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CA Intermediate · Financial Management and Strategic Management

Management of Receivables for CA Intermediate: Chapter Guide

Management of Receivables is the Financial Management chapter on how a firm sets credit terms, checks customers, tracks dues and funds them. To solve questions, compare incremental profit with the extra cost of funds locked in receivables and bad debts, then accept the policy with the higher net benefit.

What this chapter covers

This chapter in Paper 6 Section A (Financial Management) deals with money a firm is owed by customers on credit sales. Credit raises sales, but it also locks up funds, adds collection cost and creates bad debts. The chapter teaches you to weigh these effects and decide how much credit to give, to whom, and on what terms.

The chapter has three layers. First, policy: credit period, standards, discount and collection effort. Second, control: ageing analysis, days sales outstanding (DSO) and credit evaluation. Third, tools to convert receivables into cash early: factoring, forfaiting, bills discounting and credit insurance.

It connects directly to working capital management, where receivables are one part of the operating cycle. It also links to cost of capital and short-term financing, because the cost of funds tied up in debtors is the yardstick in most numericals. A weak grip here costs you marks in the working capital chapters too.

This chapter is among the more numerical and predictable parts of Financial Management, so it rewards steady practice. Both MCQs and written questions appear in the form of credit policy comparisons, cash discount decisions, DSO and ageing calculations, and factoring cost. The method is the same each time, so once you learn it, marks become dependable. The theory on factoring and forfaiting also suits short written answers and MCQs. Since you need 40% in each paper, a chapter where you can score full marks is worth the effort.

Management of Receivables: topics in the order to study them

  1. 1Receivables Management: Meaning, Objectives and CostsStart here to learn the trade-off between sales growth and the cost of funds, collection and bad debts, which every later numerical uses.
  2. 2Credit Policy Variables and Credit EvaluationYou need the policy variables (credit standards, period, discount, collection effort) before you can evaluate a change in any of them.
  3. 3Evaluating Credit Policy Changes and Cash DiscountThis is the main numerical topic, so do it once the variables and cost concepts are clear.
  4. 4Monitoring Receivables: Ageing Analysis and DSOMonitoring comes after policy, because you track whether the policy you set is actually working.
  5. 5Factoring and Forfaiting of ReceivablesOnce you know the cost of holding receivables, you can judge whether selling them to a factor is worth the fee.
  6. 6Other Receivables Tools: Bills Discounting and Credit InsuranceFinish with these shorter tools, which are easier to compare once factoring and forfaiting are fresh in mind.

How to prepare Management of Receivables

Treat this chapter as one decision framework plus a few definitions. Build the framework first, then practise numericals until the layout is automatic.

  1. Read the meaning, objectives and costs of receivables, and list the costs: financing cost, administration and collection cost, bad debts, and delay cost.
  2. Learn the four policy variables and the idea of credit evaluation, then write one line on how each affects sales and cost.
  3. Master one fixed layout for credit policy numericals: incremental sales, incremental contribution, less incremental bad debts and collection cost, less cost of extra investment in receivables, equals net benefit.
  4. Practise cash discount questions separately. Compute the discount cost, the saving in financing cost and the effect on sales, and read the result as accept or reject.
  5. Work DSO and ageing problems, writing the formula first, then the working, then a one-line interpretation.
  6. Make a comparison note on factoring, forfaiting, bills discounting and credit insurance: who bears the risk, recourse, and typical use.
  7. Attempt MCQs on the chapter and review each wrong answer. Since there is no negative marking, never leave an MCQ blank.

Common mistakes in Management of Receivables

  • Calculating the cost of funds on sales value instead of cost.

    Fix: Check whether the question gives variable cost or cost percentage. If it does, compute receivables investment at cost, and say so in your working.

  • Counting the full sales increase as profit.

    Fix: Always convert incremental sales to incremental contribution first, then deduct the related costs.

  • Leaving out bad debts or collection cost on the incremental sales only, or applying them on total sales wrongly.

    Fix: Note whether the percentage applies to total sales or only to the new sales, and compute accordingly.

  • Using the wrong number of days or the wrong base in DSO.

    Fix: Use credit sales unless told otherwise and use the day count given in the question. State your assumption.

  • Giving a number with no conclusion.

    Fix: Write a one-line decision such as accept or reject the proposal, with the reason, because the interpretation earns marks.

  • Mixing up factoring and forfaiting, or recourse and non-recourse.

    Fix: Make a short comparison note on type of receivable, tenor, recourse and who the buyer is, and revise it before the exam.

Last-day revision: Management of Receivables

  • Receivables arise from credit sales and tie up funds, so every extra rupee of credit has a financing cost.
  • Credit policy variables: credit standards, credit period, cash discount and collection effort.
  • Accept a policy change only if incremental contribution exceeds incremental costs.
  • Investment in receivables is usually measured on cost, not sales value, when the question gives cost data.
  • Cost of extra receivables = extra investment × required rate of return.
  • Cash discount cuts the average collection period but costs the discount given.
  • DSO = (Receivables ÷ Credit sales) × number of days in the period.
  • Ageing analysis groups debtors by how long they are overdue, so it shows where collection is slipping.
  • Factoring: a factor buys receivables and may offer finance, collection and credit protection; with non-recourse the factor bears bad debt risk.
  • Forfaiting: non-recourse discounting of medium-term export receivables, usually backed by a bank guarantee or similar.
  • Bills discounting turns a bill of exchange into cash before maturity at a discount charge.
  • Credit insurance covers loss from customer default and is a protection tool, not a collection tool.

Management of Receivables practice questions

Management of Receivables in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Management of Receivables: frequently asked questions

Is Management of Receivables numerical or theory?

It is both. Credit policy, cash discount, DSO and factoring cost are numerical. Meaning, objectives, factoring, forfaiting, bills discounting and credit insurance are theory and suit short answers or MCQs.

What is the quickest way to solve a credit policy question?

Use a fixed layout. Find incremental contribution, subtract incremental bad debts and collection cost, subtract the financing cost of extra receivables, and compare the net benefit. Then state accept or reject.

What is the difference between factoring and forfaiting?

Factoring usually deals with short-term domestic or trade receivables and can include collection and credit protection. Forfaiting deals with medium-term export receivables and is typically without recourse to the exporter.

How should I use ageing analysis in an answer?

Group the debtors by overdue period, work out each group's share of the total, and point out where the older balances are concentrated. Then suggest action such as tighter follow-up or stricter credit terms.