Receivables Mgt & Its Impact on Cash Flows Nithin Project Report

A STUDY ON RECEIVABLES MANAGEMENT AND ITS IMPACT ON CASH FLOWS

INDUSTRY PROFILE:

The art, science and engineering prowess of making metals and increasingly other advanced

materials join together and function as one.

Commercial production of welding electrodes was started in India in early 1960s. In 1970s a

number of companies with foreign collaboration or joint venture went into production. Small

scale sector entered the scene in 1980. In 1980s too, a number of organized sector units were set

up with foreign collaboration but now in special welding consumables.

Welding electrode is a delicate tool which while in use combines physical, chemical, and

metallurgical processes of the flux, core wire and parent metal to achieve a durable weld joint or

surfacing. With advent of electronically controlled welding equipments and use of gas as

shielding medium the construction of welding electrode has simplified considerably. For mass

welding jobs solid continuous welding wires find increasing application. Welding electrodes are

used in joining, surfacing and protective maintenance for varied materials and thus their variety

is large while their raw material requirement being very specific

In Welding Electrode industry there are 28 organized sector units of stick electrodes and 8

manufacturers of continuous welding wires. There are around 100 small scale units in this

industry. Stick electrodes, which can be categorized into 8 to 10 broad groups, are of around 150

varieties. Continuous welding electrodes of solid core (MlG and MAG) type and flux cored type

are manufactured in India. In stick electrode the product mix is of mild steel electrodes (about

60%), mild steel high tensile and low hydrogen low alloy (about 30%), and special type (about

10%). Indigenously produced electrodes find application in major industries like Railways,

Petrochemicals, Fertilizers, Sugar, Automobile, Nuclear Power and others.

Foreign collaborations have continued in welding electrode industry from early 1960s till date.

Initially AOL, Philips, and IOL entered the market with joint ventures with their parent

companies. GEEL and Modi Arc went ahead with technical foreign collaboration in which

know-how and machinery supplies were included. In late '80s collaborations were for specialized

welding consumables like SAW fluxes, Flux cored wires, etc.


At present there are 28 organized sector welding electrode units with installed capacity of

1054.61 million running meters in India. Out of the 28 units two units control around 40% of the

installed capacity and six units control around 60% of the installed capacity. The rest is

fragmented among 22 units. The SSI sector which entered this industry a decade ago has at

present a share of 30% of the total stick electrode production. Confirmed production data of

continuous welding electrodes is not available. In welding electrodes exports as well as imports

have been very limited. In 1991 imports were of the

order of Rs.4.10 crores and exports Rs.6.5 crores.

For majority of the electrode manufacturers the major manufacturing processes involved in

production of stick electrode are wire drawing, wire cutting to size, flux constituent grinding, dry

mixing, wet kneading, slug preparation, wire coating, brushing, printing, drying and packing.

They have similar manufacturing facilities which include major machinery like draw bench, dry

and wet flux mixers, slug press, wire feeder, extruder, baking oven, and packing machine. A few

units have very sophisticated inspection and testing facilities and observe stringent quality

control procedures.

The technology with respect to welding electrodes around the world is basically based on

extrusion press. Leading manufacturers have automated their plants by process control

equipments, and material handling equipments. They have introduced computerized batching

Plants, X-ray fluorescent testers, high speed extrusion presses, digital concentricity testers etc.

Use of such equipments is economical for them as they have very high plant capacities. Special

purpose electrode manufacturers attain their leadership by carrying out research in specific

application areas like protective maintenance, in their research centers spread world wide. In

continuous welding wires automatic drawing plants and coating plants are used.

Technology for welding electrodes imported over the last 3 decades has been fully absorbed and

adapted. Indian collaborators have been able to improvise and indigenous flux formulations and

all manufacturing machinery. However no further innovative changes have been carried out in

manufacturing machinery design.

Basic technology of welding electrode production was received from developed countries like

Sweden, Germany, USA, and UK through foreign collaborations and joint ventures. Initially

basic machines like extrusion press, wire feeder, etc. were imported with the knowhow of

electrode recipes and method of preparing flux compositions. Most of the organized sector units


who have had foreign know-how have assimilated the technology and now do not depend on

imported raw materials and equipments except for very sophisticated requirements. M/s. Advani

Orlikon Ltd. has played a lead role in technology assimilation and up-gradation as well as in

training of technical manpower. At present quite a few manufacturers have not extended their

decade long collaboration agreement. An assessment indicates that those with extended foreign

collaborations of joint ventures are more up-to-date technologically and have synergic advantage

in export market. Majority of organized sector units have quite low installed capacities to enable

them to use modern machinery set up like computerized batching plant, X-ray florescent tester,

etc.

In India, basic manufacturing technology for welding electrodes has remained same over the

years. Various electrode coating plant designs have been tried out by the Indian electrode

manufacturers. At present horizontal type (angular and right angled both) electrode coating

plants have found wide acceptance. Screw type press was also tried out but was found

commercially unviable. Indian electrode manufacturers and electrode plant manufacturers can

now develop complete stick electrode manufacturing plant as well as CO2 wire plant. Capital

equipment in new organized sector units and all the SSI sector units are largely Indian. Electrode

quality steel shortage is felt in summer months due to power cuts at major producer plants.

In Welding Electrodes, exports as well as import have been quite limited. Exports are increasing

although the pace is slow. Imports have decreased over the years. However they are mainly for

small highly specialized application requirements. Comparison of prices and quality of welding

electrode plants of European and Indian plant manufacturers reveal that the former's prices are

quite high relative to their quality. Indian plant manufacturers can be competitive in exports if

they improve their workmanship, basic engineering and stick to delivery schedules.

Research and development activities in this sector are carried out by leading 5 private sector

companies and public sector Welding Research Institute, Tiruchy. Electrode manufacturers who

do not carry out in house research suffer from limited product range. Welding Research Institute,

Tiruchy has done considerable work in development and spread of welding electrode production

technology. Its work has specially benefitted small scale sector units. The later have received

technology for general purpose electrodes, SAW fluxes, hard facing and super hard facing

electrodes etc. and welding equipments.


COMPANY PROFILE

BACKGROUND AND INCEPTION OF THE COMPANY

ADOR FONTECH LIMITED a front-runner organization that operates on the philosophy of

'partnering' with its clients in recommending and implementing value-added reclamation, fusion,

surfacing and spraying solutions.

The Company was incorporated originally as Cosmics Electronics and Ancillaries Pvt. Ltd. on

22nd August,1974. The name of the Company was changed to Cosmics General Engineering

Pvt.Ltd. on 7th December, 1979. On 21st October, 1988 the Company changed its name to

Cosmics Fontech Pvt.Ltd. The Company became a Public Limited Company on 17 th November,

1993.

M/s. Cosmics Fontech Limited (CFL) is an associate Company of M/s. Advani-Oerlikon

Limited. It was set up to provide Products, Services and Solutions for Reclamation and Service

Life Improvement of vital machinery components in various industries.

The Company commenced operations on 17th December, 1979 under the name of Cosmics

General Engineering Pvt Ltd. The purpose was to provide industries a comprehensive range of

Low Heat Input Welding Alloys, Flux Cored Welding Wires, Thermal Coating Alloy Powders

and the associated equipment used with the relevant reclamation and surfacing processes.

On 21 st October 1988 obtained the certificate for change of name to Cosmics Fontech Private

Limited. The word Private was deleted from the name of the Company on 21st October 1988

under the Companies Act 1956, when the Company became a deemed public Company. On 17th

November, 1993 the Company became Cosmics Fontech Ltd., full fledged Public Limited

Company under Section 43(A).

