Corp.finance 3: Working capital Management (2) - A/R

MANAGING A/R (account of receivables)

• A/R features
• important, 'cos:
• lead to customers' default (more popular), or
  
• lead to decrease sales
• a go-between for credit manager, treasury manager & accounting manager => need to combine the operating
• considered to be a derivative activity from credit granting
• goals of managing AR:
• update
• accurate
• exactly appropriate btw the 3 department
• How to do managing:
• inside: by captive finance subsidiary: established to provide financing of the sales of the parent firm
• outside: outsourcing service
  
• Key element of trade credit granting process
• Types of credit accounts
•  Ordinary terms: standard format
  
•  Net t: pay fully @ t days after today
  
• d/t1 net t: discounted d% if pay in t1 days from now, or full @ t days after today
  
• CBD: cash before delivery
  
• COD: cash ON delivery
  
• Bill-to-bill: pay for Nth bill before (N+1)th bill
• Monthly billing: pay monthly
  
• Credit scoring model
• Managing customers' receipts (not yet understood)
• Evaluating AR management
• AR turnover, no. of days of AR: rough data, tell nothing 'bout quality of AR
  
• weighted average collection period
• separate AR in different groups, for example: 1-30days, 31-60days...
• compute % of each group in total AR (*), eg.: 20/100 = 20%
  
• weighted days: multiply (*) by average day in each aging group, for example: average day of aging group "1-30 days" is 28 days => 20% * 28days = 5.6 weighted days
• sum all the weighted days => weighted average collection period