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RECEIVABLES AND INVENTORY MANAGEMENT — Transcript

by Dr Sahid Cholayil · 2,157 words · 367 segments · language en · Watch on YouTube

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0:00[Music]
0:06hello students welcome to the lecture on
0:09receivables and inventory management and
0:12after this lecture we will be able to
0:15learn the following objectives
0:17understand receivable management define
0:20objective of receivable management
0:22explain credit policies of receivable
0:25management discuss evaluation of the
0:28credit applicant describe inventory
0:31management define techniques of
0:33inventory management and explain
0:36economic order quantity model e oq
0:42receivable management let us start with
0:45what management is management of trade
0:48credit is commonly known as management
0:51of receivables receivables are one of
0:54the three primary components of working
0:57capital the other bean inventory and
1:00cash the primary aim of receivables
1:02management wet in minimizing the value
1:05of the firm while maintaining a
1:07reasonable balance between risk in the
1:10form of liquidity and profitability
1:13objectives of management of receivables
1:15are to attain not maximum possible but
1:20optimum volume of sales to exercise
1:23control over the cost of credit and
1:25maintain it on a minimum possible level
1:28to keep investments at an optimum level
1:32in the form or receivables to plan and
1:35maintain a short average collection
1:37period works of receivable management
1:41old business credit they will look at
1:45how business has dealt with other
1:47suppliers and vendors wholly personal
1:50credit they want to ensure that not just
1:54one business is willing to and has
1:56demonstrated in the past that we will
1:59repay suppliers fully financials many
2:04suppliers will look at analyze financial
2:06strengths via supplied financial
2:09statements or tax returns important
2:13benefits
2:15efficiently managed receivables can free
2:18up funds and in the same time improve
2:21customer relationship reduction of
2:23funding requirements and interest
2:25expenses as cash flow increases
2:29reduction of days receivable outstanding
2:32DSO bad debt and receivable right of
2:36improvement of liquidity and free cash
2:39flow improvement of the customer
2:41communication and the customer
2:43relationship optimization in all
2:46elements of the accounts receivable
2:49processes credit policies of receivables
2:53management a central element and
2:57developing credit management policy
2:59involves design choices on the extent to
3:03which credit activities are best managed
3:06internally or through specialist market
3:09intermediaries a firm practicing lenient
3:13or relatively liberal credit policy its
3:17size of receivables will be
3:18comparatively large than the firm with
3:21more rigid or Signet credit policy it is
3:25because of a lenient credit policy leads
3:28to greater defaults and payments by
3:31financially weak customers resulting in
3:36bigger volume of receivables a lenient
3:39credit policy encourages the financially
3:42sound customers to delay payments again
3:45resulting in the increase in the size of
3:48receivables aspect of credit policy a
3:53credit policy establishes guidelines
3:56that govern grant or reject credit to a
4:00customer what should be the level of
4:02credit granted to a customer etc a
4:06credit policy can be said to have a
4:09direct effect on the volume of
4:11investment a company desires to make in
4:14receivables credit policy of every
4:17company is that large influenced by
4:20tokens
4:21objectives irrespective of the native
4:24and type of company they are liquidity
4:28and profitability variables of credit
4:32policy the important variables of credit
4:35policy are credit standards edits
4:38standards refers to the minimum criteria
4:41adopted by a firm for the purpose of
4:44shortlisting its customers for extension
4:47of credit during a period of time the
4:50quality of forms customers largely
4:53depends upon credit standards analysis
4:57of customers is done under two aspects
5:00average collection period it is the time
5:03taken by customers bearing credit
5:06obligation in materializing payment
5:09default rate this can be expressed in
5:12terms of debt losses to the proportion
5:15of uncontrolled receivables collection
5:19policy collection policy reference to
5:23the procedures adopted by a firm
5:25creditor collect the amount of from its
5:28debtors when such amount becomes due
5:31after the expiry of credit period 5 C's
5:36of credit all the 5 C's of credit are
5:40character character means reputation of
5:43debtor for honest and fair dealings
5:46capacity capacity refers to the
5:49experience of the customers and has
5:52demonstrably to operate successfully
5:55capital capital refers to the financial
5:59standing of a customer collateral
6:01collateral are the assets that a
6:04customer readily offers to the creditor
6:07that is formed granting credit as a
6:10security which should be possessed by
6:12the firm in the event of non-payment by