The Company came into being in 1980. Right from its inception, it has had a focus of supplying

products, services and solutions that meet and exceed the needs of its end-users.

In the growing competitive Indian economy, the need to contain both capital and revenue costs

has to be closely monitored. Ador Fontech Limited being in life enhancement segment, the value

addition that it brings in terms of cost savings to organizations is paramount. In other words, the

company provides a positive edge both towards, the impact of business cycle and the varied

movements of the economy in general.


There is a plethora of opportunities to enhance the market share of the company and also to bring

in newer concepts related to repair and refurbishment operations. In this, the company would

endeavor to have an inside out approach to build on its strengths like consolidation of viable

business opportunities and diversified portfolios of products and solutions. Nonetheless, care

would be evinced to strike a balance between the risks and rewards of opportunities, as also

strive towards ensuring a consistent growth module.

There are quite a number of players operating both in the organized and unorganized sectors and

the gap between fabrication and repair welding is nebulous with many organizations expanding

their terrains to cover both these segments.

The company caters to the “Life Enhancement if Vital Machinery Components”. The domain

expertise in this sector calls for application of high level of skills covering metallurgy, chemical

and repair welding processes. There are quite a few players in this marker and competition is

keen. Nonetheless, the underlying fact is the contribution that this segment offers to the world at

large, in terms of conservation of depleting natural resources, which is substantial. Further,

industries in general are benefited by way of greater productivity, resulting from lesser

downtime. This unique predisposition, places the organization on a consistent growth platform.

The company has a wide range of products and solutions and this range is constantly being

monitored by way of additions and deletions to keep abreast with the latest in technology and

operational efficiency.

Ador Fontech limited is a front-runner organization that operates on the philosophy of

‘partnering’ with its clients in recommending and implementing ‘best-in-class’ joining,

reclamation and surfacing solutions. The company is dedicated to supply of products, services

and solutions that meet and exceed the needs of the end-users. The customer-base includes

mining industries, steel and other metallurgical complexes, power plants, fertilizer and chemical

plants, oil drilling and refining sector, defence workshops and a whole range of engineering

industries.

A key strength of the Company is motivated employees with high morale and innovativeness.

The work culture provides the employees with challenging goals and joy of work. Fonetwork

also consists of a service-oriented Authorized Dealer network and suppliers both in India and


Overseas with whom win-win 'partnerships' exist. Continuous improvement in long term

relationships is considered as an investment towards the common mission of Total Customer

Satisfaction. Frequent interactions are aimed at understanding internal and external customer

needs and measurement of customer satisfaction Ador Fontech’s future vision has to take into

account these rapid technological breakthroughs. There are also opportunities of strategic

alliances and mutually beneficial partnerships both globally and within our country. Collectively

the Company has a quiet confidence about the future and has a strong belief that customer focus,

quality and productivity will continuously improve in years to come.

NATURE OF THE BUSINESS CARRIED

Ador Fontech limited (ADFL) network has been situated in all over the country The primary

business of Ador Fonetch is – Life enhancements of vital machinery components Ador Fontech

Limited engages in the manufacture and supply of welding consumables, equipment,

reclamation, resurfacing, and refurbishment services of metallic components. The company’s

products include low heat input welding alloys; hard-facing and wear-resistant products;

welding, cutting, and welder safety equipment; and in-situ reclamation services. It also provides

thermal spray technology, products, and solutions; wear-resistant cast-wear plates; cobalt and

nickel based alloys and cast components; welding power sources and systems; arc and resistance

welding and plasma cutting equipment; welding fume extraction equipment and systems; bore

welding solutions; thermal insulation solutions; and welding spot separation and welder safety

products. The company supplies products, services and solutions that meet and exceed the needs

of end-users.. The organization’s core operation is providing surfacing and reclamation services.

The company main concentrates on producing flux cored wires and electrodes products. This is

done through implementation of value- added reclamation, fusion, surfacing and coating

solutions. Considering the growth in various user industries such as steel, cement, power,

mining, metallurgical complexes, Ador Fontech’s core business of recycling and life

enhancement provides an increasing window of opportunity. The company has 2 revenue

streams: Manufacturing & Trading. The customer-base includes mining industries, steel and

other metallurgical complexes, power plants, railways, road transport workshops, shipping

industries, sugar mills, cement plants, fertilizer and chemical plants, oil drilling and refining

sector, defence workshops and a whole range of engineering industries


Vision and Mission policy

Vision

“Our vision is to be considered as the partner of first choice by our customer”.

Mission

“Mission is to partner with the customer in implement value added reclamation fusion, surfacing

and spraying solutions”.

Quality policy

“To shrine to delight the customer by understanding and exceeding their needs. This shall be achieved through continual improvement of the work processes and by involvement of the employees”

SHARED VALUES

Our Shared Values are DELIGHT

Delighting customers is first & foremost.

Empowered employees who enjoy their work.

Living upto our shared values.

Innovative ideation throughout the company and continuous improvement in everything we do.

Growth is our way of life.

Honouring commitments whether made orally or in writing.

Technology as it continues its advance will be a vital enabler in the Company.s plans and

operations


PRODUCT AND SERVICES

As a result of continuous analysis and evaluation of the end-user needs, the Fon

Spectrum consists of low-heat input alloys, solid and flux-cored wires, welding and

cutting equipment, fume extraction products, in-situ machining systems, thermal spray

products and hands-on rebuilding and reclamation services. The products and services

have been categorized as follows.

Low heat input welding alloy

Hard-facing and wear-resistant products

Welding, cutting and welder safely equipment

Fon reclamation services

In-situ reclamation services

Thermal spray technology, products and solutions

Within the scope of the above product groups, in addition to the in-house manufacturing

program, the Company exclusively represents the following internationally well-known

brand names in India

Thermal spray technology, products and solutions

World’s most wear-resistant cast-wear plates

Cobalt and nickel based alloys and cast components

FON

FMA

FAC

FRS

LES

FTS

http://www.sulzermetco.com/eprise/SulzerMetco/Sites/main.htm

http://www.alloysteel.net/english/default.asp

http://www.stellite.com/


High-tech welding power sources and systems

Arc and resistance welding and plasma cutting

equipment

Welding fume extraction equipment and systems

Flux is in the flame

Bore welding solutions

Thermal insulation solutions

Welding spot separation and welder safety products

AREA OF OPERATION

The company has 2 revenue streams: Manufacturing & Trading. The company has 3

manufacturing units: Two in Bangalore and one in Nagpur. The production takes

place in the national level. Ador Fontech limited situated in all over India. ADFL

network includes field sales

BHILAI

BOKARO

CHENNAI

CHITTORGARH

JABALPUR

JAMESHEDPUR

LUCKNOW

LUDHIANA

NAGPUR

http://www1.ewm.de/

http://www.ceaweld.com/en/index.htm

http://www.euromate.com/

http://www.gasflux.com/

http://www.yorkmachine.com/

http://www.microtherm.uk.com/EXEN/site/index.aspx

http://www.cepro.nl/EN/index.htm


PUNE

RAJKOT

ROURKELA

SECUNDARABAD

TRICHY

VADODARA

VISAKAPATNAM.

OWNERSHIP PATTERN

ADOR FONTECH LIMITED is public limited which started of business as Private limited

company in the year 1979. It got converted into public limited company by making public issue

on 17th November, 1993.


