PROJECT REPORT ON

FOR THE AWARD OF

PARTIAL COMPLETION OF

POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT (PGDBM)

(PGDBM

From

NATIONAL INSTITUTE OF MANAGEMENT AND TECHNOLOGY,

GREATER NOIDA

Submitted by
SANDEEP ARORA
PGDBM (2007-2009)
 COMPANY PROFILE
Lucas - TVS was set up in 1961 as a joint venture of Lucas Industries
plc., UK and T V Sundaram Iyengar & Sons (TVS), India, to
manufacture Automotive Electrical Systems. One of the top ten
automotive component suppliers in the world, Lucas Varity was
formed by the merger of the Lucas Industries of the UK and the Varity
Corporation of the US in September 1996. The company designs,
manufactures and supplies advanced technology systems, products
and services to the world's automotive, after market, diesel engine
and aerospace industries.

The combination of these two well-known groups has resulted in the

establishment of a vibrant company, which has had a successful
track record of sustained growth over the last three decades.TVS is
one of India's twenty large industrial houses with twenty-five
manufacturing companies and a turnover in excess of US$ 1.3 billion.
The turnover of Lucas-TVS and its divisions is US$ 233 million during
2003-2004.

Incorporating the strengths of Lucas UK and the TVS Group, Lucas

TVS has emerged as one of the foremost leaders in the automotive
industry today. Lucas TVS reaches out to all segments of the
automotive industry such as passenger cars, commercial vehicles,
tractors, jeeps, two-wheelers and off-highway vehicles as well as for
stationary and marine applications. With the automobile industry in
India currently undergoing phenomenal changes, Lucas-TVS, with its
excellent facilities, is fully equipped to meet the challenges of
tomorrow.
 PRODUCTS OF TVS LUCAS

Lucas-TVS manufacture the most comprehensive range of auto

electrical components in the country. A range which continues to set
standards in the industry. The products are designed to meet the
demands of vehicle manufacturers both in India and worldwide. With
the emission standards in India becoming increasingly stringent,
Lucas-TVS has ensured that each of its products is manufactured to
meet global standards\

Lucas-TVS Product Lucas-TVS Product Range

Range for Indian Market for US/European Market

Starter Motor Starter Motor

Alternator Alternator

Small Motor
14W Wiper Motor
Headlamp WindShield Wiper
Motor (GM Range)
LRW Products
Small Motor
Wiper Motor
Blower Motor Dynamo Regulator
Fan Motor

Dynamo Regulator
Dynamo

Auto Electricals
Dynamo Telco Vehicles
Ashok Leyland Vehicles
Suzuki Vehicles
 Ignition Coil

Distributor

Diesel fuel
injection

DIVISION OF TVS LUCAS

Lucas TVS has grown hand in hand with the automobile industry in
the country. The company's policies have recognised the need to
respond effectively to changing customer needs, helping to propel it
to a position of leadership. The company has raised its standards on
quality, productivity, reliability and flexibility by channeling its
interests.

At present, there are five divisions:

Turn-over during 2006 - 2007

Divisions
Crores INR Million USD
Auto Electricals L-TVS 902.57 220.14
Fuel Injection Equipment (FIE) - DTVS 494.81 120.69
Electronic Ignition Systems (INEL) 143.18 34.92
Automotive Lighting (IJL) 110.10 26.85
After Market Operations (LIS) 144.31 35.20

QUALITY ASSURANCE
"Lucas TVS is committed to achieving
ever increasing levels of customer
satisfaction through continuous
improvements to the quality of the
products and services. It will be the
company's Endeavour to increase
customer trust and confidence in the
label 'Made in Lucas TVS'."

Quality is no longer an option but a basic requirement in today's

world. At Lucas TVS, quality in inbuilt in every phase of manufacture.
The company's quality assurance measures stand on the foundation
of a solid belief - that quality begins and ends with the customer. This
commitment forms the backbone of its approach to Quality
Assurance.

Lucas TVS has adopted a prevention-oriented quality policy though

ingrained with the traditional ideas of quality control. Everyone from
the highest levels of the organization to the lowest practise quality
control both as an individual and as a team.

