-making system that would allow to evaluate and compare the benefits and risks when concluding transactions with deferred payment. Therefore, in order to achieve the optimal amount of accounts receivable and ensure its timely repayment, a credit policy is developed and regularly reviewed. The credit policy should correspond to the development strategy of the enterprise and implies the solution of the main issues: which counterparties can be granted a commodity loan, and which are undesirable; under what conditions and for how long such a loan is provided; What is the procedure for the withdrawal of receivables.
Elements of the credit policy structure
The structure of the credit policy can be summarized as follows:
1. The purpose of the credit policy and its type.
2. Criteria for evaluating buyers and compiling a credit rating.
3. The maximum amount and terms of granting a trade credit, as well as the size of the discount (depending on the rating of the buyer).
4. Interaction of departments involved in the process of managing receivables, and functions of employees.
5. Applications with forms of documents required in the process of managing receivables.
Let us consider in more detail each element of the structure of the credit policy.
The purpose of the credit policy should be consistent with the development strategy of the company. As a rule, the goal may be to increase the volume of sales and profitability of the company's assets while reducing the risk of insolvency. The objective of a credit policy may be to build strong long-term relationships with buyers and to withdraw debt in a way that does not threaten those relationships.
Note! It is necessary to choose the type of credit policy depending on the rigidity of the parameters of lending and debt collection: aggressive, conservative and moderate.
To do this, it is necessary to constantly compare the expected benefits from the growth in sales volumes and the cost of commercial loans provided, not forgetting the risks of insolvency.
It is important!Often, buyers are not able to pay for the goods or the entire volume of purchases in a timely manner, therefore, when concluding a transaction, credit conditions must be set individually for each of them. To do this, the criteria and procedure for evaluating buyers to assign them a credit rating are determined..
The terms and sizes of allowable loan amounts for each category of customers will depend on it. In addition, the credit policy should define the size and procedure for determining the total limit of receivables of the enterprise. The easiest way is to study the financial statements and legal documents of the counterparty to assess its financial condition, as well as the dynamics of development and the degree of reliability as a buyer. This is done, for example, by commercial banks that analyze the client's entrepreneurial activity before issuing a loan to him. Liquidity ratios, business activity ratios, and capital structure indicators will be useful. However, the counterparty may refuse to provide financial statements, which should raise doubts about the advisability of granting him a trade credit. After all, the receivables that appeared when working with such a buyer can become hopeless. Intending to study the financial statements, it should be remembered that it can not always give a true and clear picture. Therefore, it will not be superfluous to involve your own security service (if any) in this work and collect additional information regarding the counterparty:
about real owners;
the presence or absence of problems in the field of taxation;
presence or absence of litigation;
about credit history and history of business, foreign economic activity;
branches, representative offices and subsidiaries.
If the company does not have the appropriate service, then with a large scale of the upcoming transaction, it makes sense to seek the services of special agencies to collect information about the counterparty. Attention should be paid to the quality of information, excluding "information noise", and its value.
Then, criteria are selected by which the creditworthiness of future partners will be assessed (for example, the total time of work with this buyer and the volume of transactions with him; the presence of positive feedback from other organizations that are counterparties of this buyer; the stability of fulfilling obligations in previous periods; turnover of receivables; size and timing of overdue receivables; financial condition of the buyer).
Note!The enterprise independently determines the indicators that are significant for it and the weight of each of them, while the total number of weights should be 100%. The selection of the most significant evaluation criteria and the determination of their weights can be made collegially by the participants in the process (up to the level of the board of directors) or by the person responsible for this process, after receiving the appropriate approvals.
The selected criteria are evaluated on a 100-point scale by the analytical department or a loan officer. For this purpose, it is necessary to develop a clear procedure in advance with standards for grading. Moreover, it is necessary to determine the minimum threshold of the result. If the rating score is below this minimum, then this counterparty is recognized as unreliable.
EXAMPLE 1
For clarity, we give an approximate calculation of the rating of the buyer, presented in Table. 1.
|
No. p / p |
Criterion |
Specific weight of the criterion, % |
Estimated value for this counterparty |
Result (group 3 × group 4) |
|
Total time spent with this buyer and the volume of transactions with him |
||||
|
The presence of positive feedback from other organizations that are counterparties of this buyer |
||||
|
Stability of fulfillment of obligations in previous periods |
||||
|
Accounts receivable turnover |
||||
|
Sizes and terms of overdue receivables |
||||
|
Buyer's financial condition |
||||
|
Total |
||||
If the minimum threshold for the credit rating and reliability of the counterparty was set, for example, at 50 points, then the data from Table. 1 show that the presented potential buyer scored 64 points as a result of the assessment and the analytical service can give a positive recommendation for working with this enterprise. For greater convenience, you can distribute counterparties into groups depending on the results of the assessment, for example:
- group I: 75 points or more - credit is provided to buyers on general terms, maximum delays and other individual conditions are possible in case of particular importance of a particular buyer or expected benefits in the future;
- group II: from 50 to 75 points - a loan limited in amount or deferred payment can be provided, followed by strict control of the payment term;
- group III: less than 50 points - credit is not provided to buyers.