COMPETITORS INFORMATION:

Company Sales current price

Change % P/E Ratio market cap ( Rs million)

52 week High/Low

HEG 10290.04 362.55 -0.03 9.96 15533.6 413/116Graphite India 11258.77 90.1 0.33 5.95 15454.14 97/31Esab india 4206.28 617.9 -6.4 15.35 10161.7 665/295Ador Welding 2238.38 186.6 -0.43 17.58 2548.35 222/107GEE 1217.61 63 1.04 13.1 1473.07 79/33Panasonic.Carbon

303.94 176.15 1.03 10.88 836.88 185/92

Ador Fontech 1048.41 225.6 0.33 6.65 786.98 228/85Titanor com 193.84 94.65 6.35 358.27 494.41 93/41D&H Welding 483.87 30.8 -3.14 18.64 310.05 34/13Rasi Electrodes 173.8 22.95 -5.94 12.93 116.14 27/14


INFRASTRUCTURAL FACILITIES

1. Medical Facilities only through cash

2. Training Facilities( technical training includes In-house training)

3. Recreation Facilities (reimbursement of lunch expenses ranges varies from Rs.35 to

Rs.50 per head depending upon the position held by the employee)

4. Transport Facilities (vehicles are provided under closed motor vehicle scheme where in

Company will take deposit from the employee and company will buy the vehicle making

full payment to showroom after 4years, later WDV value it will be left to employees. In

case of four wheeler it is 5years.

5. The company is providing free transport facilities to the ward of employees.

6. Salary advances are giving to employees when necessary meet emergencies line sickness,

etc.

ACHIEVEMENTS

1980 Commencement of operations.

1983 New reclamation welding alloy developed for the Indian Railways in the H3

class

1985 Finalization of exclusive distributorship for India from SULZER METCO

(Switzerland, Singapore & USA) for thermal spray equipment and materials

1987 Launch of FONMATIC open arc FCAW wires and feeders.

1988 FONTECH training centre launched at Mumbai.

1992


Acquisition of FIST India Private Limited and merger of the same with ADFL.

Acquisition of KOSTECH India Private Limited and merger of the same with

ADFL

Number of shareholders increased from 112 to 1874 and equity capital

increased from Rs.48 lakhs to Rs.169 lakhs

1994 Equity capital increased to Rs. 225 Lakhs.

1995 Public issue successfully completed to raise the equity capital to Rs. 350 Lakhs.

1996

ISO 9002 Certification.

Launch of ARCOFON range of superior wear resistance technology wear plates.

1997 Exclusive distributorship for copper and copper alloys from BEDRA (Germany).

1998

Exclusive distributorship for GASFLUX range of products and services

Approval of special welding alloys from defence organizations for armour steel welding.

Exclusive distributorship for EUROMATE (Holland) range of welding fume extraction

equipment and systems.

1999 Exclusive distributorship for CEA (Italy) range of inverter welding equipment.

2000 Exclusive distributorship for CEPRO (Netherlands) range of world class 'welding

spot separation' products .

2002 Distributorship for Soitaab (Italy) range of cutting systems

2004 Manufacturing Unit for Low Heat Input Welding Alloys at Bangalore

WORK FLOW MODEL (END TO END)


MC KINSEY’S 7S FRAME WORK:

THE 7S MODEL

PUCHASE OF ESSENTIAL RAW-MATERIAL

INVERT

PROCESS (Flux Mixing)

OVERLAPPING

TUBES

TESTING

POONING

REFORM TO THE FINAL FINISHED GOODS


The 7S model is better known as McKinsey’s 7S. This is because the two persons who

developed this model, Tom Peters and Robert Waterman, have been consultants at McKinsey &

Co at that time. They published their 7S Model in their article “Structure Is Not Organization”

(1980) and in their books “The Art of Japanese Management” (1981) and “In Search of

Excellence” (1982). The model starts on the premise that an organization is not just structure, but

consists of seven elements:

MC KINSEY’S 7S FRAME WORK MODEL

These seven elements are distinguished in so called hard S’s and soft S’s. The hard elements are

feasible and easy to identify. They can be found in strategy statements, corporate plans,

organizational charts and other documentation

Shared values

SystemStrategy

StyleSkills

Staff

Structure


The four soft S’s however, are hardly feasible. They are difficult to describe since capabilities,

values and elements of corporate culture are continuously developing and changing. They are

highly determined by the people at work in the organization. Therefore it is much more difficult

to plan or to influence the characteristics of the soft elements. Although the soft factors are

below the surface, they can have a great impact of the hard structures, strategies and systems of

the organization.

Mckinsey’s 7S frame work of business

This is the McKinsey ‘7S frame work’ of business that have been used at the Mckinsey

consulting company:

‘Hard Variables:

Strategy: Plan leading to allocation of resources.

Structure: Organization reporting lines, geography etc.,

Systems: Formal and informal process use.

‘Soft’ Variables:

Staff: Demographics of personnel

Style: behavior of managers when interacting with others.

Skills: Core competencies of the firm.

Shared value: Culture, which is actually the core element to it all.

The 7-S framework of McKinsey is a management model that describes 7 factors to organize a

company in an holistic and effective way. Together these factors determine the way in which a

corporation operated. Managers should take into account all seven of these factors, to be sure of

successful implementation of a strategy. Large of small. They are all interdependent, so if you

fail to pay proper attention to one of them, this may effect all others as well. On top of that, the

relative importance of each factor may vary over time.


Origin of the 7-S Frame Work

History

The 7-S Framework was first mentioned in “ The Art of Japanese Management” by Richard

Pascale and Anthony Athos in 1981. They had been investigating how Japanese industry had

been so successful. At around the same time that Tom peters and Robert Waterman were

exploring what made a company excellent. The Seven S model was born at a meeting of these

four authors in 1978. It appeared also in “In Search of Excellence” by Peters and Waterman, and

was taken up as a basic tool by the global management consultancy company McKinsey. Since

then it is known as their 7-S model.

The meaning of the 7Ss

McKinsey 7-S frame work Shared Values (also called super ordinate Goals).

The interconnecting center of McKinsey’s model is:

Shared Values

What does the organization stands for and what is believes in. Central beliefs and attitudes.

Compare Strategic Intent.

Strategy

Plans for the allocation of firm scarce resources, over time, to reach identified goals.

Environment, Competition, customers.

Structure

The way in which the organization’s units relate to each other: centralized, functional divisions

(top-down), decentralized, a matrix, a network, a holding etc.,

Systems


The procedures, processes and routines that characterize how the work should be done: financial

systems, recruiting, promotion and performance appraisal systems, information systems.

Staff

Numbers and types of personnel within the organization

Style

Cultural style of the organization and how key managers behave in achieving the organization’s

goals. Compare Management Styles.

Skills

Distinctive capabilities of personnel or of the organization as a whole. Compare core

Competences.

THE HARD S’s

STRUCTURE:

The term structure in 7s framework model refers to the organizational structure of the company.

The designs of the organizational structure is critical task to the management of an organization,

it is the skeleton of the whole organization. Organization structure refers to relatively more

durable organizational arrangements and relationship.

It prescribes the formal relationship among various positions and activities. Arrangement about

reporting how an organizational member is to communicate with other members, the various

activities performed by members is all the part of organizational structure.

Organizational structure performs four major functions:

It reduces internal uncertainty arising out of variable unpredictable, random human behavior

within the organization through control mechanisms.

It reduces external uncertainty through forecasting, research and planning in the organization.

It undertakes a wide variety of activities through devices such as departmentation,

specialization and division of labor and delegation of authority.


It enables the organization to keep its activities coordinated and to have a focus in the midst of

diversity in the pursuit of its objectives.

