Receivables Management

Submitted by,

GROUP-13

Megha J 231089 Rohit Mohan 231103 Rohan Sachdeva 231118

2015

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Table of Contents Executive Summary ................................................................................................................................. 3

APPLICATION: .......................................................................................................................................... 4

RECEIVABLES MANAGEMENT POLICY AT TATA STEEL: ....................................................................... 4

Innovations: ............................................................................................................................................ 6

Cloud Computing ................................................................................................................................ 6

FI-AR Credit Management .................................................................................................................. 6

NEWSPAPER ARTICLES ............................................................................................................................ 7

Article 1: .............................................................................................................................................. 7

Article 2: .............................................................................................................................................. 8

RESEARCH PAPER-1: ................................................................................................................................ 9

Research Paper-2: ................................................................................................................................. 13

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Executive Summary The report is based on Receivables Management. It primary covers 4 aspects:

Application in Business.

News in the media relating to Receivable Management within 2 year.

Innovations in Receivables Management.

Research Paper relating to Receivables Management within last 3 years

The real life application included in the report is of TATA STEEL. TATA STEEL has entered

into an arrangement whereby it made HDFC Bank its factoring agent. It also insured all its

debtors from The New India Assurance Co. Ltd. This arrangement assured the company of

making good all the losses that it may suffer as a result of failure in payment of its debtors

and managing its working capital efficiently. It also saves the company’s time and cost

involved.

The news covered in the report is of Trade Receivables Discounting System which has

recently implemented by RBI which allows an exchange where an MSME that has some

receivables pending from a large corporate will be able to trade the bill.

The second article says that minimum capital of Rs.25 crore for entities setting up

and operating the Trade Receivables Discounting System (TReDS).

There are 2 Research Papers, the 1st one is of Study of Pharmaceutical Industry by Ashish

Mohanty ,Dr Lalat K Pani and Sukhamaya Swain which was published in January 2014. The

objectives of this study was to analyze the efficiency of Receivables Management, analyzes

the financial position in terms of receivables, study aims at finding the size and growth of

receivables & sales and study of detail analysis of the composition of receivables like

debtors and loans & advances.

The 2nd research paper was study of The Impact of Effective Management of Credit Sales

on Profitability and Liquidity of Food and Beverage Industries in Nigeria by By M.S.K.

Ifurueze in year 2013. The objectives

To examine the impact of effective and efficient management of credit sales on

profitability and liquidity of Food and Beverage industries in Nigeria.

To establish the correlation between the level of credit granted to customers and

operating profit of the companies.

And the inferences were:

Effective management of credit sales has a positive relationship with the operating

profit of the companies in the Food and Beverage Sector.

A favourable debtor’s turnover would result to favourable liquidity position.

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APPLICATION:

RECEIVABLES MANAGEMENT POLICY AT TATA STEEL:

TATA STEEL, recently, entered into an arrangement whereby it made HDFC Bank its

factoring agent. It also insured all its debtors from The New India Assurance Co. Ltd. This

relieved TATA STEEL of any bad debts because, now, in exchange for a factoring commission

to HDFC Bank and an insurance premium to The New India Assurance Co. Ltd., all the

responsibility of collecting payments from debtors was passed on to the Factor(in this case

HDFC Bank). This arrangement assured the company of making good all the losses that it

may suffer as a result of failure in payment of its debtors and managing its working capital

efficiently. It also saves the company‟s time and cost involved in employment of credit

rating agencies for the assessment of credit to be extended.

TATA STEEL will be able to reduce the following costs due to the triangular arrangement done.

Collection costs (administrative costs incurred in collecting the receivables from customers to whom credit sales have been made) will be reduced because HDFC bank will be responsible in collecting the receivables.

Capital cost: Additional capital which would have been locked in with the customers could be used somewhere else as the bank will pay TATA STEEL the entire value of invoices upfront

Delinquency cost: Blocking up of funds for extended period and costs associated with steps that have to be initiated to collect over dues such as reminders and other collection efforts such as legal charges whenever necessary would be saved.

Default Cost: Since the agreement is without recourse, TATA STEEL will not be responsible for any default by customers. So the default cost would also be saved.

The policy is assigned in the name of HDFC BANK LTD., the banker of TATA STEEL. This

makes it the sole beneficiary under this policy and henceforth all claims or recoveries made

thereof are paid directly to the Assignee. However, it might be that TATA STEEL receives the

claims directly from the insurer at times; in that case it has to inform the bank.