An effective Quality Control System has resulted in the recognition of

the company's outstanding achievements in the various fields. Lucas-
TVS was awarded the ISO 9001 certified by BVQI in December 1993.
The company reached a further milestone when it recently received a
certificate of recognition from BVQI for QS 9000 for Auto Electrical.
 OFFICE NETWORK OF TVS LUCAS

Lucas-TVS provides quality service to its customers with a

comprehensive distribution and service network. The company
reaches out to its customers, vehicle manufacturers as well as
vehicle users, through a network of 100 branches spread throughout
the country. The secret of Lucas-TVS' excellent services lies in its
ability to respond to changing customer needs swiftly, effectively and
consistently.

An in-depth training programmed has been developed to provide

effective after-market service to customers. This has led to increased
appreciation of the commitment of Lucas-TVS to do service and
support the end users.

ACKNOWLEDGEMENTS
I would like to take this opportunity to thank all the people who helped me
in completion of my management training and in the completion of this
report.

I would sincere thanks to Mr. Pradeep khaneja (Manager- Finance and

Accounts Department) for providing me guidance at each and every step of
the training. I would always be obliged to him because he shared his real-life
experiences with me.

I am thankful to the other members of the finance department who explained

me finance work, solving queries and being there to help me whenever
required.

PREFACE
Project Training is an important part of each management course. These
studies cover what is left uncovered in the theoretical gamut. It exposes a
student to valuable treasure of experience. My project is about ‘A study of
Accounts Receivables Management in TVS Lucas.’

The purpose of this project is to analyze the important dimensions of

the efficient management of receivables within the framework of a firm’s
objectives of value maximisation.

When a firm makes an ordinary sale of goods and services and does
not receive payment, the firm grants trade credit and creates accounts
receivable which would be collected in future. Thus, accounts receivable
represent an extension of credit to customers, allowing them a reasonable
period of time, in which to pay for the goods/services which they have
received. It is an essential marketing tool, acting as a bridge for the
movement of goods through production and distribution stages to customers.
A firm grants trade credit to protect its sales from the competitors and to
attract the potential customers to buy its products at favourable terms.

The management of receivables involves crucial decision in three

areas : (i) credit policies, (ii) credit terms, and (iii) collection policies.

The credit policy of a firm provides the framework to determine

whether or not to extend credit to a customer and how much credit to extend.
The two broad dimensions of credit policy decision of a firm are credit
standards and credit analysis. The term credit standards, represents the basic
criterion for the extension of credit to customers. The criterion and,
therefore, standards can be tight/restrictive or liberal/non-restrictive. The
credit analysis component of credit policies includes obtaining credit
information from different sources and its analysis.

The second decision area in receivables management is the credit terms. The
credit terms specify he repayment terms, comprising credit period, cash
discount, if any, and cash discount period.

The third area involved in the management of receivables is collection

policies. It refers to the procedures followed to collect accounts receivable
when they become due. The two relevant aspects are the degree of efforts to
collect the overdues and the type of collection effort.

The framework of analysis of all the three decision areas in

receivables management is to secure a trade-off between the costs and
benefits of the measurable effects on the sales volume, capital cost due to
change in accounts receivable, collection costs, bad debt, and so on. The
alternative will be selected when the benefits exceed the costs.

Receivable constitutes a substantial portion of current assets of several

firms. For example, in India, trade debtors, after inventories, are the major
components of current assets. They form about one-third of current assets in
India. Granting credit and creating debtors amount to the blocking of firm’s
funds. The interval between the date of sale and the date of payment has to
be financed out of working capital. This necessitates the firm to get funds
from banks or other sources. Thus, trade debtors represent investment. As
substantial amounts are tied-up in trade debtors, it needs careful analysis and
proper management.
 OBJECTIVES OF ACCOUNTS RECEIVABLES
MANAGEMENT

The term receivables is defined as ‘debt owned to the firm by customers

arising from sale of goods or services in the ordinary course of business’.
When a firm makes an ordinary sale of goods or services and does not
receive payment, the firm grants trade credit and creates accounts receivable
which could be collected in the future. Receivables management is also
called trade credit management. Thus, accounts receivable represent an
extension of credit to customers, allowing them a reasonable period of time
in which to pay for the goods received.