The next step will be to develop the conditions for granting a commercial loan for each credit rating. To begin with, it is necessary to calculate the minimum allowable rating (P min) of a particular buyer, upon reaching which he will not be denied a commodity loan, according to the following formula:
P min \u003d C × (1 + (D × t/ 365)) / About procurement,
where C is the cost of the purchased volume of products;
D - the percentage of alternative income (for example, providing a loan to another enterprise at this rate);
t- term of the loan;
О purchases - the volume of the proposed purchase by the counterparty.
EXAMPLE 2
The buyer intends to buy products for a total amount of 330,000 rubles. The cost of this volume of goods is 259,000 rubles. The enterprise could receive an opportunity income at the rate of 11%. The loan is provided for 40 days. Then the minimum credit rating of the buyer will be: Rmin = 0.79, or 79 points (259,000× (1 + (0,11 × 40 / 365)) / 330 000).
As you can see, under these conditions, it makes sense to sell products on credit to this buyer if his credit rating is 79 or more points (otherwise, a transaction under such conditions is unprofitable).
The acceptable term of commercial credit most often depends on the amount of discounts applied for early payment of products. You can calculate the allowable discount using the following formula:
Discount = D / (D + 365 / ( t - t sk)),
Where t sk — validity period of the discount.
EXAMPLE 3
Let's determine the amount of a possible discount if its validity period is 5 days. The loan term and the percentage of alternative income (we use the data of example 1) are 40 days and 11%, respectively.
Discount = 0.11 / (0.11 + 365 / (40 - 5)) = 0.01, or 1%.
Under these lending conditions, a discount of 1% would be optimal.
Note! To stimulate the interest of buyers in prepayment or in the timely repayment of receivables, an enterprise can develop attractive discount systems, ranging from the largest for 100% prepayment and ending with various discounts for the purchase volume, for timely or early payment.
There are also possible options for applying the system of accrual of penalties and fines for late payment according to the debt repayment schedule, which should be reflected in the contract. But they need to be introduced deliberately, especially in the case of minor violations, so that this does not negatively affect relationships with counterparties and, ultimately, the company's turnover.
An important part in the structure of the credit policy is the regulation of the interaction of departments involved in the process of managing receivables, as well as the delineation of functions and responsibilities of the employees involved. This section of the credit policy serves to reduce decision-making time and establish a unified scheme of interaction in certain situations. Often at enterprises these tasks are performed by separate documents - regulations, procedures or instructions. As a rule, you need to cover the activities of many services (security services, financial, legal, commercial, marketing, etc.). It would be useful to motivate employees by bonuses or the use of increasing coefficients for salaries, which are dependent on the level of receivables or on compliance with the terms of their repayment.
It is important! The bonus system must be balanced with a system of punishments (remarks, warnings, reduction or deprivation of the bonus). But it is necessary to fine not for the appearance of overdue receivables, but for violation of procedures receivables management (for example, for errors in the calculation of interest, for the supply of products when shipment is prohibited to this client, distortion of information about the counterparty, non-compliance with the rules of document flow, etc.).
In the process of managing accounts receivable, various internal documents cannot be dispensed with. The forms of these documents will become part of the credit policy and will be approved along with it. It will help to formalize the process of controlling receivables, for example, a report on settlements with debtors (Table 2), reflecting the timeliness of repayment of receivables in accordance with the terms of contracts. This report is completed weekly or ten days.
Table 2. Report on settlements with debtors
Using the generally accepted classification, accounts receivable should be analyzed by limitation period: current (operational), long-term; overdue; hopeless. A detailed distribution of debt by maturity and for each debtor can be tracked in the register of aging of receivables (Table 3). Monitoring the status of debt on this report should be done once or twice a month. The distribution by terms of payment is carried out on the basis of the company's policy in the field of crediting counterparties. That is, if the management of the enterprise considers a 15-day delay in payment to be acceptable, a debt exceeding this period is the basis for intensifying work with the counterparty, and a delay of more than 60 days is a reason for going to court, then the form of the receivables aging register will reflect this particular grouping of receivables. debt.