The board of directors

Mrs. R.T. Malkani chairman

Mr.H.P Ledwani Managing Director

Board of Directors

DIs CPGIs

North West

Managing Director

East South FON FMA FAC FRSFTS

Finance I/C

Reclamation Welding Technicians

Regional Product Group In-charges

Sales Services + HRD Plant In-charge

Area Product Group In-charges

ADFL Organization Chart

Chairman

Regional In-charges

EUIn-charges

Territory In-charges

Zonal In-charges

Area In-charges

Divisional Product Group In-charges

COPEC, Admin, Accounts & EDP


Mr. N Srinivasan

Mr. Arvind Mathur

Mr. N Malkani Nagpal

COMPANY SECRETARY

Mr. Geetha D

OPERATING TEAM

Mr. H P Ledwani

Mr. M J Kurian

Mr. Muneesh Narain

Mr. P Ramachandran

Mr. Ravi Magal

Mr. Rajesh V Joshi

Mr. S V Puntambedkar

Mr. Melville ferns

REGISTERED AND CORPORATE OFFICE

Beliview, 7, Haudin Road, Bangalore 560 042.

MANUFACTURNING UNITS


S-60-61, MIDC, Hingna Industrial Estate, Nagput 440 016

No. 486,B-1, 14th cross, 3rd Main, 4th Phase, Peenya Industrial Area, Bangalore 560 058

A-288, II Stage, Peenya Industiral Estate, Bangalore 560 058

AUDITORS

Amarnath kamath and Associates

Chartered Accoutants

Carewell House, 6th Cross Muniswamappa Layout, Opp. Kemp Fort , Off Airport Road,

Bangalore 560 017

BANKERS

HDFC Bank Limited

The Bank of Nova Scotia

Finance Department:

Finance is the life blood of every organization. It involves procurement of funds and its effective

utilization in the organization to earn good rate of return. Proper accounting of the various

transactions of the company is the first foremost important activity in every organization. It

directly affects the lives of every organization, be it a private or public, financial or non-

financial, profit seeking or not-for-profit.

Finance department structure

Managing Director


General Manager (Finance)

Deputy Manager

Assistant Manager

Accounts officers

Superintendent

Accounts assistant l/II/III

Helper

Proper accounting of the various transaction of the company is the first foremost important

activity in every organization. It directly affects the lives of every organization. Be it a private or

public financial or non financial, profit seeking or not -for- profit.

STRATEGY:

A set decisions and actions aimed at gaining a sustainable completive advantage. Hence the

company mainly follows long tem strategy. Where they need to set-up their organization all over

the country.

SYSTEM :

The term systems in the 7s framework refers to all the rules, regulation, procedures and process

both formal and informal, that compliment the organization structure to work successfully.

System and process of controlling is the measurement and correction of performance in order to

make sure that enterprise objective and the plans devised to attach them are being accomplished.

ADFL is an organization, which is systematic in doing its day-to-day work and any work for that

matter is done in a very systematic and sophisticated manner. ADFL uses SAPAD system

software which interlinks employees within the organization. Through this software employees

can excess the information depending on the designation and level of authority and

responsibilities. The various systems that exist at ADFL are as follows:


MIS System

Billing System

Quality control system

Procurement system

Mainly these organization follows SAPAD system software. This is evident from the fact that

ADFL has well-managed PURCHASE.

THE SOFT S’s

SKILL:

Waterman considers ‘skills’ as one of the most crucial attributes or capabilities of an

organization. Organizations have strengths in number of areas but their key strength dominant

skills are few. These are developed over a period of time and are as result of the interaction of

number trips performing certain tasks.

Skills in the Mckinsey framework are equivalent of Seizenik’s- “distinctive competencies” to

dominant skills or distinctive competencies of organization are part to the organizational

character.

ADFL is the company well known for its quality products and services which is evident through

state-of-the-art design and technology. It is the company which is bench marked for its quality

and customer service.

The training steps followed in ADFL is explained below:

The training needs of the employees are monitored by the HRD head in accordance with the

functional head. Head of HRD shall be responsible for organizing relevant training and

development program. Training needs for all personal are identified once in a year and are

recorded in training needs record format.

The training will divide into two categories:

Core Programs: Trainning given to each level of employee as soon as they are promoted to the

responsible levels.


Specialized Programs: provided as per the training requirements mentioned in the performance

appraisal report of the employees.

The training methods used are;

On- The-Job-training: It includes imparting skills by exposing the employee to the work

environment. It include job rotations and under study assignments.

Off- The-Job-training: It involves learning skills through simulations exercises such as case

analysis, role playing, group interaction etc.

STYLE:

ADFL work force is participative by nature. Each employee is contributing themselves at their

level best towards the companies’ policies, procedures, programs and growth.

In every perspective the company considered all employees in decision making planning and the

company respects the suggestions, opinions, ideas of its human resources. Employees can be

participative in plans but cannot change any acts made by the co-operative society. No superior

does have the individual’s decision making unlike that of private sector companies.

STAFF:

There are bout 250 employees working for ADOR FONTECH LIMITED. It can be divided into

following categories:

Technical staff:


Technical staff comprised of the engineers, diploma holders, etc are directly involved in

production. Maintenance of machines, operating of CNC machines, repairing of machines are

look forward by the technical staff..

Non technical staff:

The main objective of non-technical staff is to carry the business of management. Post graduates,

graduates and highly qualified peoples constitute non-technical staff. The main function of non-

technical staff is to maintain paper works, computer works, planning, decision-making, etc., the

non-technical staff indirectly involved in production process.

Duties and responsibilities of the technical and non-technical staff are as follows

To respect the right of peers, sub-ordinates, superiors, etc.,

To maintain discipline in the working hours and at work place.

To follow the rules and regulations setup by the company.

To contribute for the well-being and growth of the company.

To enrich the knowledge about the job.

SHARED VALUES:

Our Shared Values are DELIGHT

Delighting customers is first & foremost.

Empowered employees who enjoy their work.

Living upto our shared values.

Innovative ideation throughout the company and continuous improvement in everything we do.

Growth is our way of life.

Honouring commitments whether made orally or in writing.

Technology as it continues its advance will be a vital enabler in the Company’s plans and

operations.


SWOT ANALYSIS

SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of

planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses,

opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and

threats are external factors.

Strengths:

1. ADFL has been a market leader with brand identity- The brand and reputation of ADFL

in the markets is strong and is recognized as being professional and reliable.

2. Wide range of products- ADFL manufactures around 250 varieties of products.

3. ADFL has built a strong human resources program in the company which helps them to

hire, train and retain the best people.

4. ADFL has good cost control team which makes best effort to reduce the cost wherever

possible but not at the expense of quality, safety.

5. ADFL has well organized distribution network. It has good network of dealers who care

of distribution.

6. ADFL manufactures products at a reasonable price which has been attracting prospective

and existing customers.

Weakness:

1. Less advertisement- As ADFL customer base includes more public limited companies

like defense, railways, shipping industry.

2. Some gap in range of product for certain products.

3. ADFL does not have well established research & development department.


4. Promotion is based on seniority – as result very efficient junior employee may get de-

motivated and may not perform to his best.

Opportunities:

1. Growing needs for life enhancement solution.

2. Comparison of prices and quality of welding electrode plants of European and Indian

plant manufacturers reveal that the former's prices are quite high relative to their quality.

This provides opportunities to expand business to European countries.

Threats:

1. Emergence of competition from foreign company in the form of joint ventures.

E.g.:- Esab India Ltd in collaboration with Esab A B Sweden.

2. Increasing competition from lower price and small-scale industries.

3. Newer technologies and new welding and thermal coating processes are evolving

4. Electrode quality steel shortage is felt in summer months due to power cuts at major

producer plants. It is met by Mini steel plants by non-rimming semi-skilled steels but

they have higher tramp elements.