The sale of goods on credit is an essential part of the modern competitive

economic systems. In fact, credit sales and, therefore, receivables, are treated
as a marketing tool to aid the sale of goods. The credit sales are generally
made on open account in the sense that there are no formal
acknowledgements of debt obligations through a financial instrument. As a
marketing tool, they are intended to promote sales and thereby profits.
However, extension of credit involves risk and cost. Management should
weigh the benefits as well as cost to determine the goal of receivables
management. The objective of receivables management is ‘to promote sales
and profits until that point is reached where the return on investment in
further funding receivables is less than the cost of funds raised to finance
that additional credit (i.e. cost of capital).
 COSTS ASSOCIATED WITH
ACCOUNTS RECEIVABLES MANAGEMENT

The major categories of costs associated with the extension of credit

and accounts receivable are :
Collection Cost
Capital Cost
Delinquency Cost
Default Cost

COLLECTION COST 

Collection costs are administrative costs incurred in collecting the

receivables from the customers to whom credit sales have been made.
Included in this category of costs are :
additional expenses on the creation and maintenance of a credit department
with staff, accounting records, stationery, postage and other related items;
expenses involved in acquiring credit information either through outside
specialist agencies or by the staff of the firm itself.
These expenses would not be incurred if the firm does not sell on
credit.

CAPITAL COST 

The increased level of accounts receivable is an investment in assets.

They have to be financed thereby involving a cost. There is a time-lag
between the sale of goods to, and payment by, the customers. Meanwhile,
the firm has to pay employees and suppliers of raw materials, thereby
implying that the firm should arrange for additional funds to meet its own
obligations while waiting for payment from its customers. The cost o the use
of additional capital to support credit sales, which alternatively could be
profitably employed elsewhere, is, therefore, a part of the cost of extending
credit or receivables.
DELINQUENCY COST 

This cost arises out of the failure of the customers to meet their
obligations when payment on credit sales become due after the expiry of the
credit period. Such costs are called delinquency costs. The important
components of this costs are :
(a) blocking-up of funds for an extended period,
cost associated with steps that have to be initiated to collect the overdues,
such as, reminders and other collection efforts, legal charges, where
necessary, and so on.

DEFAULT COST 

Finally, the firm may not be able to recover the overdues because of
the inability of the customers. Such debts are treated as bad debts and have
to be written off as they cannot be realised. Such costs are known as default
costs associated with credit sales and accounts receivable.

ADMINISTRATION COSTS OF ACCOUNTS RECEIVABLES

MANAGEMENT

The costs relating to the administration of receivables is as follows :-

Screening the potential customers for granting credit.
Accounting, recording and processing costs of debtors balances.
Expenditure incurred for credit control checks.
Cost incurred for sending invoices and statements of accounts to individual
customers.
Chasing up slow paying debtors.
Cost incurred for classification of quaries.
Recording receipt of cash and processing on individual customer records.
Use of office space, processing equipment and remuneration of sales force
involved in debtors collection etc.
 BENEFITS OF ACCOUNTS RECEIVABLES
MANAGEMENT

Apart from the costs, another factor that has a bearing on accounts
receivable management is the benefit emanating from credit sales. The
benefits are the increased sales and anticipated profits because of a more
liberal policy. When firms extend trade credit, that is, invest in receivables,
they intend to increase the sales. The impact of a liberal trade credit policy is
likely to take two forms. First, it is oriented to sales expansion. In other
words, a firm may grant trade credit either to increase sales to existing
customers or attract new customers. This motive for investment in
receivables is growth-oriented. Secondly, the firm may extend credit to
protect its current sales against emerging competition. Here, the motive is
sales-retention. As a result of increased sales, the profits of the firm will
increase.
 COST BENEFIT TRADE-OFF

We all know that investments in receivables involve both benefits and costs.
The extension of trade credit has a major impact on sales, costs and
profitability. Other things being equal, a relatively liberal policy and,
therefore, higher investments in receivables, will produce larger sales.
However, costs will be higher with liberal policies than with more stringent
measures. Therefore, accounts receivable management should aim at a trade-
off between profit (benefit) and risk (cost). That is to say, the decision to
commit funds to receivables (or the decision to grant credit) will be based
on a comparison of the benefits and costs involved, while determining the
optimum level of receivables. The costs and benefits to be compared are
marginal costs and benefits. The firm should only consider the incremental
(additional) benefits and costs that result from a change in the receivables or
trade credit policy.

While it is true that general economic conditions and industry

practices have a strong impact on the level of receivables, a firm’s
investments in this type of current assets is also greatly affected by its
internal policy. A firm has little or no control over environmental factors,
such as economic conditions and industry practices. But it can improve its
profitability through a properly conceived trade credit policy or receivables
management.
 PROCESS OF ACCOUNTS RECEIVABLES
MANAGEMENT
The following process will help in efficient management of the receivables :-

Take the opinion of the sales force and internal staff.