Table 3. Register of aging receivables
|
No. p / p |
counterparty |
Term of accounts receivable |
The total amount of debt, thousand rubles. |
Share in total volume, % |
||||||||
|
up to 15 days |
15-30 days |
30-60 days |
over 60 days |
|||||||||
|
thousand roubles. |
thousand roubles. |
thousand roubles. |
thousand roubles. |
|||||||||
Analysis of the aging register will allow you to control the change in the percentage of receivables from its total volume within different reporting periods, as well as to evaluate the nominal composition of debtors, which will allow you to see certain trends. After all, a single appearance of a time-tested buyer in the group of overdue receivables may be the result of a banal error or even a technical failure. The constant inclusion of any counterparty in this group signals its “uncleanliness” or financial difficulties. This trend implies either the termination of lending to such a buyer, or a radical revision of the terms of the loan.
Preparation for the development of credit policy
To solve the problems inherent in the credit policy (do not forget that it must be consistent with the company's development strategy), you will need to perform some preparatory steps:
1) to investigate the existing receivables by the timing of occurrence, from the standpoint of payment discipline, by turnover;
2) establish the maximum amount of the total limit of receivables;
3) establish debt limits for each counterparty, regularly adjusting them taking into account payment discipline and market risks for the activities of these counterparties;
4) plan the level of receivables.
Various indicators will help analyze the level of existing receivables.
The accounts receivable turnover ratio (About DZ) shows how quickly the company receives money from the buyer. This indicator is calculated according to the formula:
About DZ = Revenue from sales / DZ cf.
By calculating the turnover of receivables in days, or the average collection period (And cf), we can find out if the deadlines for receiving payments are violated, and also determine how long the buyer is granted a delay on average.
And sr = Period (in days) / About DZ
And av = DZ av / Sales on credit per day.
The volume of credit sales per day is determined by dividing the volume of credit sales for the period by the number of days in the period.
In addition, to calculate some of the above indicators, it is necessary to find the average amount of receivables (DZ cf):
DZ av = (Accounts receivable at the beginning of the period + Accounts receivable at the end of the period) / 2.
After analyzing the actual state of receivables, you can begin to resolve the issue of establishing its total limit at the enterprise and distributing this limit among specific counterparties.
Let's consider the calculation of these coefficients using an example.
EXAMPLE 4
For 90 days, the enterprise received proceeds from the sale of products in the amount of 800 thousand rubles. Accounts receivable at the beginning of the period amounted to 400 thousand rubles, at the end of the period - 590 thousand rubles. The volume of sales planned for the next period is 1 million rubles. (when setting a limit on receivables of no more than 350 thousand rubles).
DZ cf = (400,000 + 590,000) / 2 = 495,000 rubles.
About DZ \u003d 800,000 / 495,000 \u003d 1.62 turns.
And av = 90 / 1.62 = 56 days (or And av = 495,000 / (800,000 / 90) = 56 days).
Planned turnover of receivables: About DZ \u003d 1,000,000 / 350,000 \u003d 2.86 turnover.
Planned collection period: And cf = 90 / 2.86 = 31 days.
Thus, the achievement of the planned parameters in the next period is possible only if the payment delay is reduced to 31 days.
According to various experts, the maximum possible amount of investments in commercial loans and receivables is from 10 to 30%. You can determine the amount of the allowable total limit of receivables (OL DZ) using the formula:
OL DZ = (Planned sales volume for the period / Period (in days)) × t,
Where t- term of the loan.
EXAMPLE 5
With a planned sales volume of 1 million rubles for a period of 90 days. with a credit term of 40 days, the accounts receivable budget will be: OL DZ = (1,000,000 / 90)× 40 \u003d 444,444 rubles.
A generalizing indicator in debt management is the coefficient of overdue receivables (K etc. DZ), which is calculated using the following formula:
To pr. DZ \u003d Amount of overdue debt / Total amount of receivables.
It is important! Experts in this field believe that the 20% amount of overdue debt becomes critical for the organization.
Trends in the state of receivables of an enterprise can be analyzed using the coefficient of diversion of working capital (K o), calculated for a certain period:
K o = DZ cf / The total value of current assets.
The growth of this indicator indicates an increase in the share of accounts receivable in the total volume of current assets. This means that the company's liquidity is declining. There comes a time of choice between increasing sales volume while increasing receivables and maintaining liquidity.
Note! To analyze receivables, indicators such as the ratio of sales on credit to the total sales for the period, the level of bad receivables, etc. are used.
The indicators should be evaluated in dynamics (track them in the context of not only the company's customers, but also the range of products sold). This is due to the fact that the turnover period for different types of products is different, so the timing of the return of funds will be different.
