CMA Intermediate · Financial Management and Business Data Analytics

Receivable Management for CMA Intermediate Paper 11

Receivable management is the control of credit sales so that extra sales earn more profit than the extra cost of funds, bad debts and collection effort. To solve questions, compare incremental profit with incremental cost of each credit policy, and accept the policy with the higher net benefit.

What this chapter covers

This chapter in Paper 11 (Financial Management and Business Data Analytics) deals with money your firm is owed by customers. When a company sells on credit, it gains sales but locks up funds, risks bad debts and spends on collection. The chapter teaches you how to set a credit policy, judge customers, decide whether to relax or tighten terms, offer a cash discount, collect dues and, if needed, sell receivables to a factor.

Most of the chapter runs on one idea: incremental analysis. You compare two policies and look only at what changes: contribution on extra sales, cost of carrying extra receivables, extra bad debts, extra collection cost and discount cost. If you hold this idea, the numerical questions become routine.

The chapter connects to the rest of the paper. It is a part of working capital management, so it sits beside cash and inventory management. It uses the cost of funds from your cost of capital work and the time value of money logic when you compare a discount with the cost of waiting. Its short-term financing side links to sources of working capital finance.

Receivable management is a compact, numerical chapter. Practice with credit policy comparisons, cash discount evaluation and the cost of factoring is useful for both MCQs and written questions. The theory parts, such as credit standards and the five Cs, suit MCQs in the compulsory Section A, while the numerical parts prepare you for step-marked written answers.

Receivable Management: topics in the order to study them

1Receivables Management Basics and ObjectivesStart here to learn the terms, the cost-benefit trade-off and the objective of maximising value, which all later topics use.
2Credit Policy Variables and Credit StandardsCredit period, standards, discount and collection effort are the inputs you will change in every later numerical.
3Credit Evaluation and Credit Granting DecisionOnce standards are clear, learn how to assess an individual customer and decide whether to grant credit.
4Evaluating Credit Policy and Cash Discount DecisionsThis is the main numerical core, so study it after the policy variables and evaluation ideas are firm.
5Monitoring and Collection of ReceivablesLearn the control tools such as ageing analysis and collection steps after you know how policy is set.
6Factoring and Receivables FinancingFinish with the outsourcing and financing of receivables, which builds on all earlier ideas and needs cost comparison.

How to prepare Receivable Management

Spend your first sitting on concepts and the rest on numericals. Aim to be able to write each policy comparison in a fixed layout without thinking.

Read the basics and write down, in your own words, the three costs of holding receivables: funding cost, bad debts and collection cost.
List the credit policy variables and note which way each one moves sales, receivables and bad debts when you relax or tighten it.
Learn credit evaluation tools such as the five Cs and credit scoring as short lists, then test yourself with a few MCQs.
Practise the incremental policy statement: extra contribution, less extra cost of funds on extra investment in receivables, less extra bad debts, less extra other costs, equals net benefit. Use the same layout every time.
Solve cash discount problems by finding the effective annual cost of the discount and comparing it with the return or cost of funds. Also work out the new average collection period.
Practise ageing schedules and factoring questions, separating the fee, interest and any bad debts saved, then compare with the cost of your own collection.
Finish with a timed set of MCQs and two full written questions, checking that every step and the final decision are shown.

Common mistakes in Receivable Management

Valuing the extra investment in receivables at sales value instead of cost.
Fix: Read the question for the basis. Where cost or variable cost is given, apply the required return to that cost figure, and state your assumption.
Using total figures instead of incremental figures in a policy comparison.
Fix: Show a row for each change, such as extra contribution and extra bad debts, and conclude with net incremental benefit.
Taking bad debts on total sales when the question gives them on the new or extra sales.
Fix: Underline the base of every percentage before calculating, and write it beside the working.
Calculating the cost of a cash discount without adjusting the days correctly.
Fix: Use the days you gain by paying late: credit period minus discount period. Check the result against the cost of funds.
Ignoring the effect of a discount on the average collection period and on discount cost itself.
Fix: Compute the new average collection period using the share of customers taking the discount, and include discount cost on those sales.
Ending a numerical without a decision.
Fix: Add a one-line conclusion, such as accept the relaxed policy because net benefit is positive. For a discount, say it should be offered or taken when its effective cost is lower than the cost of funds or return. If the cost of forgoing it is higher than the cost of funds, take it as a buyer. Reject the discount offer only when its cost exceeds the benefit.

Last-day revision: Receivable Management

Receivables arise from credit sales; the aim is higher value, not the highest sales.
Credit policy variables: credit standards, credit period, cash discount and collection effort.
Looser standards raise sales but also bad debts and investment in receivables.
Investment in receivables is measured at cost (or variable cost for extra sales), not at sales value, unless the question says otherwise.
Average collection period = Receivables ÷ Credit sales per day.
Receivables turnover = Credit sales ÷ Average receivables.
Carrying cost = Investment in receivables × Required rate of return.
Decide by incremental benefit: accept a policy only if net benefit is positive.
Cost of forgoing a cash discount, approx. = Discount % ÷ (100 − Discount %) × 365 ÷ (Credit period − Discount period).
Ageing schedule groups dues by how long they are outstanding, to spot slow payers.
Factoring: with recourse leaves bad-debt risk with you; without recourse transfers it to the factor.
Compare factoring cost (fee plus interest) with savings in collection cost, bad debts and funding.

Receivable Management practice questions

Receivable Management in other exams

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

Receivable Management: frequently asked questions

Is Receivable Management mostly theory or numericals in Paper 11?

It is a mix, but the numericals carry the most weight in effort. Credit policy variables, evaluation and collection tools suit MCQs and short notes. Policy comparison, discount and factoring suit written numerical questions.

How do I decide whether to relax the credit policy?

Work out the incremental contribution from extra sales. Subtract the extra cost of funds on additional receivables, extra bad debts and any other extra costs. If the net figure is positive, relaxing the policy is worthwhile.

Which formula should I remember for the cost of a cash discount?

Use Discount % ÷ (100 − Discount %) × 365 ÷ (Credit period − Discount period). It gives the approximate annual cost of not taking the discount. Compare it with your cost of funds to decide.

Do I need to know factoring in detail?

Yes. Know the difference between recourse and non-recourse factoring, the services a factor gives, and how to compute net cost. Factoring is a common comparison question because it combines theory with a short calculation.