5. Boundaries b/w fabrication and repair wielding.

FINANCIAL ANALYSIS

ADOR FONTECH LIMITED.

BALANCE SHEET AS ON 31st March

2008-09 2007-08 2006-07SCH AMOUNT AMOUNT AMOUNT


LIABILITIES

SHARE CAPITAL A 35000000 35000000 35000000RESERVES & SURPLUS B 269879840 193801433 129305791UNSECURED LOANS ------ ----- 10275000

CURRENT LIABILITIES PROVISIONS

F 143397889 172329451 124082669

GRAND TOTAL 448277729 401130884 298663460

ASSETS

FIXED ASSETS C 79518706 68530226 60645908

DEFERRED TAX ASSET 13834838 5078677 403426

INVESTMENTS D 104980 254600 254600SUB TOTAL (1) 93458524 73863503 61303934

CURRENT ASSETS-LOANS-ADVANCES E

INVENTORY 94645892 82192037 88504107

SUNDRY DEBTORS 108456348 145238769 106592476

CASH & BANK BALANCES 113597272 70115666 29681399

LOANS & ADVANCES 38119693 29715212 12575847INTEREST ACCURED ON INVESTMENTS ------ 5697 5697

SUB TOTAL(2) 354819205 327267381 237359526

GRAND TOTAL(1+2) 448277729 401130884 298663460CURRENT LIABILITIES PROVISIONS 143397889 172329451 124082669

CURRENT ASSETS-LOANS-ADVANCES 354819205 327267381 237359526

WORKING CAPITAL 211421316 154937930 113276857

It can be observed from the Balance sheet that company has not made public issue for the last

few years. The reserves and surplus of the company has been increasing year by year. It has not

borrowed neither short term (secured or unsecured loans), from this we can come to conclusion

that company is self sufficient (cash rich) in cash position. The debtors have been decreasing

year by year and company’s cash balance is increasing. There is considerable increase in


investments by the company. It can also be observed that company has current assets more than

twice the current liability which is ideal current ratio for a company.

LEARNING EXPERIENCE:

It helps me to feel the real business environment

This training is very useful as it manifolds our confidence apart from the theoretical

knowledge.

To know the various departments effectively contribution towards the fulfillment of

organization goal.

To know about the partial aspects of the functioning of an organization.

It helps know the relation b\w various departments & co-relation of them.

Preparation of project imparts of professional skills which will be great use in future.

To know the activities of the different staff.

It helps me to know the strategies used by company to achieve its objectives.

To know about welfare facilities adopted by company.

It helps me to know about company position, its competitors.

To know the how to behave in corporate world.

In plant training helped me to know the various departments in detail so I can get the

knowledge about the organization from different aspects and to study the function of

different departments

PART- B

GENERAL INTRODUCTION

Accounts receivable consists of money due from customers as a result of an organization's

normal business operations. The management of accounts receivable is an extremely important

function since the collection of outstanding receivables represents the single most important


source of cash for all organizations selling goods on open account. Because of the impact that

accounts-receivable collections have on cash flow, it is important that responsibility for the day-

to-day management of credit and collections activities be delegated to a single individual within

the organization

Because of the significance of accounts receivable it is important for management to receive

periodic reports that both measure the effectiveness of collection activities and inform or alert

management of problem accounts. Ideally, reports should be generated on a monthly basis, but

depending on the size of the receivable balance and collections staff, the issuance of such reports

may range from weekly to quarterly. This flow of information is necessary so that management

and collections staff can determine whether current credit and collections policies and procedures

are working, or whether any of the policies and procedures need to be changed to more

effectively collect outstanding receivables. Additionally, the collections staff needs information

so that collection activities can be prioritized, problem accounts isolated, and outstanding

balances collected.

ACCOUNTS RECEIVABLE MANAGEMENT:

An account receivable is the money owed to a company by a consumer for products and services

purchased on credit. This is usually treated as a current asset of accounts receivable after the

customer is sent an invoice. Accounts receivable are known by various names, such as accounts

receivable aging, accounts payable, days receivable, accounts receivable turnover and invoice

factoring. According to the experts, accounts receivable or invoice factoring is one of a series of

accounting transactions. These accounting transactions deal with the billing of customers who

owe money to a person, company or organization for goods and services purchased. If you are

seriously considering using accounts receivable as a method of obtaining a more liquid asset,

then it is wise to hire accounts receivable management specialists.

Accounts receivable management can help in a variety ways:

It can cut and maintain your average collection delay or DSO

It can lessen your direct and indirect expenses

It can considerably reduce your bad debt

It can tell you various ways to take advantage of your cashflow


It can help you capitalize on your internal resources

It can maximize your interventions on sales, service and market share.

Hiring the best accounts receivable management will clear up the common misconception that

the selling of accounts receivable is a loan. Accounts receivable are the amounts that customers

owe a business; this is clearly shown on a company's balance sheet. Some also call accounts

receivable trade receivables and try to classify them as current assets. Accounts receivable

management’s main goal is to take care of all these debts and to record sales of accounts; one

must debit a receivable and credit a revenue account. Accounts receivable management also

looks into issues such as recognizing accounts receivable, valuing accounts receivable, and

disposing of accounts receivable.

CREDIT POLICY VARIABLES:

The important dimensions of a firm’s credit policy are:

Credit standards

Credit period

Cash discount

Collection effort

These variables are related and have a bearing on the level of sales, bad debt loss, discounts

taken by the customers, and collection expenses. For purposes of expository convenience we

examine each of these variables independently.

CREDIT STANDARDS:

A pivotal question in the credit policy of a firm is: what standard should be applied in

accepting or rejecting an account for credit granting? A firm has a wide range of choice in this

respect. At one end of the spectrum, it may decide not to extend credit for any customer,

however strong his credit rating may be. At the other end, it may decide to grant credit to all


customers irrespective of their credit rating. Between these two extreme positions lies several

possibilities, often the more practical ones.

Liberal credit standards tend to push sales up by attracting more customers. This is, however

accompanied by a higher incidence of bad debt loss, a larger investment in receivables, and a

higher cost of collection. Stiff credit standards have opposite effects. They tend to depress sales,

reduce the incidence of bad debt loss, decrease the investment in receivables, and lower the

collection cost.

CREDIT PERIOD

The credit period refers to the length of time customers are allowed to pay for their purchases. It

generally varies from 15 days to 90 days. When a firm does not extend any credit, the credit

period would obviously be zero. If a firm allows 30 days of credit, with no discount to induce

early payments, its credit terms are stated as ‘net 30’.

Lengthening of the credit period pushes sales by inducing existing customer to purchase more

and attracting additional customers. This is accompanied by a larger investment debtors and a

high incidence of bad debt loss. Shortening of the credit period would have opposite influences.

It tends to lower sales, decrease investment in debtors, and reduce the incidence of the bad debt

loss.

CASH DISCOUNT

Firm generally offer cash discount to induce customers to make prompt payments. The

percentage discount and the period during which it is available are reflected in the credit terms.

Liberalizing the cash discount policy may mean that the discount percentage is increased or the

period is lengthened. Such an action tends to enhance sales, reduce the average collection period,

and increase the cost of discount.

COLLECTION EFFORT

The collection program of the firm, aimed at timely collect of the receivables, may consist of the

following.

Monitoring the state of receivables.


Dispatch of letters to customers whose due date is approaching.

Telegraphic and telephonic advice to the customers around the due date.

Legal action against overdue accounts.

A rigorous collection program tends to decrease sales, shorten the average collection

period, reduce bad debt percentage and increase the collection expense. A lax collection

program on the other hand, would push sales up, lengthen the average period and

increase the bad debt percentage, and perhaps reduce the collection expense.