Accounts receivable risks
Accounts receivable for an actively developing enterprise is a normal phenomenon. Complete disposal of it means the termination of the organization. However, according to experts, when the amount of receivables reaches more than 30% of the assets, there is a significant risk to the economic well-being of the enterprise. As long as buyers fulfill their obligations to the company to pay the debt in a timely manner, the threat of its non-repayment fades into the background. But as soon as counterparties (even one) have financial difficulties or the delay in payments is made intentionally, there is immediately cause for concern.
"Freezing" cash in receivables on a huge scale can even lead to bankruptcy.
When there is a firm belief that the overdue receivables cannot be returned, they are classified as uncollectible. The company can resell such debt to a factoring company (for example, a bank) at a significant discount.
Uncollectible receivables that cannot be disposed of are written off as losses. If an enterprise can predict the percentage of non-repayment of receivables fairly accurately, then for the reliability of management reporting, a reserve should be created to cover it, otherwise non-repayment of the debt may lead to non-fulfillment of its own obligations. For its calculation, you can use the statistics of past periods. The amount of deductions to the reserve, most often set as a percentage of sales proceeds on credit, should be fixed in the accounting policy of management accounting.
Note!An insurance instrument can be used to protect against the risk of non-collection of receivables.
The presence of an insurance policy dramatically increases the investment attractiveness of a business. The insurance company guarantees payment for the client's obligations in case of insolvency. It is necessary to insure the risk of non-fulfillment by the counterparty of its obligations at the stage of signing the contract, since shipments made before the receipt of the insurance policy will not be an insured event.
Many enterprises (despite the frequent misunderstanding among partners) when providing a commodity loan to protect against non-payments use a personal guarantee of the general director of the debtor company or its owner (major shareholder). It is assumed that a person confident in the fulfillment of obligations will not refuse to sign this document.
Conclusion
As you can see, there are no universal recipes for managing accounts receivable. The content of the credit policy of each company will be different, because any company should be guided by the specifics of its activities, the situation in the market segment it occupies, the strategy of its behavior, the availability of resources. Accounts receivable are a company asset and can be seized for non-payment of taxes or filed for bankruptcy. But a liquid asset will be only such a debt that can be withdrawn quickly enough. Therefore, the quality of work with receivables must be given special attention.
No matter how well the credit policy is developed, without monitoring its implementation it is useless to wait for a visible effect. Therefore, the credit process should be strictly regulated, and the forecasting and monitoring of customer solvency should become a continuous activity.
Automation of the process of accounting and withdrawal of receivables, as well as the introduction of a single database throughout the enterprise will greatly simplify the review of the credit history of counterparties. The client’s electronic card must necessarily reflect the established credit limits, terms for granting a loan, payment discipline, etc. The program can be configured so that if the credit limit is exceeded or there is a delay in payment, the counterparty will automatically be blacklisted, and the shipment of products to such a buyer will be suspended until solving billing problems.
Undoubtedly, receivables are a complex management object that requires the adoption of qualified decisions in various areas: financial, legal, marketing. Their implementation will help improve the well-being of business owners.
E. A. Kozhevnikova,
Leading Economist, CJSC Orenburgtransneft
Accounts receivable are classified:
- by maturity (short-term - payments are expected within 12 months after the reporting date; long-term - payments are expected more than 12 months after the reporting date);
- according to the degree of possibility of collection (current - debt within the payment terms established by the agreement; doubtful - the maturity date has already been violated, but the company is sure that the funds will be received; bad - debts are unrealistic to collect).
Companies may establish their own classifications of receivables depending on the size of their operations.
How to avoid doubtful and bad debts
There are several ways to prevent or minimize bad debts.
1. Prepayment
If there is a risk of problems with the buyer, it is better to conclude an agreement with him on an advance payment basis. Moreover, the prepayment in this case must be 100%. Then you, as a supplier, will not have problems with debts.
2. Security in the form of a pledge, surety, bank guarantee
3. Counter debt (accounts payable)
When there is a counter-debt, it is possible to ship products relatively calmly without prepayment, without security and other safety nets. If there are accounts payable and accounts receivable arise, it is always possible to cover them by offsetting.
4. Letter of credit
This is a rather exotic option, although undeservedly forgotten. A letter of credit is one of the forms of non-cash payments, the meaning of which is as follows: when both parties to the contract (for example, for deliveries) do not trust each other (that is, the supplier does not trust the buyer, because he is afraid that he will not pay for it, and the buyer is afraid make an advance payment because I am not sure that the supplier will ship the goods), the problem can be solved by a third independent party represented by the bank (issuing bank).