6:15the customer conditions conditions refer
6:18to the prevailing economic and other
6:20conditions which can place their
6:23favorable or unfavorable impact on the
6:26ability of customer to pay evaluation of
6:30the credit applicant
6:32the goal of modern credit management is
6:35to evaluate customers creditworthiness
6:38as precisely as possible and provide
6:41early warning of credit defaults this
6:45requires software solutions which
6:47provide comprehensive support for the
6:49demands and cold processes of credit and
6:53receivables management data collection
6:56and import comprehensive and up-to-date
6:59information about a firm's customers is
7:02the fundamental precondition for
7:05successful credit management the credit
7:08management platform it provides data
7:12entry screens for credit managers to
7:15collect all necessary customer data such
7:18as master data financials and credit
7:21limit requests risk analysis and
7:24determination of creditworthiness
7:27scoring models may be freely defined for
7:31the analysis of creditworthiness and
7:33limit determination credit and limited
7:37decisions any approval processes may be
7:40implemented for example to require the
7:43approval of a superior before changing a
7:46credit limit reporting and
7:49administration all input data and output
7:52values example credit limits are
7:56centrally stored and maintained in an
7:59electronic credit file monitoring an
8:02early warning system the customer base
8:05can be continually monitored using
8:08freely definable business rules that
8:10define the criteria by which worklist
8:14entries are generated simulations and
8:18impact analysis role models for customer
8:22scoring and creditworthiness assessment
8:24can be simulated using historic data
8:27before they are taken into production
8:30process management and monitoring the
8:34credit management process is also
8:36subject to constant process optimization
8:39in order to make the most efficient use
8:42of available resources risk control and
8:47management on the basis of data a wide
8:51variety of analysis may be performed
8:53providing comprehensive information
8:56regarding risk distribution within the
8:59portfolio risk concentrations or trend
9:02analysis among other areas credit terms
9:07the receivables management of an
9:10enterprise is required to determine the
9:12terms and conditions on the basis of
9:15which trade credit can be sanctioned to
9:18the customers are of vital importance
9:20for an enterprise as the nature of the
9:23credit policy of an enterprise is
9:25decided on the basis of components of
9:28credit policy these components include
9:32credit period cash discount and cash
9:35discount period credit terms refer to
9:38the stipulations recognized by the
9:41firm's
9:41for making credit sale of the goods to
9:44its buyers there are two important
9:47components of credit terms credit period
9:51credit period is the duration of time
9:54for which trade credit is extended
9:57during this time the overdue amount must
10:00be paid by the customers cash discount
10:04terms the cash discount is granted by
10:08the firm to its debtors in order to
10:11induce them to make the payment earlier
10:13than the expiry of credit period allowed
10:16to them cash discount is expressed as a
10:20percentage of sales credit control
10:25credit control is a complex process
10:27which costs both time and administrative
10:31costs the function of credit control
10:34incorporates the following elements
10:37checking customers creditworthiness
10:40prompt invoicing and follow-up credit
10:43insurance financial statements and use
10:47of electronic data processing equipment
10:50checking customers creditworthiness this
10:54step relates to applicant's ability to
10:57pay for the goods or services opted by
11:00him prompt invoicing and follow-up this
11:04is an executive action involving prompt
11:07issue of invoice and equally close
11:10follow-up action credit insurance this
11:14point pertains to credit exports
11:17financial statements financial statement
11:21is an important document that presents
11:24desirable sources of information to the
11:26seller regarding the financial position
11:29of customer for credit control use of
11:33electronic data processing equipment
11:36electronic data processing equipment
11:38holds its own individual importance in
11:41providing timely and accurate
11:43information pertaining to the status of
11:46accounts inventory management a
11:51significant example concerning inventory
11:53management is the allocation of
11:55responsibilities and authorities
11:58inventory control problems can easily
12:01arise when for instance nobody is in the
12:04organization is responsible for the
12:07inventory or the responsible person has
12:10insufficient authorities to carry out
12:12the task objective of inventory
12:16management protect the company against
12:19theft make sure that the only people in
12:22warehouse belong in warehouse establish
12:26an approved stock list for each
12:28warehouse order only the amount of
12:32non-stock or special order items that
12:35customer has committed to buy assign and