Goals of credit policy:

A firm may follow a lenient or a stringer credit policy. The firm following a lenient credit

policy tends to sell on credit to customers on very liberal terms and standards credit is granted

for longer periods over to those customers who credit worthiness is not fully known or whose

financial position is doubtful.

Traditional credit Analysis:

The traditional approach to credit analysis calls for assessing a prospective customer in terms of

the “5 C’s of credit”.

Character: The willingness of the customer to honor his obligation. It reflects integrity, a moral

Attribute that is considered very important by credit managers.

Capacity: The ability of the customer to make credit obligations from the operating cash flows.

Capital: The financial reserves of the customer. If the customer has problem in meeting credit

Obligation from operating cash flow, the focus shifts to its capital.

Collateral: The security offered by the customer in the form of pledged assets.

Conditions: The general economic condition that affect the customer.

To get information on the 5 C’s, a firm may relay on the following:-

Financial statements:

Financial statements contain a wealth of information. A searching analysis of the customer’s

financial statements can provide useful insights into the credit worthiness of the customers. The

following ratio seems particularly helpful in this context:

Current ratio, acid-test ratio, debt-equity ratio. EBIT to total assets ratios and return on equity.


Bank reference:

The banker of the prospective customer may be another source of information. To ensure a

higher degree of candour, the customer’s banker may be approached indirectly through the bank

of the firm granting credit.

Experience of the firm:

consulting one’s own experience is very important. If the firm had previous dealings with the

customer, then it is worth asking: how prompt has the customer been in making payments? How

well has the customer honored his word in the past? Where the customer is been approached for

the first time, the impression of the company’ sales personnel is useful.

Price and yield of securities:

For the listed companies, valuable inferences can be derived from stock market data. Higher the

price earning multiple and lower the yield on bonds, other things being equal, lower will be the

creditors.

NEED FOR STUDY

Business activity is dynamic in character and subject to wide fluctuations. Most firms treat

account receivables as marketing tool to promote sales and profits. Every firm has a set of credit

terms and policies under which goods are sold on credit and every policy has a cost and benefit

associated with it. This project attempts as to how to manage the accounts receivable and the

impact of it.

In a competitive environment sometimes the firms are compelled and sometimes the firms desire

to adopt liberal credit policies for pushing up the sales and the factoring has been done. So a

careful analysis of various aspects of the credit policy is required. That is why “Appraisal of

Receivable Management” is done.


STATEMENT OF PROBLEM

How to improve receivables performance of company and its impact on cash flows. Analysis of

receivables management in the company.

OBJECTIVES OF THE STUDY

1. To suggest the necessary measures.

SCOPE OF STUDY

The study is limited only to the operations of ADOR FONTECH LIMITED using data for last

three years starting from 2006-07 to 2008-09. It concentrates on receivables of ADFL and its

impact cash flows. The study aims at analyzing the debtors and outstanding of company. It is

hoped that this study will help the company in reducing its investment in Accounts Receivables.

REVIEW OF LITERATURE

MEANING OF ACCOUNTS RECEIVABLES:

Accounts receivable is one of a series of accounting transactions dealing with the billing of

customers who owe money to a person, company or organization for goods and services that

have been provided to the customer. In most business entities this is typically done by generating


an invoice and mailing or electronically delivering it to the customer, who in turn must pay it

within an established timeframe called credit or payment terms.

While booking a receivable is accomplished by a simple accounting transaction, the process of

maintaining and collecting payments on the accounts receivable subsidiary account balances can

be a full time proposition. Depending on the industry in practice, accounts receivable payments

can be received up to 10 – 15 days after the due date has been reached. These types of payment

practices are sometimes developed by industry standards, corporate policy, or because of the

financial condition of the client.

OBJECTIVE OF RECEIVABLE MANAGEMENT:

From creation of receivables the firm gets a few advantages & it has to bear bad debts,

administrative expenses, financing costs etc. In the management of receivables financial manager

should follow such policy through which cash resources of the firm can be fully utilized.

Management of receivables is a process under which decisions to maximize returns on the

investment blocked in them are taken.

Thus, the main objectives of management receivable are to maximize the returns on investment

in receivables & to minimize risk of bad debts etc. Because investment in receivables affects

liquidity and profitability, it is, therefore, significant to maintain proper level of receivables.

Efficient credit management helps to increase the sales of the firm.

To optimize the amount of sales.

To minimize cost of credit.

To optimize investment in receivables.

To establish a balance between profitability and risk (cost).

A business can afford to invest in its receivables unless the marginal costs and marginal profits

are the same. Although the level of receivables is affected by various external factors like

standards of industry, economic conditions, seasonal factors, rate of competition etc,

management can control its receivables. Though credit policies, credit terms, credit standards

and collection procedures.


FACTORING:

Factoring is the sale of invoices or Accounts Receivable at a discount. It is a way for the business

to generate cash and improve cash flow without taking on additional debt.

Traditionally, factoring was a financing service used by the textile and furniture industries.

Today however, factoring has become a financing standard in just about any industry that created

Accounts Receivable by extending terms to its customers.

REASONS FOR COMPANIES FACTORING THEIR RESOURCES:

Simply put, to generate cash flow. Factoring provides immediate working capital for companies

facing a short term cash constraint. Most companies that choose factoring are not currently able

to qualify for a traditional loan from their bank or companies who are growing faster than their

bank is willing to extend credit.

Due to credit policies and regulatory constraints, banks typically need to see 2 years of profits,

minimal leverage and a certain amount of cash flow for debt coverage. Companies that do not

meet these characteristics and does not have any real estate to pledge as collateral can many

times find itself on the outside looking in. However, companies with Accounts Receivable (a

current asset but not cash) can use them to generate cash for their day to day working capital

needs.

When a company sells its product or service on terms, it typically creates an invoice. This

outstanding invoice for completed work can be called an Accounts Receivable. Instead of

waiting to receive the cash when the customer remits payment, the business may decide to factor

the receivable and immediately receive the cash. In order to have instant access to funds, the

company is charged a nominal fee.

ADFL company does not go for direct factoring. Here the dealers act as factor where in they will

make payment to the company immediately when they receive the products from the company.

Dealers will receive the amount once they sell the products to the ultimate customer.


BENEFITS

Although every business is different and their reasons for Factoring may not be the same, the

following benefits are representative of most situations:

Additional cash is immediately available.

Quick and easy to set up

It is temporary (no long term contracts required) and flexible (frequency and amount of

funding is optional)

No additional debt is created as it is "Off Balance Sheet" financing

Owner avoids giving up equity or control of the company

Unlimited source of Working Capital - the funds available grows as the company's sales

grow.

THE BANKERS OF ADOR FONTECH LIMITED

HDFC Bank Limited

The Bank of Nova Scotia

Immediate cash requirement:

Immediate cash require of ADFL is met by factoring from dealers. It can be observed from the

balance sheet of the company that it has not borrowed any kinds of loans (both secured and

unsecured) loan from outsiders for last 5 years.

Bills discounting:

Bills discounting is the another sources, in addition to bank overdraft, by which the company

meets its immediate cash requirements. In this process, the company draws bills of exchange for


products on buyers, and then discounts it with its bankers for a charge. The banker will give an

account, discounting the charge of the bank from the full amount of the bill, and collects the full

amount on maturity.

The amount provided by the bank is covered within the overall credit limit. Though the banker

becomes the owner of the bill, he holds them as a security of the credit. In this case, the

transaction is between the companies and the bankers and if the dealer fails to pay the amount

within the stipulated period, the company has to pay back the money.