In this case, the bank opens a letter of credit: part of the funds of the buyer's current account are transferred to a special account in this bank, and the buyer does not have the right to dispose of this money for a certain period of time. The bank then informs the supplier that the money is "reserved" for him in a separate account and this money will be transferred to him as soon as he submits documents confirming the shipment.
Unfortunately, this service is not very popular. Probably because it's not cheap. But from a financial and civil point of view, this is a good option for preventing the accumulation of debt.
6 methods of internal control of receivables
It must be said right away that there are no universal methods for controlling receivables. Everything is very specific, and much depends on the activities of the enterprise, its scale, the amounts that pass, customers, the market in which the enterprise operates. There are too many factors to consider. However, you can focus on several important criteria.
1. Planned level of receivables
The maximum allowable amount of receivables is determined by calculation. It is expressed in absolute terms and/or as a percentage of revenue.
We are talking about the amount of debt that the company can afford without serious damage to financial and economic activities. This size is best set in a fixed amount, that is, in rubles. Additionally, you can set it as a percentage of revenue.
2. Conditions for granting a deferred payment (loan) to customers
A company may have a specific deadline - 15 or 30 days, for example. But one term cannot be universal for everyone she works with.
If we are talking about a key or regular client, then for him the period may be longer. After all, he, as a rule, makes large orders and regularly fulfills his obligations.
If a new client appears, in which the company is not yet sure, then it makes sense to revise the term downward. A problematic client needs to set either a minimum period, or even insist on an advance payment.
3. Employee motivation
It is desirable to develop a system in which the salary of an employee will depend on the age of the receivables.
4. Procedure for granting deferred payment to customers
The information collected about him plays an important role in making a decision on granting a loan to a client.
You can start by analyzing information from open sources and the information that is requested from buyers. How long have they been on the market? Which of their counterparties can be contacted for feedback? How accurate are they? A lot of valuable information for analysis can be extracted from the company's website.
It is best to personally visit the buyer's office. This will allow you to form an idea of how risky it will be to work with him.
5. Determining the parameters for evaluating the information provided by the client
In this case, it is important to take into account the availability of property, through which it is possible to repay the debt, the size and dynamics of accounts payable, potential financial difficulties and problems with solvency.
6. Distribution of responsibility for the management of receivables between commercial, financial and legal services
It all depends on the scale of the enterprise, but even in a small enterprise it makes sense to determine who is responsible for what in working with receivables, how responsibility is distributed.
From the point of view of logic, the commercial department should be responsible for granting a deferred payment, to exercise control over the current receivables. The area of work of the legal department is doubtful and uncollectible receivables (personal meetings, negotiations, correspondence, claims, statement of claim). Accounting includes accounting, control over registration and write-off of receivables.
The flip side of sales growth is almost always an increase in receivables. In the current post-crisis situation, an increase in production and sales is no longer a key factor in the development of the company. The main indicator of stability is competent control, planning and management of receivables.
At the stage of making a decision on granting a loan to the buyer, the following are of primary importance:
- the term of the agreement for deferred payment (as a rule, standard agreements with a predetermined loan period are used);
- the level of solvency and reliability of the client, with special attention when collecting information is paid not only to open sources, but also to unofficial ones (for example, personal contacts in regulatory and law enforcement agencies);
- creation of a system of reserves in case of bad debts. The most reliable and honest client on the basis of any standard contract is released from liability in the event of force majeure, and although force majeure circumstances are rarely the real reason for non-payments, they should not be discounted;
- creation of a reliable mechanism for working with problem payers. As a rule, this responsibility is assigned to the enterprise security service. In addition, financial instruments are used, such as the accrual of interest for each day of delay, including the day of payment, the revision of the terms of the contract as a whole;
- providing a discount, the amount of which is inversely proportional to the term of the loan. Thus, the client becomes interested in repaying the debt as soon as possible.
First, the level and dynamics of debt in the previous period are analyzed using the formula:
Kdz \u003d Z / A,
where Kdz is a coefficient showing the level of involvement of working capital in receivables;
Z - the amount of debt;
A is the total amount of working capital.
An important indicator of the quality of receivables is the rate of circulation of working capital invested in DZ, which is calculated using the following formula:
KO \u003d OR / Z,
where KO - the number of revolutions of the remote sensing in the period under review;
RR - the amount of turnover in the period under review;
After that, the level of bad debt is determined by the formula:
Kpr \u003d Zpr / Z,
where Kpr is a coefficient expressing the level of overdue debt;
Zpr - debt not paid under the contract in the period under review;
Z - the amount of debt in the period under review.
Then the coefficient of efficiency of investment of working capital in receivables is determined:
Edz \u003d Pdz - Zdz - Pdz,
where Edz is the efficiency ratio of invested funds in receivables;
Pdz - profit received due to the sale on contractual terms;
Zdz - costs associated with the implementation of lending (verification, work with debtors, etc.);
Pdz - the amount of financial losses from non-repayment of debts.