The sales are made to the customers as per their respective credit limits which are decided keeping in mind three points namely: 1) Credit rating of the debtors done by an independent credit rating agency.

2) Debtor’s bankers report, and

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3) Their trading experience with the company and other related parties. In case of any default or some debtor becoming insolvent, the bank communicates the

matter to the insured before filing the claim to the insurance company.

The interest on the difference between the claim amount and the settlement amount has to

be borne by TATA STEEL along with the discounting charges

STEP BY STEP PROCESS: 1st Step • TATA STEEL recommends customers along with their credit limits and provide necessary details to HDFC Bank.

• New India Assurance Co Ltd. will do a credit appraisal and inform TATA STEEL the percentage of whole turnover that they will insure (insurable turnover) & charges TATA STEEL a premium on insured turnover.

• HDFC Bank does a credit appraisal and informs the company about the category in which the customer shall fall. On completion of the documentation, the transaction starts. 2nd Step • TATA STEEL sends a soft copy of the invoices uploaded through Ethernet and follow up mails.

• The company retains the original invoices with it.

• The Bank makes the payment to the company for the sale value on behalf of the customer.

• The Bank deducts invoice discounting charges from the companies account for the number of days of discounting made.

• The Bank confirms the transaction through MIS reports to TATA STEEL.

• The Bank receives the payment from the customer after the expiry of the credit period. 3rd Step • The company has entered into an insurance arrangement with New India to safeguard its interest in case of a default being made by the customer to pay the bank after the expiry of the credit period.

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Innovations:

Cloud Computing Software solutions have transformed the workplace, and with SaaS applications being

available anytime anywhere all users can be guaranteed to share the same information. This

is why these solutions are particularly suitable for credit risk management. Easy to deploy

on several sites worldwide, they allow data to be shared between the head office of a

company and its different subsidiaries and between all the relevant parties within the

organisation. All the functions of the order-to-cash cycle benefit from centralised tasks and

automated solutions, from the sales team and administrators, the supply chain department,

deliveries and finally the client accounting and financial staff. Various stakeholders including

brokers, insurers, factoring companies and advisers can also benefit from a system that

automates and streamlines all procedures linked to credit management. With access to

critical data in real time, it is much easier to track exposure to risk, accrued provisions, and

cash flow, not just on a daily basis, but hourly, and be informed if a customer’s own financial

situation deteriorates and put in place measure to limit the financial impact. A software

solution for credit risk management helps to reduce DSO, secure cash flow, underline credit

management policy and increase productivity. Thanks to its flexibility and responsiveness, it

makes the company more proactive in managing and preventing risks, allows optimisation

of costs and supports the performance of the credit insurance programme whilst also

ensuring that all defined governance rules are applied on a daily basis. In our recent poll

amongst credit managers, when asked for their wish list to better support their credit

management, just over half said that they would change or improve their system software.

FI-AR Credit Management If you implement the Accounts Receivable (FI-AR) application component to manage your receivables, but a non-SAP system for sales and distribution processing, Credit Management enables you to assign a credit limit to each customer. When you post an invoice (in FI-AR) the system then checks whether the amount exceeds the credit limit. Facilities like the credit master sheet or early warning list help you monitor the customer’s credit situation. If you implement both the Accounts Receivable (FI-AR) and Sales and Distribution (SD) application components, you can specify in Customizing when (at the point of order, delivery, goods issue and so on) and to what extent a check on the customer’s credit limit is to take place. Features If you implement both SD and FI-AR, Credit Management provides the following facilities:

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You can define automatic credit limit checks according to a range of criteria and in line with your company’s requirements You can also define at what point the system carries out these checks (order, delivery, goods issue, and so on).

The credit representative is automatically alerted to a customer’s critical credit situation as soon as order processing starts.

The relevant employees can be automatically notified of critical credit situations via internal mail.

Your credit representatives are able to check a customer’s credit situation quickly and reliably, and, in line with the appropriate credit policy, to decide whether the customer should be granted credit.

Using Credit Management you can work in distributed systems. A distributed system is one with central financial accounting and non-central sales and distribution on several sales and distribution computers.

