Receivables Management

Corporate Finance

SUBMITTED TO:

SUBMITTED BY:

Prof. A.K. PURI

Group-12
Mridvika Kwatra 221071
Paul Mathews 221087
Rahul John 221107
S.Venkatraman 221120
Charles Henri Gilbert De
Cauwer FY1401

Contents
ACKNOWLEDGEMENT ................................................................................................................................... 3
INTRODUCTION ............................................................................................................................................. 4
Objectives of Receivables Creating ........................................................................................................... 4
FACTORS OF CREDIT POLICY ..................................................................................................................... 5
STEPS IN CREDIT POLICY ........................................................................................................................... 6
CREDIT TERMS........................................................................................................................................... 6
COLLECTION POLICIES ............................................................................................................................... 7
ASPECT OF COLLECTION POLICIES ............................................................................................................ 7
TYPES OF COLLECTION PERIOD ................................................................................................................. 8
NEWS ARTICLES............................................................................................................................................. 9
1.

JAIN IRRIGATIONS: RECEIVABLES FLOW CHANGES FORTUNES ........................................................ 9

2. NEW VERSION OF SUNGARDS AVANTGARD RECEIVABLES HELP COMPANIES TO PRIORITIZE

COLLECTIONS .......................................................................................................................................... 10
3.

RBI MULLING EXCHANGE FOR RECEIVABLES OF SMALL UNITS ..................................................... 11

4.

SKS MICROFINANCE UP 3% ON SECURITISATION WORTH RS.80.3 cr ........................................... 12

5.

RELIANCE TO SECURITISE RECEIVABLES FROM IOC ........................................................................ 13

6.

KINETIC TO CUT RECEIVABLES, RETIRE EXPENSIVE DEBT................................................................ 14

7.

GUJARAT STATE PETRONET LTD. .................................................................................................... 15

8.

HPCL TO BUY MORE IRAQI OIL ON LONGER CREDIT TERMS .......................................................... 16

9.

SHIPPING CORPORATION OF INDIA ................................................................................................ 17

RESEARCH PAPERS ...................................................................................................................................... 18

..

1.

AUTOMOBILE INDUSTRY ................................................................................................................. 18

2.

CEMENT INDUSTRY ......................................................................................................................... 20

3.

FOOD AND AGRICULTURE ORGANIZATION .................................................................................... 22

4.

REAL ESTATE SECTOR ...................................................................................................................... 24

ACKNOWLEDGEMENT
We take this opportunity to express our profound gratitude and deep regards to
Prof. A.K. PURI for his exemplary guidance, monitoring and constant
encouragement. The blessing, help and guidance given by him shall carry us a long
way in the journey of life on which we all are about to embark.

INTRODUCTION
Receivables, also termed as trade credit or debtors are component of current assets. When a firm
sells its product in credit, account receivables are created.
Most business transactions are in credit, as a sales promotion tool, credit sale enhances firm's
sales revenue and ultimately pushes up the profitability.
Late payments stretch out over time so may cause substantial drop in a company's profit margin.
The basic purpose of firm's receivable management is to determine effective credit policy that
increases the efficiency of firm's credit and collection department and contributes to the
maximization of value of the firm.

Objectives of Receivables Creating

Preserving and collecting A/R.

Establishing and communicating credit policies.
Evaluation of customers and setting credit lines.
Ensuring prompt and accurate billing.
Maintaining up-to-date records of accounts receivables.
Initiating collection procedures on overdue accounts.

Following are the reasons to offer Credit:

1.
2.
3.
4.
5.
6.

Competition To attract customers and have an edge over the competitors

Market Share
Promotion
Credit Availability to Customers
Customer Convenience
Profit

The Five Cs of Credit or Receivable control

Character
Capacity
Capital
Collateral security
Conditions Terms of asset sale

Optimum credit policy- Credit policy means those decision variables that influence the amount
of trade credit. i.e. investment in receivables. A firms credit policy provides the guide lines for
determining whether to extend credit to customer and how much credit to extend. A credit policy
may be lenient or tight.

FACTORS OF CREDIT POLICY

Cost of credit extension
Collection cost
Capital cost
Delinquency cost
Default cost
Benefits of credit extension
Oriented to sales expansion
Protect from competition

Days Sales Outstanding (DSO) Assume that a company has outstanding receivables of
$350,000 at the end of the first quarter and credit sales of $425,000 for the quarter. Using a 90day averaging period, the DSO for this company can be computed as follows: If the companys
credit terms are net 60, the average past due is computed as follows:

STEPS IN CREDIT POLICY

Obtaining credit information
Internal
External

Financial statements
Bank reference
Trade reference
Credit bureau reports

Analysis of credit information

Quantitative aspects
Qualitative aspects

CREDIT TERMS
Credit terms the repayment of the amount under the credit sale. Three components are:
Credit period

Sales volume of the firm would increase

Average collection period would increase
Bad debt expensive would increase. Thus the net effect of increase period may be
negative.