Sdz \u003d Or + Ks x (Pdn + Ppr),
where Sdz - the amount of funds invested in receivables;
Op - the planned sales volume on credit;
Kc - the ratio of the cost and price of products;
Pdn - the weighted average of the number of days for which the goods are shipped on credit;
Pdr - the period of delay in payments, days.
When a company cannot invest the necessary funds in receivables, it is necessary to make an adjustment to the planned revenue and profit received from sales in debt.
One of the new methods of debt management is the refinancing of receivables, the main forms of which are factoring, forfeiting, bill accounting.
Of particular interest to the company is factoring as a tool that covers a significant number of supplier risks. In addition, the capital turnover period increases, for a relatively small percentage the company optimizes the structure of finances, and does not incur additional costs for working with problem customers.
One of the key conditions for granting a loan is to determine the duration of the contract. Due to the increase in the term of the contract, sales volume and revenue increase, but the amount of funds that need to be invested in receivables increases, and the company's financial cycle increases. When setting the limit of the loan agreement, it is necessary to take into account all the above points.
Determining for itself the importance of each of the factors, weighing all the potential risks, the company builds its credit policy, which determines the credit limit for each individual period.
In combination with the term for which the loan is granted, its cost is of particular importance. Determined by the system of price discounts for immediate settlements for the supply of products. Based on these indicators, the rate of interest for the granted loan is calculated:
Pg \u003d Tss x 360 / Sp,
where Pg - the rate of interest on the loan;
Сс - discount for immediate payment without delay;
Cn - the term of the loan agreement.
A feature of the establishment of the named norm is its binding to the interest rate on a bank loan. In any situation, it should be lower than in financial institutions. Otherwise, it is more profitable for the counterparty to take a loan from a bank and pay for the delivery on a prepaid basis.
Based on the experience of domestic companies, it is possible to draw up an algorithm that shows the degree of responsibility of each employee in the process of managing receivables. As a rule, the commercial division of the company (sales department) oversees sales and cash receipts, the financial service is responsible for information and analytical work. The legal service is responsible for the impeccable state of the document flow for problematic shipments (a necessary condition in the event of a lawsuit). If the debt becomes problematic, then the company's security service is connected to the work.
In addition, it is important that the functions of performers when working with a client are not duplicated. Otherwise, there is inconsistency between departments, leading to a decrease in efficiency. Therefore, it is necessary not only to clearly distribute functions between departments, but also to clearly describe their actions at all stages of working with a problem client (see table).
Distribution of functions of performers when working with clients
Receivables management stage | Actions of departments for managing receivables | Responsible department |
| Establishment of the payment term within the scope of the contract | Signing an agreement | CFO |
| Issuing an invoice for payment | Sales department | |
| Shipment of goods and shipment support (issuing invoices, receiving confirmation from the client that the goods have been received in the proper quantity and quality) | Sales department | |
| Reminder of the payment date (three business days before the end of the contract) | Sales department | |
| Control over late payments up to 7 working days | Finding out the reasons for the delay in payment | Sales department |
| Coordination of the repayment schedule for overdue debts | Financial department | |
| Termination of further shipments | Commercial Director | |
| Written notification of the commencement of the application of penalties | CFO | |
| 7 to 30 business days | Accrual of a fine | CFO |
| Daily reminder calls | Sales department | |
| Personal meeting with the head or owner of the debtor's company | Commercial Director, Sales Department | |
| Written Notice of Preparation for Litigation | legal service | |
| 30 to 60 working days | Repeated personal meeting with the head or owner of the debtor's company, taking all possible measures to find a compromise solution | Head of Security, Sales Department |
| Formal complaint (in writing) | legal service | |
| more than 60 working days | Filing a lawsuit | legal service |
An additional incentive that can reduce the number of bad debts is such an unpopular measure as establishing a relationship between bonus payments to sales employees and the state of the total receivables in the company. Despite the fact that all divisions of the company, without exception, take part in the process of assessing the solvency of a potential client, its reliability, it is the specialists of the sales department who are the first link in the chain of initiating contractual relations, they always have more reliable and up-to-date information about the state of the market, the solvency of certain counterparties. It is on the basis of information transmitted by the sales department to other divisions of the company that decisions are made to sign or not to sign agreements for deferred payment.
Equally responsible is the financial department of the company, whose responsibilities include conducting an error-free analysis of the state of the total receivables for the whole company. The systemic errors that can be made in this case are no less dangerous for the company's activities than the occurrence of bad debts due to the collection of incorrect information about potential customers.