Frame the credit terms for the customer if credit is sanctioned.

Establish the initial creditworthiness.

Check the credit before the despatch of consignment.

Close monitoring of the credit terms and customer compliance.

Review the customer credit, if required.

Develop the reports for internal appraisal of the customer.

CREDIT POLICY

A firm’s investment in accounts receivable depends on :

the volume of credit sales, and
the collection period.
For example, if a firm’s credit sales are Rs 30 lakh per day and customers,
on an average, take 45 days to make payment, then the firm’s average
investment in accounts receivable is :
Daily credit sales × Average collection period

Rs 30 lakh × 45 = Rs 1,350 lakh

The investment in receivable may be expressed in terms of costs
instead of sales value.

The volume of credit sales is a function of the firm’s total sales and
the percentage of credit sales to total sales. Total sales depend on market
size, firm’s market share, product quality, intensity of competition,
economic conditions, etc. The financial manager hardly has any control over
these variables. The percentage of credit sales to total sales is mostly
influenced by the nature of business and industry norms.

There is one way in which the financial manager can affect the
volume of credit sales and collection period and consequently, investment in
accounts receivables. That is through the changes in credit policy. The term
credit policy is used to refer to the combination of three decision variables :
credit standards
credit terms, and
collection efforts,
on which the financial manager has influence.

Credit Standards are criteria to decide the types of customers to whom

goods could be sold on credit. If a firm has more slow-paying customers, its
investment in accounts receivable will increase. The firm will also be
exposed to higher risk of default.
Credit Terms specify duration of credit and terms of payment by
customers. Investment in accounts receivables will be high if customers are
allowed extended time period for making payments.

Collection Efforts determine the actual collection period. The lower the
collection period, the lower the investment in accounts receivable and vice
versa.

CREDIT POLICY VARIABLES

In establishing an optimum credit policy, the financial manager must

consider the important decision variables which influence the level of
variables. The major controllable decision variables include the following :
Credit standards and analysis
Credit terms
Collection policy and procedures

The credit policy of a firm may be administered by the financial manager or

the credit manager. It should, however, be appreciated that credit policy has
important implications for the firm’s production, marketing and finance
functions. Therefore it is advisable that the firm’s credit policy be
formulated by a committee which consists of executives of production,
marketing and finance departments. Within the framework of the credit
policy, as laid down by this committee, the financial or credit manager
should ensure that the firm’s value of share is maximised. He does so by
answering the following questions :
What will be the change in sales when a decision variable is altered?
What will be the cost of altering the decision variable?
How would the level of receivable be affected by changing the decision
variable?
How are expected rate of return and cost of funds related?
The most difficult part of the analysis of impact of change in the credit
policy variables is the estimation of sales and cost. Even if sales and costs
can be estimated, it would be difficult to establish an optimum credit policy
as the best combination of the variables of credit policy is quite difficult to
obtain. For these reasons, the establishment of credit policy is a slow process
in practice. A firm will change one or two variables at a time and observe
the effect. Based on the actual experience, variables may be changed further,
or change may be reversed. It should also be noted that the firm’s credit
policy is greatly influenced by economic conditions. As economic
conditions change, the credit policy of the firm may also change. Thus, the
credit policy decision is not one time static decision.

CREDIT STANDARDS 

Credit Standards are the criteria which a firm follows in selecting

customers for the purpose of credit extension. The firm may have tight credit
standards; that is, it may sell mostly on cash basis, and may extend credit
only to the most reliable and financially strong customers. Such standards
will result in no bad-debt losses, and less cost of credit administration. But
the firm may not be able to expand sales. The profit sacrificed on lost sales
may be more than the costs saved by the firm. On the contrary, if credit
standards are loose, the firm may have larger sales. But the firm will have to
carry larger receivable. The costs of administering credit and bad-debt losses
will also increase. Thus the choice of optimum credit standards involves a
trade-off between incremental return and incremental costs.

CREDIT ANALYSIS 

Credit standards influence the quality of the firm’s customers. There

are two aspects of the quality of customers :
(a) the time taken by customers to repay credit obligation, and
(b) the default rate.
The average collection period (ACP) determines the speed of payment by
customers. It measures the number of days for which credit sales remain
outstanding. The longer the average collection period, the higher the firm’s
investment in accounts receivable. Default rate can be measured in terms of
bad-debt losses ratio – the proportion of uncollected receivable. Bad-debt
losses ratio indicates default risk. Default risk is the likelihood that a
customer will fail to repay the credit obligation. On the basis of past practice
and experience, the financial or credit manager should be able to form a
reasonable judgement regarding the chances of default. To estimate the
probability of default, the financial or credit manager should consider three
C’s :
(a) character,
(b) capacity, and
(c) condition.