NEWSPAPER ARTICLES:

Article 1: RBI announces norms for trade receivables discounting system

Mumbai, Dec 4, 2014

To make it easier and faster for micro, small and medium enterprises (MSMEs) to get their

dues, the RBI put out final guidelines for setting up of a Trade Receivables Discounting

System (TReDS).

TReDS will be like an exchange where an MSME that has some receivables pending from a

large corporate will be able to trade the bill. So, if an MSME has to realise ₹ 100 from a

corporate, it can exchange the bill with one of the participating entities on the exchange for,

say, ₹ 95. The buyer of the bill will then recover the ₹ 100 from the corporate concerned,

pocketing the profit of ₹ 5.

Better price

The MSME will benefit because its credit cycle is shortened and it will get a better price on

the bill due to competition.

MSME sellers, corporate buyers and financiers — both banks and non-bank (NBFC factors)

— will be direct participants in the TReDS, the RBI said.

The central bank, while inviting applications from the interested entities, said that it will

receive applications till February 13, 2015

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Article 2: Rs.25 crore minimum capital for Trade Receivables Discounting System

Chennai, Dec 20, 2014: The Reserve Bank of India (RBI) Wednesday stipulated a minimum

capital of Rs.25 crore for entities setting up and operating the Trade Receivables Discounting

System (TReDS).

According to the guidelines issued by the RBI, the start-up capital for TReDS outfits will be a

minimum of Rs.25 crore and entities other than promoters will not be permitted to have

shareholding over 10 percent of the equity capital.

The guideline said the promoters/promoter groups should be "fit and proper" to operate

TReDS.

The RBI would assess the "fit and proper" status of the applicants on the basis of their past

record of sound credentials and integrity; financial soundness and track record of at least five

years in running their businesses.

The RBI may also seek feedback on the applicants on these or any other relevant aspects

from other regulators, and enforcement and investigative agencies like Income Tax, CBI,

Enforcement Directorate, SEBI and others.

Since technology is going to play an important role in its operations, the RBI has stipulated

that TReDS shall be able to provide electronic platform for all the participants; information

about bills/invoices, discounting and quotes should be communicated on real time basis.

The TReDS shall have a suitable Business Continuity Plan (BCP) including a disaster

recovery site and also have an online surveillance capability to monitor positions, prices and

volumes in real time so as to check system manipulation.

Micro, small and medium enterprises (MSMEs), face constraints in obtaining adequate

finance, particularly in terms of their ability to convert their trade receivables into liquid

funds.

In order to address this pan-India issue through setting up of an institutional mechanism for

financing trade receivables, the RBI in March published a concept paper on MSME

Factoring-Trade Receivables Exchange.

Based on the comments received, the central bank came out with its guidelines

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RESEARCH PAPER-1: Study of Pharmaceutical Industry Volume: 4 | Issue: 1 | Jan 2014 | ISSN - 2249-555X Ashis Mohanty Sr. Lecturer (Finance), Bhadrak Institute of Engineering & Technology,Barpada,Bhadrak (Odisha) Dr Lalat K Pani Retd. Reader of Commerce, Bhadrak Autonomous College, Bhadrak Sukhamaya Swain Circle Business Banking Head, Odisha Circle, AXIS Bank Objectives of the Study:

• The main thrust of this study is to analyze the efficiency of Receivables Management in the selected sample pharmaceutical companies of India.

• The study also analyzes the financial position in terms of receivables of selected pharmaceutical companies as a whole.

• Besides, the study aims at finding the size and growth of receivables & sales • The study also includes detail analysis of the composition of receivables like debtors

and loans & advances Sample Size Sales has been taken as the major criterion The total pharmaceutical companies, thirty two pharmaceutical companies have been taken from the pharmaceutical Industry on the basis of their annual turnover. Further, they were divided into four groups with eight companies in each group. The groups are named Group A which includes companies with turnover more than one thousand crores, Group B includes companies with turnover more than five hundred crores but less than one hundred crores, Group C includes companies with turnover more than one hundred crores but less than five hundred crores and finally Group D includes companies with turnover less than one hundred crores. The list of companies under each groups along with their annual turnover in rupees and dollars are presented in the table A, B, C and D respectively

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Accounting Tools used:

A. Receivables to Current Asset Ratio This Ratio of Receivables as a percentage of Current Assets would reveal the size of receivables with reference to Current Asset and the opportunity cost associated with the same. When the percentage of current asset is higher, it indicates the cost of carrying the Receivables is higher. It is therefore advised that a firm needs to carry the least percentage of Receivables without affecting the sales volume. The ratio is calculated as follows.