12:38used bend locations assign primary and
12:42surplus bin locations for every stocked
12:45item record all material leaving
12:48warehouse
12:50there should be appropriate paperwork
12:52for every type of stock withdrawal
12:55process paperwork in a time
12:57man Oh all printed picking documents
13:01should be filled by the end of the day
13:03set appropriate objectives for buyers
13:06buyers should be judged and rewarded
13:09based on the customer service level
13:11invent returns and return on investment
13:15for the product lines for which they are
13:17responsible ensure that stock balances
13:21are accurate and will remain accurate
13:24implement a comprehensive cycle counting
13:27program techniques of inventory
13:30management inventory management can be
13:33one of the most expensive aspects of
13:35running a business but with proper
13:37techniques we can reduce the inventory
13:40burden on bottom line just-in-time
13:43delivery
13:44just-in-time delivery or JIT is an
13:47inventory system that works to reduce
13:50the amount of inventory that a company
13:53will have on hand drop shipping drop
13:58shipping is an inventory process by
14:00which a company can sell a product to a
14:03consumer without ever having the product
14:06in inventory bulk shipments bulk
14:10shipping is an old staple of inventory
14:13management the idea is that it is
14:15cheaper to purchase and ship goods in
14:18bulk so we plan to replenish our
14:21inventory less frequently than we
14:23normally would record-keeping the basis
14:28for all inventory management is
14:30record-keeping small companies may be
14:33best off keeping track of the inventory
14:36manually physical inventory physical
14:41inventory should be done at least once a
14:43year and as often as once a month
14:46depending how likely items are to be
14:49missing cleaning out old inventory
14:52storing inventory is not free inventory
14:56represents an investment in a product or
14:59material mastering stock levels and
15:02inventory management for dealers keeping
15:06controls of parts and whole goods
15:08inventory can be tricky
15:10inventory overload many dealers have
15:14excessive amounts of parts and whole
15:16goods money that could or should be
15:19spent elsewhere is stuck on the shells
15:22or in the showroom evaluate and purge to
15:26get that idle inventory out of the way
15:29dealers should evaluate which parts and
15:32equipment are needed and which are in
15:35less demand storage and monitoring once
15:39inventory has been whittled down what's
15:42left should be well organized in a
15:44manner that allows for easy operation
15:48economic order quantity model e oq
15:52managing inventory is an important task
15:55for every business that holds it there
15:58are many costs that occur because of
16:01inventory that need to be minimized
16:03while still providing enough inventory
16:05to operate without losing customer
16:08business the e oq economic order
16:12quantity model is used to minimize these
16:15inventory related costs calculation
16:19formulas the cost of carrying inventory
16:21can be calculated by multiplying the
16:25cost of carrying the unit of inventory C
16:27by the average number of units carried q
16:31usually for a year
16:33garrick cost is equal to C in bracket Q
16:38by 2 to determine the number of orders
16:41we simply divide the total demand d of
16:44units per year by Q the size of each
16:47inventory order number of order is equal
16:51to D by Q to determine the ordering cost
16:55multiplied number of order by the fixed
16:58cost per order F ordering cost is equal
17:03to F in bracket D by Q the total
17:08inventory cost for a year for a business
17:10is simply the sum of the carrying cost
17:13and the ordering cost total inventory
17:17cost is equal to C
17:19in bracket Q by 2 plus F in bracket D by
17:25Q using calculus to determine the
17:28minimum point where the slope equals 0
17:31will provide us with the optimal order
17:34quantity to reduce total inventory cost
17:37over the year this is known as the
17:40economic order quantity EQ Q is equal to
17:452 ft upon C 1 by 2 summary now in the
17:52end let us summarize what we have learnt
17:55in this lecture receivables are one of
17:58the three primary components of working
18:01capital the other being inventory and
18:04cash the other being inventory and cash
18:06the primary aim of receivables
18:09management wet in minimizing the value
18:11of the firm while maintaining a
18:14reasonable balance between risk in the
18:16form of liquidity and profitability the
18:20main purpose of maintaining receivables
18:22is not sales maximization not as for
18:26minimization of risk involved by way of
18:28bad debts the goal of modern credit
18:33management is to evaluate customers
18:35creditworthiness as precisely as
18:38possible and provide early warning of
18:41credit defaults inventory management can
18:44be one of the most expensive aspects of
18:47running a business but with proper
18:50techniques we can reduce the inventory
18:52burden on bottom line

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