Character refers to the customer’s willingness to pay. The financial or

credit manager should judge whether the customers will make honest efforts
to honour their credit obligations. The moral factor is of considerable
importance in credit evaluation in practice.

Capacity refers to the customer’s ability to pay. Ability to pay can be

judged by assessing he customer’s capital and assets which he may offer as
security. Capacity is evaluated by the financial position of the firm as
indicated by analysis of ratios and trends in firm’s cash and working capital
position. The financial or credit manager should determine the real worth of
assets offered as collateral (security).

Condition refers to the prevailing economic and other conditions which may
affect the customer’s ability to pay. Adverse economic conditions can affect
the ability or willingness of a customer to pay. An experienced financial or
credit manager will be able to judge the extent and genuineness to which the
customer’s ability to pay is affected by the economic conditions.
Information on these variables may be collected from the customers
themselves, their published financial statements and outside agencies which
may be keeping credit information about customers. A firm should use this
information in preparing categories of customers according to their
creditworthiness and default risk. This would be an important input for the
financial or credit manager in formulating its credit standards. The firm may
categorise its customers, at least, in the following three categories :

Good accounts; that is, financially strong customers.

Bad accounts; that is, financially very weak, high risk customers.
Marginal accounts; that is, customers with nmoderate financial health and
risk (falling between good and bad accounts).

The firm will have no difficulty in quickly deciding about the extension of
credit to good accounts and rejecting the credit request of bad accounts.
Most of the firm’s time will be taken in evaluating marginal accounts; that
is, customers who are not financially very strong but are also not so bad to
be outrightly rejected. A firm can expend its sales by extending credit to
marginal accounts. But the firm’s costs and bad-debt losses may also
increase. Therefore, credit standards should be relaxed upon the point where
incremental return equals incremental cost.

CREDIT TERMS 

The stipulations under which the firm sells on credit to customers are
called credit terms. These stipulations include :
(a) the credit period, and
(b) the cash discount.
 Credit Period 

The length of time for which credit is extended to customers is called

the credit period. It is generally stated in terms of a net date. For example, if
the firm’s credit terms are ‘net 35’, it is expected that customers will repay
credit obligation not later than 35 days. A firm’s credit period may be
governed by the industry norms. But depending on its objective, the firm can
lengthen the credit period. On the other hand, the firm may tighten its credit
period if customers are defaulting too frequently and bad-debt losses are
building up.

A firm lengthens credit period to increase its operating profit through

expanded sales. However, there will be net increase in operating profit only
when the cost of extended credit period is less than the incremental
operating profit. With increased sales and extended credit period, investment
in receivable would increase. Two factors cause this increase :
(a) incremental sales result in incremental receivable and
(b) existing customers will take more time to repay credit
obligation (i.e., the average collection period will increase), thus
increasing the level of receivable.

Cash Discount 

A cash discount is a reduction in payment offered to customers to

induce them to repay credit obligations within a specified period of time,
which will be less than the normal credit period. It is usually expressed as a
percentage of sales. Cash discount terms indicate the rate of discount and the
period for which it is available. If the customer does not avail the offer, he
must make payment within the normal credit period.

In practice, credit terms would include :

(a) the rate of cash discount,
(b) the cash discount period, and
 (c) the net credit period.

For example, credit terms nay be expressed as ‘2/10, net 30.’ This means
that a 2 percent discount will be granted if the customer pays within 10 days;
if he does not avail the offer he must make payment within 30 days.

A firm uses cash discount as a tool to increase sales and accelerate

collections from customers. Thus the level of receivable and associated costs
may be reduced. The cost involved is the discount taken by the customers.

COLLECTION POLICY AND PROCEDURES 

A collection policy is needed because all customers do not pay the

firm’s bills in time. Some customers are slow-payers while some are non-
payers. The collection efforts should, therefore, aim at accelerating
collections from slow-payers and reducing bad-debt losses. A collection
policy should ensure prompt and regular collection. Prompt collection is
needed for fast turnover of working capital, keeping collection costs and bad
debts within limits and maintaining collection efficiency. Regularity in
collections keeps debtors alert, and they tend to pay their dues promptly.