ADFL discounts the BILLs with its banker to meet the immediate cash requirements.

CREDIT MANAGEMENT:

Trade credit is considered as an essential tool, acting as a bridge for the movement of the

products through production and distribution stages to customers. When the firm sells its product

or services and do not receive the cash for it immediately the firm is said to have granted trade

credit to the customers. Trade credit thus, creates receivables or book debts which the firm is

expected to collect in the near future.

Receivables constitute a substantial portion of current assets of several firms. In India debtors,

after the inventories, are the major components of the current assets. They form one-third of the

current assets in India. Granting credit and creating debtor amount to the blocking of funds. The

internal between the date of the sale and the date of payments has to be financed out of the

working capital. Thus, trade debtors represent investment. As substantial amounts are tied up in

trade debtors, it needs careful analysis and proper management.

CREDIT POLICY AND PRACTICES AT ADOR FONTECH LIMITED

The sales of the company ADFL goes on cash and as well as credit terms. The trading division of

the ADFL sells its products, which it receives from the manufacturing which is located in

Bangalore (2 plants) and Nagpur on a credit period of 30-90 days, through the branches of the

company located all over the country. The branches in turn, will distribute these products to the


dealers of the company all over the country. The dealer may either pay the cash immediately or

after making receiving cash from the customers.

In certain cases like very costly products which have low market, the company will collect the

cash when the order is placed. Later company will manufacture the product and dispatch it to the

customers.

CREDIT POLICY:

The company ADFL extends a credit period of 30-90 days to its dealers. It waits for a period of

90 days for the payments from the customers.

CASH DISCOUNT

Cash discount is a reduction in payment offered to the customers to induce them to repay credit

obligation within a specified period of time, which will be less than the normal credit periods. 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. ADFL provides cash discount varying from 2% to 7% of

selling price of product depending upon the value of the product and early payment made by the

customer.

ANALYSIS OF DEALERS:

One of the main strengths of the company is it has good dealer network, spreading throughout

the country. It has around 100 dealers all over India. The company looks for the following

factors in granting the credit to its dealers.

Looks for the period of presence of the dealer in the business

Looks for the character of the dealer i.e., his willingness to pay. The moral factor is of

considerable importance in credit Evaluation.


Looks for his ability to pay. This is evaluated by his financial position and the bank

guarantee given by him.

Based on the above factors the company analyses the dealers and determine the credit limit to

them every six months, the company goes for the review of the dealers.

When a dealer is found to be regular in playing the dues within stipulated days, the company

may go for increase in credit limit for the dealer. In the small way, new dealer are taken into

consideration and given the credit. The company gives a margin of “Three Percentage” to its

dealers.

COLLECTION PROCEDURES

The company follows a system of centralized control and decentralized collection. The company

does not employ and collection agency for its collection activities. The trading division receives

statements of sales and outstanding daily from all the branches in the country, to initiate

appropriate actions. The sales officers are engaged in collections activity at the branch level. The

sales branch deposits the payments from the dealers in the banks, insisted by the trading division

of the company.

MONITORING BOOK DEBTS

The company classifies its debts on the number of outstanding ways in the following way.

OUTSTANDING DAYS DEBTS CATEGORY

More than 90 days Disputes

Between 45 to 90 days Doubtful


Less than 45 days Good

The ADFL Company prepares the “Aging schedule” to monitor the control the books debts. The

monthly aging schedule is prepared according to the outstanding days classification as given

below with the corresponding due amount

Age Group (days) % of receivables

0-30 30

31-60 40

61-90 25

>=90 5

The ADFL Company will go for the “cash in advances” or “cash on demand” terms for the

repeated promise breakers.

RESEARCH DESIGN AND METHODOLOGY

This project study is aimed at analyzing the receivable management and its impact on cash flows

with respect to Ador Fontech Limited.

RESEARCH:

Systematic and organized effort to investigate a scientific problem.

Identify the problem.


Gather information.

Analyze the data.

Take corrective action and solve the problem.

RESEARCH METHODOLOGY

It is the way to systematically solve the research problem. This study on Receivable

Management is an analytical study because the facts and information that is readily available are

being used to make critical evaluation of receivable Management and its impact on cash flows

with respect to Ador Fontech Limited.

RESEARCH DESIGN

Research design is a blue print or a planned procedure for conducting research program.

RESEARCH DESIGN USED IN THE STUDY

Analytical Research:

The researcher has to use facts or information already available and analyze those facts to make a

critical evaluation of the Receivable Management.

DATA COLLECTION METHOD:

Nature of Data

The data collected is secondary in nature. This is due to the nature of analysis, which only

call for secondary data.

Source of Data


The source of data is the various years’ balance sheet, profit and loss account and statements

provided by Ador Fontech Limited were used for the analysis and for preparing reports. The

records maintained by the company where referred to get the required information.

Hypothesis:

H0: There is no significant relationship between sales and profit of ADOR FONTECH

LIMITED

H1: There is significant relationship between sales and profit of ADOR FONTECH LIMITED

H0: There is no significant relationship between sales and debtors of ADOR FONTECH

LIMITED.

H1: There is significant relationship between sales and debtors of ADOR FONTECH LIMITED.

H0: There is no significant relationship between sales and bad debts of ADOR FONTECH

LIMITED.

H1: There is significant relationship between sales and debts of ADOR FONTECH LIMITED.

H0: There is no significant relationship between sales and operating cash flows of ADOR

FONTECH LIMITED.

H1: There is significant relationship between sales and operating cash flows of ADOR

FONTECH LIMITED.


LIMITATION OF THE STUDY

The study has taken into account only three years for analysis starting from 2006-07 to

2008-09.

Time and other resources have proved to be a constraint.

It has always not been possible to get the full information.

Since the study is based only on secondary data, so the reliability of information may not

be ensured.

Face to face interaction with all related officials was not possible due to their busy

schedules.

RATIOs

DEBTORS TURNOVER RATIO

This is also called “Debtor Velocity” or “Receivable Turnover”. A firm sells goods on credit and

cash basis. When the firm extends credits to its customers, book debts (Debtors or Account

Receivable) are created in the firms account. Debtors expected to be converted into cash over

short period and thus included in current assets. A debtor includes the amount of Bills


Receivable and Book Debts at the end of accounting period. It is most essential that a reasonable

quantitative relationship not been able to collect within a reasonable time its funds are

unnecessarily locked up in receivables. In such case short – term loans have to be arranged for

paying off its current liabilities. The liquidity position of the firm depends on the quality of

debtors to a great extent.

The purpose of this ratio is to measure the liquidity of the receivables or to find out the period

over which receivables remain uncollected.

Formula

Net Credit Sales

Debtors Turnover ratio=

Average Accounts Receivables

Where, Account receivables= Debtors + Bills Receivables

Average Account Receivable = Opening receivable + Closing receivables

2

year net credit sales Average accounts receivable Debtors turnover ratio

2006-07 746629197 107376285.56.9533

2007-08 946303616 124039517 7.6290

2008-09 975483044 124673891 7.8248


2006-07 2007-08 2008-096.4

6.6

6.8

7

7.2

7.4

7.6

7.8

8

Debtors turn over ratio

debtors turn over ratio

Inference

AS the value of debtors turnover ratio has been increasing year by year from 6.9533, 7.6290

to 7.8248 for the year 2006-07, 2007-08 and 2008-09 respectively. Thus we can say that the

more efficient is the management of debtors or more liquid the debtors are.

DEBT COLLECTION PERIOD

This ratio indicates the extent to which the debts have been collected in time. It gives the average

debt collection period. The ratio is very helpful to the lenders because it explains to them

whether their borrowers are collection money within a reasonable time. An increase in the period

will result in greater blockage of funds in debtors.

