中公财经

(b) Pangli Co could use the following techniques in managing trade receivables: assessing creditworthiness; managing accounts receivable; collecting amounts owing; offering early settlement discounts; using factoring and invoice discounting; and managing foreign accounts receivable.

Assessing creditworthiness

Pangli Co can seek to reduce its exposure to the risks of bad debt and late payment by assessing the creditworthiness of new customers. In order to do this, the company needs to review information from a range of sources. These sources include trade references, bank references, credit reference agencies and published accounts.

To help it to review this information, Pangli

Co might develop its own credit scoring process. After assessing the creditworthiness of new customers, Pangli Co can decide on how much credit to offer and on what terms.

Managing accounts receivable

Pangli Co needs to make sure that its credit customers abide by the terms of trade agreed when credit was granted following credit assessment. The company wants its customers to settle their outstanding accounts on time and also to keep to their agreed credit limits. Key information here will be the number of overdue accounts and the degree of lateness of amountsoutstanding.

An aged receivables analysis can provide this information.

Pangli Co also needs to make sure that its credit customers are aware of the outstanding invoices on their accounts. The company will therefore remind them when payment is due and regularly send out statements of account.

Collecting amounts owing

Ideally, credit customers will pay on time and there will be no need to chase late payers. There are many ways to make payment in the modern business world and Pangli Co must make sure that its credit customers are able to pay quickly and easily.

 If an account becomes overdue, Pangli Co must make sure it is followed up quickly. Credit control staff must assess whether payment is likely to be forthcoming and if not, a clear policy must be in place on further steps to take. These further steps might include legal action and using the services of a debt collection agency.

Offering early settlement discounts

Pangli Co can encourage its credit customers to settle outstanding amounts by offering an early settlement discount. This will offer a reduction in the outstanding amount (the discount) in exchange for settlement before the due date. For example, if the credit customer agreed to pay in full after 40 days, an early settlement discount might offer a 2% discount for settling after 25 days.

 Pangli Co must weigh the benefit of offering such an early settlement discount against the benefit expected to arise from its use by credit customers. One possible benefit might be a reduction in the amount of interest the company pays on its overdraft. Another possible benefit might be matching or bettering the terms of trade of a competitor.

Using factoring and invoice discounting

Pangli Co might use a factor to help manage its accounts receivable, either on a recourse or non-recourse basis. The factor ould offer assistance in credit assessment, managing accounts receivable and collecting amounts owing. For a fee, the factor could advance a percentage of the face value of outstanding invoices. The service offered by the factor would be tailored to the needs of the company.

Invoice discounting is a service whereby a third party, usually a factor, pays a percentage of the face value of a collection of high value invoices. When the invoices are settled, the outstanding balance is paid to the company, less the invoice discounter’s fee.

Managing foreign accounts receivable

Foreign accounts receivable can engender increased risk of non-payment by customers and can increase the value of outstanding receivables due to the longer time over which foreign accounts receivable are outstanding.

Pangli Co could reduce the risk of non-payment by assessing creditworthiness, employing an export factor, taking out export credit insurance, using documentary credits and entering into countertrade agreements. The company could reduce the amount of investment in foreign accounts receivable through using techniques such as advances against collections and negotiating or discounting bills of exchange

Examiner’s note: Only five techniques were required to be discussed.