The collection policy should lay down clear-cut collection procedures.

The collection procedures for past dues or delinquent accounts should also
be established in unambiguous terms. The slow-paying customers are
needed to be handled very tactfully. Some of them may be permanent
customers. The collection process initiated quickly, without giving nay
chance to them, may antagonise them, and the fir may lose them to
competitors.

The responsibility for collection and follow-up should be explicitly

fixed. It may be entrusted to the accounts or sales department, or to a
separate credit department. The co-ordination between accounts and sales
departments is necessary and must be ensured formally. The accounting
department maintains the credit records and information. If it is responsible
for collection, it should consult the sales department before initiating an
action against non-paying customers. Similarly, the sales department must
obtain past information about a customer from the accounting department
before granting credit to him.

Though collection procedures should be firmly established, individual

cases should be dealt with on their merits. Some customers may be
temporarily in tight financial position and in spite of their best intentions
may not be able to pay on due date. This may be due to recessionary
conditions, or other factors beyond the control of the customers. Such cases
need special considerations. The collection procedure against them should
be initiated only after they have overcome their financial difficulties and do
not intend to pay promptly.

The firm should decide on offering cash discount for prompt payment.
Cash discount is a cost to the firm for ensuring faster recovery of cash. Some
customers fail to pay within he specified discount period, yet they may make
the payment after deducting the amount of cash discount. Such cases must
be promptly identified and necessary action should initiated against them to
recover the full amount.

In practice, companies may take certain precautions vis-a-vis

collections. Some companies require their customers to give pre-signed
cheques. Bills discounting is another practice in India. Unfortunately, it is
not very popular with a number of companies. Some companies provide for
penal rate of interest for debtors who fail to pay in time.

So, while selling gods in the domestic market, the firm can have a number of
different credit practices. With respect to domestic market, LPS has a
number of options to choose from :-

1) Direct Payment 

This option includes direct payment of the amount by the customer to the
selling party. In this type of system, one of the following two options can be
chosen :-
  Payment in Advance  In this, the purchasing party has to give
the payment in advance. The amount to be paid is known as revolving
amount. The purchasing party has to give the payment prior to taking
the goods. For immediate payment, the purchasing party is also
offered a cash discount, the rate of which is based on certain factors.

 Payment within 60 days  In this, the customer has to make

the payment within 60 days of getting the goods. No cash discount is
offered on this type of payment.

2) OBC (Outward Bill Collection) 

Under this option, along with the ordered goods, a lorry receipt (also known
as goods receipt) is sent to the customers. This receipt contains information
such as number of packets/cartons, value of goods sent, etc. This receipt is
directly sent to the customer and the customer makes the payment through
the bank. For this purpose, the bank has to provide the customer with rest of
the documents. The bank charges some interest from the selling party for
providing this facility. If the customer is unable to make the payment, then
the selling party can also take legal action. But the payment is not confirmed
under this option.

3) Bill Of Exchange 

Under this option, the bank of the purchasing party sends a confidential
letter to the bank of the selling party. Along with Bill of Exchange,
Hundi is also sent to the bank. The Hundi contains certain terms &
 conditions and bank stamp by customer. Under this option, the payment
is confirmed.

4) Hundi on Demand 

This option involves receiving of payment by the

bank. The Hundi is sent to the customer’s bank and
payment is received immediately. So there is surity of
receiving the payment. There can also be Supply
Discount Bills (SDBs). These bills carry certain limits
with them which may relate to the amount of bill, time
for discounting, etc.

Just as a firm has a no. of options about its credit policies & practices,
similarly, the firm has many alternatives regarding the credit practices while
making exports also. Such as, the firm can adopt a policy of FOBC (Foreign
Outward Bill Collection) which is same as the OBC policy in the domestic
market. Similarly, there can be Foreign Discount Bills (FDBs) which are
similar to the SDBs used in the domestic market dealings. These bills have a
certain limit within which they can be discounted. Along with this time
limit, the customer is provided with a maximum transit period of 25 days.
Now a days, the firms usually have a system of electronic transfer between
banks.

Rational of the Study:-

Today Accounts Receivables have become a standardized key to managing
the working

Capital of running business around the world. CFO, GM-Finance &

Finance managers,

all are concerned with this study. This study will throw some light on the
impact of the

accounts receivables on the working capital and currents assets as well, of

the company

& cost incurred therein.