Accounting and timely analysis of the state of receivables is currently impossible without the use of special computer programs and automation of accounting for cash receipts. This is due to the growth in the volume of shipments, the number of invoices issued and agreements for deferred payment. At the same time, it is possible to analyze not only by counterparties and periods, but also to identify for which particular product groups, in which price segment, bad and bad debts most often occur. This, in turn, allows you to more accurately assess the risks when deciding whether to sign an agreement with a particular buyer.
In conclusion, we add that in the process of managing receivables, professionalism and a high degree of motivation of the personnel involved in this process are of great importance. Registration of all necessary documents confirming the fact of shipment, the assignment of obligations to the counterparty must be completed exactly on time and in a proper manner. Practice knows many examples when the debtor during the trial was released from payments due to the fact that the plaintiff did not submit all the necessary, correctly executed documents confirming the fact of shipment and the provision of a loan.
In the example above, the assumption was made that the sales of both firms are the same. But this assumption is unfounded. Firm B can have much more revenue than firm A, as it is a more attractive business partner for customers due to liberal sales conditions. As a result, net income may be higher, which will certainly affect the return on equity. At the same time, bad debts can cause additional expenses for firm B and cause a decrease in net profit. As a result, the return on equity may decrease.
These conflicting factors make it more difficult to assess the situation. However, the decisive factor is sales, which, under more generous shipping conditions, grow faster than collection costs, bad debts and the opportunity costs of possible investment decisions.
To determine the best level of receivables, financial managers develop a firm's credit policy.
Credit policy
Accounts receivable arise from customers taking advantage of credit conditions offered by the vendor. These conditions include discounts for customers who pay their bills at a shorter time, as well as a maximum credit period during which customers must pay their bills without a discount. For example, the sales terms might be " 2/10 net 30", which means: customers can get a 2% discount if they pay for the purchase in the first 10 days instead of the usual 30 days. Some firms provide deferred payment without offering discounts.
Clients receive a loan from the firm if they meet the requirements of the credit standard according to a number of criteria. Together, the credit terms and credit standards amount to credit policy.
A firm wishing to change the level of receivables achieves this by changing its credit policy. The weakening of credit policy through the introduction of more liberal credit standards or an increase in the credit period leads to an increase in receivables. The tightening of credit policy through the introduction of more stringent credit standards or a reduction in the credit period leads to a decrease in receivables.
The percentage of the discount or the duration of the discount may also change. As a result, accounts receivable will either decrease or increase, depending on the response of customers to changing conditions. The impact of tightening credit policy on accounts receivable is shown in Table 4.2.
Table 4.2
The results of the firm's restrained credit policy
|
Firm's actions |
Impact on accounts receivable |
|
Tightening standards for obtaining a loan |
Fewer customers receive deferred payment; accounts receivable are declining. |
|
Reducing the loan term |
Bills are paid faster; accounts receivable are declining |
|
Reducing the discount percentage |
The number of clients is decreasing; some customers who enjoyed significant discounts will stop using them. The net impact on accounts receivable depends on which is greater: the loss of sales due to the loss of customers by the firm or the additional amount received from customers who took advantage of a lower level of discounts that were less beneficial to them. |
|
Shortening the discount period |
Similar to the previous one: some customers will be lost to the firm, and some will take advantage of the discount, but will pay earlier. The net effect on receivables is uncertain |
In order to find the optimal level of receivables, it is necessary to solve a number of problems:
develop forecast financial documents for each option of credit policy;
on the basis of these documents, evaluate the incremental cash flows for each option and compare them with indicators of the current policy pursued by the firm;
To better understand the process of choosing a credit policy, consider an example.
Suppose that the company "Flagman" sells its products on the terms " 2/10 net 30". The Deputy Director of Marketing believes that these conditions should be replaced by " 2/10 net 40". He believes that as a result of such a replacement, sales will increase by 10%, and bad debts will increase slightly. Should the firm change its credit policy?
To simplify the calculations, we introduce additional assumptions:
1. The Deputy Director is right about a 10% increase in sales under the new credit policy.
2. The cost of goods sold and other operating expenses reflected in the income statement, as well as all current balance sheet assets will change in direct proportion to the change in sales, i.e. will rise by 10%.
3. All sales are made by the company on credit.
Analysis of information from previous years showed:
45% of customers took advantage of discounts by paying bills within the first 10 days;
53% of customers opted out of discounts, paying bills after an average of 30 days;
the remaining 2% of customers paid their bills after an average of 100 days. In fact, most of these customers will never pay their bills, thus creating bad debts.