Cash discount
This is the rate of discount offered to customer in which the overdue amount will be reduced by
this amount. The changes in the discount rate would have both positive and negative effects.

Cash discount period

It also affects the firms collection period and profit. An increase in it and it will have a positive
effect on profit because many customers who did not take advantage of discount in the past may
now avail it. It reduces the average collection period. However, when the discount period is
increased there is also a negative effect on profit because it would make average collection
period slow.

COLLECTION POLICIES
Collection policies are the last area involved in accounts receivables management. These refers
to the procedures followed to collect accounts receivable when they become due after the expiry
of the credit period.
Their purpose should be to speed up the collection of dues.
Various steps to collect dues from customer by firm are: letter, telephone calls etc.

ASPECT OF COLLECTION POLICIES

Degree of efforts to collect the over dues
Tight: the collection policy would be tight if very vigorous procedure are followed. A tight
collection policy has both types of implication benefits as well as cost. The management has to
consider the trade-off between them. The bad debt expenses would decline and average
collection period will be reduced. Therefore the profit of the firm will increase. There may be
decline in sales volume because some consumer may not like the pressure and switch to another
one.
Lenient: a lenient collection effort also affects the cost benefits trade off. The effect of lenient
policy will be just the opposite of the tight policy.

TIGHT

TYPES OF COLLECTION PERIOD

This relates to the steps that should be taken to collect over dues from the customers. The
collection policy should have clear cut guide-lines about the sequences of collection efforts.
After the collection period is over and payment remains due, the firm should take measures to
collect them.
Following steps may be taken in this connection.

Letter to expedite payment

Telephone visit
Personal visit
Help to collection agencies
Legal action

NEWS ARTICLES
1. JAIN IRRIGATIONS: RECEIVABLES FLOW CHANGES FORTUNES

Jain Irrigation is on a recovery path after getting weighed down by receivables for the last
three years, which at one point stretched to nearly one year of its sales and resulted in
over 75% erosion of its market cap.
Gross receivables in micro-irrigation improved for the fifth consecutive quarter to 279
days at the end September '13.
The company is yet to show any improvement in the two critical matrices
debt
interest outgo

The recent credit rating upgrade and a seasonally better second half are expected to help it
trim Rs 500 crore of debt by FY14-end.

2. NEW VERSION OF SUNGARDS AVANTGARD RECEIVABLES HELP

COMPANIES TO PRIORITIZE COLLECTIONS

Statistical Modeling tools to prioritize collections.

Automated risk analysis predicts delinquency, bankruptcy of a company.
Companies to focus efforts on these parties rather than based on age of receivables.
Import data from credit bureaus and National Association of Credit Management

3. RBI MULLING EXCHANGE FOR RECEIVABLES OF SMALL UNITS

Setting up an exchange for securitization of small scale and medium enterprises trade
receivables.
MSMEs get squeezed all the time by their large buyers, who pay after long delays.
Trade receivables exchange set up with fully automated acceptance of bills and auction of
bills, then the transaction cost can be reduced considerably.

4. SKS MICROFINANCE UP 3% ON SECURITISATION WORTH RS.80.3 cr

Microfinance securitization during the current financial year of Rs 80.30cr.

The entire pool comprises receivables from women entrepreneurs belonging to
weaker sections.
They qualify for priority sector treatment as per RBI's priority sector lending
guideline.

As a result, SKS stock gained as much as 2.7%

5. RELIANCE TO SECURITISE RECEIVABLES FROM IOC

Company was exploring securitizing its trade receivables, including other public
sector oil
It is learnt that the core working capital which is generated by credit sales of
petroleum products from the Reliance Petroleum's Jamnagar Refinery to
companies like Indian Oil Corporation (IOC) is to be securitized.
Companies to raise funds for decreasing the trade receivables.
The company has approached credit rating agency Crisil to rate the credit score.
The company is looking to raise several hundred crores of rupees through the
issue.