ANALYSIS OF ACCOUNTS
RECEIVABLES MANAGEMENT & INTERPRETATION

After the data have been collected, the task of analysis them are
done. The analysis of data requires a number of closely related operations
such as establishment of categories, the application of these categories to
raw data through coding, tabulation and then drawing statistical inferences.
In present study we have critically examined the accounting data in detail. It
helps us to obtain better understanding of firm’s position and performance.
Interpretation means drawing inferences and conclusion after conducting
detailed analysis.
Having discussed the principle of credit administration and credit &
collection policies of the LPS, the organisation under study, now we shall
evaluate the receivables management.

SIZE OF RECEIVABLES 

When the firm sells its products or services and does not receive cash
for it immediately, the firm is said to have granted trade credit to its
customers. Trade credit, thus, creates receivables, which the firm is expected
to collect in the near future. In receivables, we include only sundry debtors
because only these are involved in credit sales. The receivables of various
years have been taken from the annual reports of the company.
TABLE I.

SIZE OF RECEIVABLES
YEAR PERCENTAGE
(Rs in Lakhs)
2006 379.86 100.00
2007 885.14 233.00
2008 884.87 232.97

It can be seen from Table No. I that the receivable has the tendency to rise
fast from 2000 to 2002. During this period the receivables are increasing
every year. Having considered the book debts of 2000 as base, the
receivables have become 106% during 2001 and then after a substantial
increase, they have risen to 127% in 2002. This considerable increase in the
size of receivables is not good as it demands more investment in receivables
and increases the costs related to it.

In 2003, the size of receivables has gone down considerably to 118%

and in 2004 there has been a slight increase in it and it has risen upto 121%.

TABLE II.
YEAR BOOK DEBTS PERCENTAGE
SALES (Rs in Lakhs)
(Rs in Lakhs)
2006 5770.69 379.86 6.58%
2007 9052.37 885.14 9.78%
2008 11308.66 884.87 7.82%

Table No. II shows that the receivables as a percentage of sales have risen
from 2000 to 2002 after which there has been a fall in the percentage. After
the fall in 2003 they have again risen in 2004.

In 2000, the amount of receivables as compared to sales has been

around 29.5%. After that it has risen to about 30.5% in 2001 and to 31.5% in
2002. After the increase there has been a fall in this percentage in 2003 to
28.5%. But in 2004, it has again risen to about 30%.

TABLE III.
YEAR DEBTS EXCEEDING SIX TOTAL DEBTS PERCENTAGE
MONTHS (In Lakhs) (In Lakhs)
2006 2.41 379.86 0.63%
2007 4.43 885.14 0.50%
2008 19.90 884.87 2.25%

From Table No. III it is clear that the debts exceeding 6 months form
a very less part of the total debts. They were about 4% of the total book
debts in 2000. In 2001, they rose to 7% of the receivables. This rising trend
continued till 2003. During this period, they formed 7.5% of the total debts
in 2002 and about 10% of the same in 2003. The rising trend in this
percentage is not a good indicator as it may lead to more bad-debt losses for
the firm because higher the time period for which the receivables have been
due, higher are the chances of those debts going bad.
TABLE IV.
YEAR OTHER DEBTS (LESS THAN TOTAL DEBTS PERCENTAGE
SIX MONTHS) (In Lakhs) (In Lakhs)
2006 377.45 379.86 99.36%
2007 880.71 885.14 99.50%
2008 864.97 884.87 97.75%

Table No. IV gives us the information about the percentage of debts less
than six months to total debts of the firm. From this percentage, we can see
that these debts form most of the part of total debts. Although their
percentage has been decreasing in the past few years (except 2004 in which
the percentage has risen), yet they form the bulk of total debts. This means
that the firm is able to collect a major portion of its total debts within a
period of 6 months. From 2000 to 2003, this percentage has gone down from
about 96% to 90%. Between this period, the percentage was between 92%
and 93%. In 2004, the percentage has again risen to around 93%.
TURNOVER OF ACCOUNTS RECEIVABLE 

The analysis of efficiency of granting credit and collecting the dues

can be done through the turnover of accounts receivables. In fact, as
suggested by Professor R.W. Johnson, the analysis of the efficiency of
granting credit has been done on the basis of computation of the turnover of
accounts receivables and the analysis of collecting the dues has been done
on the basis of ageing of accounts receivables. To find out the turnover of
accounts receivables, the Average Collection Period (ACP) will have to be
calculated. The average collection period can be known only when we have
sales and receivable or book debts for various years. The formula with which
average collection period can be found out is – Divide receivables by sales
and multiply by 365 (days in a year). The average collection period has been
calculated in the following table :-