Current Assets Ratio = [(Closing Receivables)/ (Current Assets)] X 100

B. Receivables to Total Asset Ratio The Ratio of Receivables to Total Assets depends on the industry, but generally a low number indicates that the company has too much money tied up with total assets that are not contributing to sales. It is a Ratio of Receivables /total assets (or Total Average Assets). The profit margins are an important consideration while analyzing this number. The percentage of Receivables to total assets is found out by using the following formula.

Receivables to Total Asset Ratio = [(Closing Receivables) / (Total Assets)] X 100

C. Receivables to Sales Ratio It indicates the amount of Receivables held by the business firm as a percentage of sales during a particular period. The main purpose of this ratio is to work out the efficiency of Re-ceivables Management in the business organization. High ratio indicates that the business firm is doing business with huge debtors. Higher the sales and lower the debtors indicate that the company has a high rate of collection. This ratio is calculated with the following formula.

Receivables to Sales Ratio = [(Closing Receivables) / (Sales)] X 100

D. Debtors Turnover Ratio Debtors Turnover Ratio is termed as Receivables Turnover Ratio or Debtors Velocity. It indicates the number of times the Receivables or turn over in business during a particular period. In other words, it indicates how quickly debtors are converted into cash. This ratio establishes the relationship between Receivables and Sales. Debtors Turnover Ratio measures the liquidity of debtors of a business firm and average collection period. It indicates the average time lag in days between sales and collection. Higher Receivables

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turnover ratio and lower debtor collection period reflect the firm’s ability to manage a larger volume of business without corresponding increase in Receivables and vice versa. This ratio is calculated with the following formula.

Debtors Turnover Ratio = (Sales) / (Average Account Receivables)

*Average Account Receivables = (Opening receivable + Closing receivable) / 2

E. Average Collection Period The average collection period is otherwise called Debt Collection Period. This technique of computation of average collection period indicates the efficiency of the debt collection period and the extent to which the debt have been converted into cash. Both the techniques are used to measure the quality of Accounts Receivable. It indicates the liquidity of trade debtors i.e., higher turnover ratio and shorter debt collection period indicate the prompt payment by debtors. Similarly, the low turnover ratio and higher collection period implies that payment of trade debtor are delayed. The Debt Collection Period can be determined as follows: Average Collection Period = (365 days) / Receivables Turnover Ratio

Table 2: Receivables Management Ratio

Company

Receivables to

Receivables to

Receivables to Debtors

Average Col-

Current Asset

Total Asset Ratio Sales

Turnover Ratio

lection Period

Ratio (%) (%) Ratio (%) (Times) (Days)

1 Ranbaxy Laboratories Ltd. 56.11 40.85 48.11 4.86 77.10

2 Cipla Ltd. 63.74 57.63 51.63 4.84 83.66

3 Dr. Reddy’s Laboratories Ltd. 57.33 39.87 53.43 4.05 91.46

4 Nicholas Piramal India Ltd. 69.49 45.68 34.75 8.03 45.95

5 Aurobindo Pharma Ltd. 63.88 46.66 52.95 3.31 115.65

6 Glaxosmithkline Pharmaceuticals Ltd. 26.60 22.78 16.27 24.78 18.15

7 Lupin Ltd. 60.87 46.49 40.28 4.58 82.53

8 Cadila Healthcare Ltd. 58.85 31.44 32.15 7.74 50.03

9 Sun Pharmaceutical Inds. Ltd. 42.20 23.12 43.80 5.27 76.42

10 Wockhardt Ltd. 49.40 35.30 46.11 5.18 72.96

11 Aventis Pharma Ltd. 27.93 30.24 20.16 14.74 25.38

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Orchid Chemicals & Pharmaceuticals

47.95 24.47 52.54 3.45 120.23

Ltd.