6. KINETIC TO CUT RECEIVABLES, RETIRE EXPENSIVE DEBT

The Pune based Rs 1,200-crore Kinetic group is working on a financial restructuring

strategy that would reduce the receivables totted up by its flagship companies KEL and
KMC.
Group companies KEL and KMC have collectively totted up receivables worth around Rs
130 crore. Of this, KMC's share is Rs 30-35 crore whereas in KEL the receivable level is
much higher at Rs 100 crore.
The group will rely partly on debt restructuring and partly on an aggressive strategy to
reduce receivables this year in an effort to bring down its debt equity ratio.
The group intends to bring down the receivable levels in KEL from Rs 100 crore to Rs 70
crore by the end of the year.
In the process, the target is to bring down KEL's debt: equity ratio from 1.6:1 to 1.3:1.
The receivable levels went up because dealers could not generate cash to stock the new
models rolled out by the company and the group had to offer
As inventory levels went up, the company had to borrow, partly to fund its Honda stake
acquisition, the new bike plant and new products and partly to finance dealer credit. The
current debt restructuring is to correct that skew.

7. GUJARAT STATE PETRONET LTD.

Current receivables increased to around 275cr.

Issues because of the Petroleum and Natural Gas Regulatory Board (PNGRB) tariff
orders which have not been finalized.
Legal cases pending
CFO expects a decrease once the issues are resolved and revised tariff orders and zoning
are received.

8. HPCL TO BUY MORE IRAQI OIL ON LONGER CREDIT TERMS

Aims at increasing crude oil imports from Iraq at 8%

Increase in credit period
Earlier 30 days
Risen to 60 days
Hence giving a scope to the company to increase the volumes from 60,000 to 65000 bpd.
Increased credit period first offered to IOC.

9. SHIPPING CORPORATION OF INDIA

SCI reported a loss of Rs.65.67 cr. for latest quarter

Current debt at Rs.8500 cr.
Trade receivables stand at Rs.800cr., maximum from government
To meet operating expenditure, company plans to hike freight rates.
Looking to raise cash from ship-building orders.
Industry passing through a difficult phase

RESEARCH PAPERS
1. AUTOMOBILE INDUSTRY

11 sample companies under Automobile Industry were selected on the basis of higher annual
turnover (more than 1000 crores) The reason behind choosing the sales as a criterion is that
higher the sale, higher is the need of working capital. It is a known fact that the company with
high sales may have to have better Receivable Management.

The sample companies selected from the Automobile Industry were further classified into three
sub categories

Commercial Vehicles
Passenger car multi-utility vehicles
Two and Three wheelers

The Ratios are effective tools to evaluate the Receivable Management. The ratios used in this
study include

Receivables to Current Asset Ratio

Receivables to Total Asset Ratio
Receivables to Sales Ratio
Debtors Turnover Ratio (Times)
Average Collection Period (In Days)
Receivables to Payables Ratio
ANOVA.

The overall analysis indicates the fact that the performance of the Automobile Industry in respect
of Receivables Management was satisfactory.
Honda Siel, Hero Honda Motor and Hyundai Motor earned higher turnovers and lower debt
collection period.
Hence the study concluded that the Automobile Industry efficiently managed their Receivables
during the study period.

2. CEMENT INDUSTRY

In this paper an attempt is made to study the impact of Receivables Management on Working
Capital and Profitability in CEMENT industry.
To accomplish this research objective data have been collected from the annual reports of select
cement companies for the period from2001 to 2010.
The ratios which highlight the efficiency of receivables management are:

Receivables to Current Assets Ratio,

Receivables to Total Assets Ratio
Receivables to Sales Ratio
Receivables Turnover Ratio,
Average Collection Period
Working Capital Ratio
Profitability Ratio
ANOVA

Working capital and profitability were considered as dependent variables.

1. The study reveals that the receivable to current assets ratio across industry worst was not
satisfactory, receivables to assets ratio position is better.
Andhra Cement Ltd and Madras Cement Ltd had better performance in receivables
management
India Cement Ltd and Bheema Cement Ltd had poor performance.
2. The average collection period across industry was less than the suggested norms during
the study period.
The collection period for India Cement Ltd and Bheema Cement Ltd was higher than the
industry average
The collection period for Andhra Cement Ltd and Madras CementLtd was less than the
industry average period.
3. Receivables management showing a significant impact on working capital management
and profitability
On whole, the receivable management across the cement industry is efficient.

3. FOOD AND AGRICULTURE ORGANIZATION

CGTMSEs (credit guarantee fund trust for micro and small enterprises) encourages member
lending institutions to base their appraisal on viability of the project and security of primary
assets for collateral
Assures lenders that in event of default by MSME then CGTMSE will pay 85% f outstanding
amount in default

4. REAL ESTATE SECTOR