The Deputy Director suggests that with the introduction of new conditions in the company's credit policy, the situation may change as follows:
45% of customers will still enjoy the discount and pay their bills within the first 10 days;
52% of customers will take advantage of a 40-day payment deferral;
3% of customers will pay bills in 100 days.
Let's calculate the average collection period for two credit policy options:
existing option:
T inc = (0.45 x 10 days) + (0.53 x 30 days) + (0.02 x 100 days) = 22.4 days;
proposed option:
T inc = (0.45 x 10 days) + (0.52 x 40 days) + (0.03 x 100 days) = 28.3 days.
Analyzing the information provided, we find that under the existing credit policy, bad debt expenses amount to 2% of sales; in the new credit policy they will increase to 3% of sales.
The financial director of the firm provides the following information:
the increase in current assets caused by the growth in sales when the new credit policy is introduced, can be ensured by attracting a short-term loan at 6%;
the firm pays income tax at a rate of 40%;
the firm's weighted average cost of capital is 10%;
the interest rate on long-term debt sources is 8%.
We will assess the feasibility of changing the credit policy step by step.
First stage. Development of forecast financial documents, including balance sheet and income statement.
Tables 4.3 and 4.4 show forecast documents for two options for the credit policy of Flagman.
Table 4.3
Balance at the end of the forecast year, thousand rubles
|
Balance sheet items |
Existing option |
Suggested option |
Remarks |
|
Fixed Assets Current assets: accounts receivable |
Without changes See note 1 |
||
|
Equity: share capital Extra capital retained earnings Commitments: long-term short-term Need for additional funding |
Without changes Without changes Growth 1500 thousand rubles Without changes See notes 2, 3 |
||
Notes:
Accounts receivable = · T inc
for the existing option: =12,380 thousand rubles;
for the proposed option: \u003d 17,205 thousand rubles.
RUB 9,352 thousand - is the need for additional sources of financing, it is calculated as the difference between the amount of assets (205,630) and the amount of equity and liabilities (196,278). Additional financing is needed to ensure the asset growth required to support the new lending policy.
If 9,352 thousand rubles. planned to attract from outside, the firm will pay interest in the form of financial costs, which must be reflected in the income statement. They will reduce net and retained earnings, which in turn will require changes in the balance sheet, and therefore changes in the need for additional financing. If the problem is solved using spreadsheets, financial documents may be changed several times until the additional interest costs become negligible.
Table 4.4
Forecast profit and loss statement for the year, thousand rubles
Second phase. Calculation of the increase in cash.
At this stage, it is necessary to determine the additional cash flows that are expected as a result of a change in credit policy. The calculations are given in Table 4.5.
Table 4.5
Increase in cash flow caused by a change in the credit policy of the company, thousand rubles.
So, the calculations show that the initial investment of the company is 9,352 thousand rubles. (additional funding to the proposed credit policy), and the net additional cash flow for the year will be 1,498 thousand rubles.
Third stage. Calculation NPV the proposed change in the conditions of the credit policy.
NPV should be defined as the sum of discounted cash flows less initial investment. In this example, the initial investment in the new lending policy is additional financial resources in the amount of RUB 9,352 thousand that the firm needs, and the annual net additional cash flow is
RUB 1,498 thousand This flow, by condition, does not have any limited time period, i.e. the company can rely on it throughout the life cycle. Under such conditions, it is clear that we are dealing with a perpetual annuity. To calculate the present value of a perpetual annuity PVP use the formula
PVP = PMT · ,
Where PMT- annual net cash flow; k- the required rate of return, equal to the weighted average cost of capital.
Substituting the values into the formula, we find the present value of an infinite annual stream of income of 1,498 thousand rubles, discounted at a rate of 10%:
PVP= 1,498 = 14,980 thousand rubles.
To complete the calculation NPV, it is necessary to subtract the initial investment from the found amount, i.e. investment in changing the credit policy:
NPV = PVP - P 0 = 14,980 - 9,352 = 5,626 thousand rubles.
Thus, the net present value as a criterion for assessing changes in the company's credit policy is 5,626 thousand rubles.
Since this value is positive, the proposal to change the credit conditions is considered appropriate.
As a result of these changes, the value of the company will increase annually by 5,626 thousand rubles. You can use another evaluation method - calculation of internal rate of return.
In this example, you just need to find IRR, i.e. the internal rate of return at which the present value of the cash flow is equal to the present value of the costs, i.e. NPV = 0:
IRR= = = 0.1602, or 16.02%.
Since 16.02% exceeds the firm's cost of capital (10%), the proposal to change the credit conditions should be approved.
Using the considered approach, it is possible to evaluate any proposed change in credit policy. In this case, you can consider and change various variables until a combination is revealed that provides the largest value NPV.