13 Ipca Laboratories Ltd. 59.06 43.46 33.20 4.98 73.77

14 Pfizer Ltd. 44.63 57.76 43.74 10.33 37.27

15 Novartis India Ltd. 72.60 82.72 53.51 10.72 37.83

16 Torrent Pharmaceuticals Ltd. 48.50 31.16 26.96 9.27 45.04

17 Abbott India Ltd. *25.76 20.99 *7.41 21.16 *17.50

18 Cadila Pharmaceuticals Ltd. 58.85 31.44 32.15 16.31 28.75

19 Glenmark Pharmaceuticals Ltd. 81.22 62.13 99.66 3.12 127.79

20 Panacea Biotec Ltd. 32.59 22.64 28.25 7.83 49.14

21 T T K Healthcare Ltd. 55.74 67.01 27.96 7.44 64.92

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22 Natco Pharma Ltd. 61.87 36.89 55.48 4.40 100.14

23 Zandu Pharmaceutical Works Ltd 45.87 36.95 17.29 *24.83 17.73

24 Ajanta Pharma Ltd. 59.69 38.32 49.09 2.77 153.35

25 Themis Medicare Ltd. 61.44 54.28 40.58 3.25 113.31

26 Amrutanjan 46.25 33.37 19.25 10.00 37.31

27 Jupiter Bioscience Ltd 51.80 *11.16 34.71 5.47 69.35

28 Wanbury Ltd. 79.25 47.81 68.15 3.90 100.85

29 Anuh Pharma Ltd. 73.56 87.81 32.65 5.68 67.07

30 Suven Life Sciences Ltd. 62.39 34.53 45.23 5.63 70.64

31 Medicamen Biotech Ltd. 67.98 83.47 28.82 4.78 79.36

32 Syncom Formulations (India) Ltd. 76.01 76.01 38.14 3.94 94.20

Industry Average 55.92 43.89 39.83 8.02 70.15

Conclusion:

• Anuh Pharma Ltd had (87.81%) earned large amount of receivables as a part of total

assets

• Jupiter Bioscience Ltd managed their Receivables (11.16%) better as a part of total

assets. It acquired the lowest percentage of Receivables to Total Assets during the

study period.

• Abbott India Ltd with the ratio of 7.41% was considered to be the most efficient firm

by holding less amount of investment in Receivables as percentage of sales.

• Zandu Pharmaceutical Works Ltd earned the higher turnover (24.83 times) which

indicates it has high liquidity.

• Abbott India Ltd managed better as their collection period is very low (17.50 days)

which shows that it generates cash faster.

Research Paper-2: The Impact of Effective Management of Credit Sales on Profitability and Liquidity of Food

and Beverage Industries in Nigeria

By M.S.K. Ifurueze

Global Journal of Management and Business Research

Volume 13 Issue 2 Version 1.0 Year 2013

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Type: Double Blind Peer Reviewed International Research Journal

Publisher: Global Journals Inc. (USA)

Online ISSN: 2249-4588 & Print ISSN: 0975-5853

Objective:

1) To examine the impact of effective and efficient management of credit sales on

profitability and liquidity of Food and Beverage industries in Nigeria.

2) To establish the correlation between the level of credit granted to customers and

operating profit of the companies.

Hypothesis 1:

Ho: There is no significant relationship between the level of credit granted to

customers and operating profit of the companies

H1: There is significant relationship between the level of credit granted to customers

and operating profit of the companies

Hypothesis 2:

Ho: There is no positive and significant correlation between liquidity position and

debtor’s turnover of the companies

H1: There is positive and significant correlation between liquidity position and

debtor’s turnover of the companies

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CSP = Credit Sales Percentage (Average Credit sales % for 5 years).

GPM = Gross Profit Margin (Average Gross Profit Margin for 5 Years).

NPM = Net Profit Margin (Average Net Profit Margin for 5 years).

ROCE = Return on Capital Employed (Average ROCE for 5 years

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Inferences:

Effective management of credit sales has a positive relationship with the operating

profit of the companies in the Food and Beverage Sector.

There is significant relationship between liquidity position and debtors turnover of

the companies in the Food and Beverage Sector in Nigeria. This implies that a

favourable debtor’s turnover would result to favourable liquidity position.

The positive correlation between liquidity and debtors turnover signifies that as the

debtors turnover rises, the liquidity position also rises.

The study also revealed that the objective of any firm's credit policy is to maximize

profit of the firm and at the same time minimize costs associated with credit sales.

Recommendations:

Organizations should consider their mission, the native of their businesses, and their

business environment before setting up a credit policy.

Companies should intensify efforts to engage the services of factoring agents. This

will reduce the incidence of bad debts losses and other associated costs of credit.

Companies should increases the rate of credit sales to trustworthy customers