FormulaDays in the year

Debt collection period =Debtors Turnover Ratio

year Days in year Debtors turnover ratio Debt collection period (Days)

2006-07 365 53


6.9533

2007-08 365 7.6290 482008-09 365 7.8248 47

INFERENCE:

It can observed that debt collection period has been declining year by year from 53, 48 to 47

days for the years year 2006-07, 2007-08 and 2008-09 respectively. Thus we can say that

collection period has been improving from year to year.

Liquidity Measurement Ratios:

Current Ratio:

The current ratio is a popular financial ratio used to test a company's liquidity by deriving the

proportion of current assets available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash,

cash equivalents, marketable securities, receivables and inventory) are readily available to pay

off its short-term liabilities (notes payable, current portion of term debt, payables, accrued

expenses and taxes). In theory, the higher the current ratio, the better it is.

Formula:

Year Current Asset Current Liabilities Current Ratio

2006-07 224777982 76015607 2.956997791

2007-08 297552169 123935070 2.400871432

2008-09 316699512 91550867 3.459273761


2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

4

current ratio

current ratio

Inference

Here the current ratio is has been the maximum in the year 2008-09 i.e. 3.459273761 and in

2007-08 it was 2.400871432 and in 2006-07 it was 2.956997791. Thus we can infer that the

company assets are highly liquid as company has current asset 3.45 times the current liabilities.

Debt Equity ratio:

The debt-equity ratio provides another vantage point on a company's leverage position, in this

case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt

ratio. Similar to the debt ratio, a lower the percentage means that a company is using less

leverage and has a stronger equity position.

Formula:

year total liabilities total share holders

equity

debt equity ratio

2006-07 35000000 10275000 3.406326

2007-08 35000000 nil -

2008-09 35000000 nil -


2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

4

debt equity ratio

debt equity ratio

Inference:

Here we can observe that the companies Debt- equity ratio is 3.406326 for the year2006-2007

later company has not borrowed any debt. Ideal debt equity ratio is 2:1. For year 2006-07 its was

3.4606326 so company is in better position to hold debts.

Cash Flow to Debt Ratio:

The coverage ratio compares a company's operating cash flow to its total debt, which, for

purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of long-

term debt and long-term debt. This ratio provides an indication of a company's ability to cover

total debt with its yearly cash flow from operations.

Formula:

year operating cash flows total debt cash flows to debt ratio

2006-07 73106723 10275000 7.11501

2007-08 78,677,633 nil -

2008-09 86772471 nil -


2006-07 2007-08 2008-090

1

2

3

4

5

6

7

8

cash flows to debt ratio

cash flows to debt ratio

Inference:

The higher the ratio, the better the company's ability to carry its total debt. If it is 1.5 0r less companies

ability to carry its total debt is questionable. Here it is 7.11 in the year 2006-07, so the company has

better ability to carry its debt. But in the year 2007-08 and 2008-09 there no debts (both secured and

unsecured loans). Hence we can say company is cash rich (cash self sufficient).

Operating cash flow/sales ratio:

This ratio, which is expressed as a percentage, compares a company's operating cash flow to

its net sales or revenues, which gives investors an idea of the company's ability to turn sales into

cash.

It would be worrisome to see a company's sales grow without a parallel growth in operating cash

flow. Positive and negative changes in a company's terms of sale and/or the collection experience

of its accounts receivable will show up in this indicator.

Formula:


year Operating cash flows net sales operating cash flows / sales ratio

2006-07 73106723 746629197 0.097916

2007-08 78677633 946303616 0.083142

2008-09 86772471 975483044 0.088953

2006-07 2007-08 2008-090.075

0.08

0.085

0.09

0.095

0.1

operating cash flows / sales ratio

operating cash flows / sales ratio

Inference :

The greater the amount of operating cash flow, the better.

The greater the amount of operating cash flow, the better it is for the company. Here the

operating cash flows to sales ratio is 0.097, 0.083 and0.089 for the years 2006-07, 2007-08 and

2008-09 respectively. The past three years reflect a healthy consistency in this ratio.


Cash Flow Coverage Ratios

This ratio measures the ability of the company's operating cash flow to meet its obligations

including its liabilities or ongoing concern costs.

The operating cash flow is simply the amount of cash generated by the company from its main

operations, which are used to keep the business funded.

The larger the operating cash flow coverage for these items, the greater the company's ability to

meet its obligations, along with giving the company more cash flow to expand its business,

withstand hard times, and not be burdened by debt servicing and the restrictions typically

included in credit agreements. A) Short term debt coverage ratio

B) Capital expenditure coverage ratio

C) Dividend coverage ratio

A) Short term debt coverage ratio

Formulas:

Year operating cash flow short term debt Short term debt coverage ratio

2006-07 73106723 10275000 7.11

2007-08 78677633 nil -

2008-09 86772471 nil -


2006-07 2007-08 2008-09

0

1

2

3

4

5

6

7

8

Short term debt coverage ratio

Short term debt coverage ratio

Inference:

The larger the operating cash flow coverage for these items, the greater the company's ability to

meet its obligations

B) Capital Expenditure coverage ratio:

Formula:

Capital expenditure coverage ratio

year operating cash flow capital expenditure Capital expenditure coverage ratio

2006-07 73106723

2007-08 78677633

2008-09 86772471


C) Dividend coverage ratio

Formula

Dividend coverage ratio

Year Operating Cash Flow Cash Dividends Divedend Coverage Ratio

2006-07 73106723 15963500 4.579

2007-08 78677633 20474125 3.842

2008-09 86772471 20474125 4.238


2006-07 2007-08 2008-093.4

3.6

3.8

4

4.2

4.4

4.6

4.8

divedend coverage ratio

divedend coverage ratio

Price/Cash Flow Ratio


The price/cash flow ratio is used by investors to evaluate the investment attractiveness, from a

value standpoint, of a company's stock. This metric compares the stock's market price to the

amount of cash flow the company generates on a per-share basis.

Formula:

Price cash flows ratio

Year stock price /share operating cash flow/ share price cash flows ratio

2006-07 72.4 2.08 34.8

2007-08 108.75 2.24 48.54

2008-09 73.45 2.47 29.73

2006-07 2007-08 2008-090

10

20

30

40

50

60

price cash flows ratio

price cash flows ratio

Inference


Price/Sales Ratio

A stock's price/sales ratio (P/S ratio) is stock valuation indicator similar to the P/E ratio. The P/S

ratio measures the price of a company's stock against its annual sales, instead of earnings. Since

earnings are subject, to one degree or another, to accounting estimates and management

manipulation, many investors consider a company's sales (revenue) figure a more reliable ratio

component in calculating a stock's price multiple than the earnings figure.

Formula:

yearstock price /share net sales(revenue) price/ sales ratio

2006-07 72.4 21.33 3.39

2007-08 108.75 27.03 4.02

2008-09 73.45 27.87 2.63


FINDINGS:

2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

4

4.5

price/ sales ratio

price/ sales ratio


SUGESSTIONS:

Management of receivables must be accorded the importance it deserves. This

responsibility should be shouldered to the senior executives.

Credit policies need to be articulated in explicit terms and revised periodically in the light

of internal and external changes.

There should be better co-ordination between sales, production and financial

departments.

Firms granting credit should examine the published statement of prospective customers

with great rigor.

References provided by the prospective customer should be consulted and necessary

follow up action should be taken.

A well defined collection program must be developed.

Date post:	14-Dec-2015
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Receivables Mgt & Its Impact on Cash Flows Nithin Project Report

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