TABLE V.
YEAR SALES RECEIVABLES ACP = RECEIVABLES × 365
(Rs in Lakhs) (Rs in Lakhs) SALES
2006 5770.69 379.86 24.03
2007 9052.37 885.14 35.70
2008 11308.66 884.87 28.56

From Table no. V we can see that the average collection period lies between
104 days to 115 days during these five years. The ACP was around 108 days
in 2000 and it has been rising since then upto the year 2002. In 2001, the
ACP was 111 days whereas in 2002 it rose to 115 days. This rise in ACP is
not good as higher the ACP, higher is the capital or carrying cost. But in
2003 the ACP has gone down to 104 days. This is a good indicator regarding
the firm’s credit policy. The ACP has again risen slightly to 110 days in
2004. So the firm should take certain steps to make sure that it does not rise
in future.

TABLE VI.

ACP TURNOVER
YEAR
365/ACP
2006 24.03 15.19
2007 35.70 10.22
2008 28.56 12.78

It is clear from Table no. VI that the turnover of accounts receivable

lies between 3 and 4 during this period. This gives indication of stability in
the firm’s investment in receivables. The turnover has been decreasing from
3.38 in 1998 to 3.17 in 2002. It has risen in 2003 to 3.49 but in 2004, it has
again gone down to 3.32. But this increase or decrease in the turnover is not
too high which is a good indicator for the firm.

CONCLUSIONS
 The credit policy of the firm is determined by Board of Directors with
consultation of the marketing division of the firm. The financial division is
informed by the marketing division about the unrealised dues. The
marketing division handles the credit policies as credit sales have got direct
bearing on the total sales. A study has been conducted to find out the
effectiveness of its credit and collection policy. The credit period lies
between 30 to 90 days depending on the credit worthiness of the customer.
The firm gives credit on selective basis after analysing the 5 C’s about the
customer viz; character, capacity, capital, condition, and collateral. The firm
charges an interest equal to commercial bank rate @ 18% at which bank
generally extends cash credit / overdrafts etc. The firm extends credit
through bills of exchange which are paid within 10 to 15 days from he date
of issue.

The size of receivables of the firm from 2000 to 2004 has shown
increasing tendency throughout this period i.e. from 100% to 121%, except
in the year 2003 when it has decreased. The increase is almost every year
which is not appreciable. The increase is considerable from 2000 to 2002 but
the rate of increase has gone down in 2003 & 2004.

The sales of the firm have increased during the time period under
consideration. But the size of receivables as a part of sales has not risen
proportionately. From 2000 to 2002, this percentage has increased from
29.5% to 31.5%. But in 2003 there has been a decline in this figure in spite
of the increase in the amount of sales. This shows a collection policy which
tends to emphasize on the restriction of credit sales. But the condition has
improved a little in 2004 with the percentage showing an increase to 30%.

The debts of the firm which are outstanding for a period of more than 6
months form a very less part of the total debts of the firm. But their
percentage to total debts has shown an increasing trend till 2003. This is not
a good indicator as it may lead to more bad-debt losses for the firm because
higher the time period for which the receivables have been due, higher are
the chances of those debts going bad. These debts have decreased in the year
2004 which shows that the firm has taken certain measures.
In contrast to the credit period of 30 to 90 days the average collection period
varies between 104 to 115 days during this period. The ACP has increased
from 108 days in 2000 to 115 days in 2002 which is not good for the firm. In
2004, after declining to 104 days in 2003, it has gain risen to 110 days. The
turnover of accounts receivable for this period lies between 3 and 3.5.

The percentage of bad debts of the firm to its sales has been fluctuating
during this period. But it has increased steeply in 2004 which is not good.
This shows that the firm has got a weak collection policy. Similar is the case
with the percentage of bad debts to total debts. This percentage has also
risen in 2004.

The percentage of book debts to current assets has declined gradually during
this period. This may be due to stringent credit policy of the firm. But a
continuous decrease in this percentage can have an adverse impact on the
future sales of the firm. The percentage of debtors to total assets has also
shown a decline during this period.

The ACP and the sales of the firm are negatively correlated. This means that
if ACP is decreased, the sales will show an increase.