RECEIVABLE MANAGEMENT

1.1. INTRODUCTION TO THE STUDY

A sale of credit is an evitable necessity in the business world of today. No
business can exist without selling the units in credit. The basic difference between the
credit sales and cash sales is the time gap in the receipt of cash.
Management of trade credit is commonly known as Management of
Receivables. Receivables are one of the three primary components of working capital,
the other being inventory and cash, the other being inventory and cash. Receivables
occupy second important place after inventories and thereby constitute a substantial
portion of current assets in several firms. The capital invested in receivables is almost
of the same amount as that invested in cash and inventories. Receivables thus, form
about one third of current assets in India. Trade credit is an important market tool. As,
it acts like a bridge for mobilization of goods from production to distribution stages in
the field of marketing. Receivables provide protection to sales from competitions. It
acts no less than a magnet in attracting potential customers to buy the product at terms
and conditions favorable to them as well as to the firm. Receivables management
demands due consideration not financial executive not only because cost and risk are
associated with this investment but also for the reason that each rupee can contribute to
firm's net worth.
The book debts or receivable arising out of credit has three dimensions:

It involves an element of risk, which should be carefully assessed. Unlike cash

sales credit sales are not risk less as the cash payment remains undeceived.

It is based on economics value. The economic value in goods and services

passes to the buyer immediately when the sale is made in return for an equivalent
economic value expected by the seller from him to be received later on.

It implies futurity, as the payment for the goods and services received by the
buyer is made by him to the firm on a future date.
The customer who represent the firm's claim or assets, from whom receivables

or book-debts are to be collected in the near future, are known as debtors or trade
debtors. A receivable originally comes into existence at the very instance when the sale
is affected.
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Receivables

may b e rep resent ed by acceptance; bills or notes and the like

due from others at an assignable date in the due course of the business. As sale of goods
is a contract, receivables too get affected in accordance with the law of contract e.g.
Both the parties (buyer and seller) must have the capacity to contract, proper
consideration and mutual assent must be present to pass the title of goods and above
all contract of sale to be enforceable must be in writing. Receivables, as are forms of
investment in any enterprise manufacturing and selling goods on credit basis, large
sums of funds are tied up in trade debtors. Hence, a great deal of careful analysis and
proper management is exercised for effective and efficient management of Receivables
to ensure a positive contribution towards increase in turnover and profits.
When goods and services are sold under an agreement permitting the customer
to pay for them at a later date, the amount due from the customer is recorded
as accounts receivables; so, receivables are assets accounts representing amounts owed
to the firm as a result of the credit sale of goods and services in the ordinary course of
business. The value of these claims is carried on to the assets side of the balance sheet
under titles such as accounts receivable, trade receivables or customer receivables. This
term can be defined as "debt owed to the firm by customers arising from sale of
goods or services in ordinary course of business."
Instruments indicating receivables
Harry Gross has suggested three general instruments in a concern that provide
proof of receivables relationship. They are briefly discussed below: Open book account
This is an entry in the ledger of a creditor, which indicates a credit transaction. It
is no evidence of the existences of a debt under the Sales of Goods.

Negotiable Promissory Note

It is an unconditional written promise signed by the maker to pay a definite
sum of money to the bearer, or to order at a fixed or determinable time. Promissory
notes are used while granting an extension of time for collection of receivables, and

debtors are unlikely to dishonor its terms.

Increase in Profit
As receivables will increase the sales, the sales expansion would favorably
raise the marginal contribution proportionately more than the additional costs
associated with such an increase. This in turn would ultimately enhance the level of
profit of the concern.

Meeting Competition
A concern offering sale of goods on credit basis always falls in the top priority
list of people willing to buy those goods. Therefore, a firm may resort granting of
credit facility to its customers in order to protect sales from losing it to competitors.
Receivables acts as an attracting potential customers and retaining the older ones at the
same time by weaning them away firm the competitors.

Augment Customer's Resources

Receivables are valuable to the customers on the ground that it augments
their resources. It is favored particularly by those customers, who find it
expensive

and cumbersome to borrow from other resources. Thus, not only the

present customers but also the Potential creditors are attracted to buy the firm's
product at terms and conditions favorable to them.
Speedy Distribution
Receivables play a very important role in accelerating the velocity of
distributions. As a middleman would act quickly enough in mobilizing his quota
of goods from the productions place for distribution without any hassle of immediate
cash payment. As, he can pay the full amount after affecting his sales. Similarly, the
customers would hurry for purchasing their needful even if they are not in a position to
pay cash instantly. It is for these receivables are regarded as a bridge for the
movement of goods form production to distributions among the ultimate consumer.

Miscellaneous
The usual practice companies may resort to credit granting for various other
reasons like industrial practice, dealers relationship, status of buyer, customers
requirements, transits delay etc. In nutshell, the overall objective of making such
commitment of funds in the name of accounts receivables aims at generating a large
flow of operating revenue and earning more than what could be possible in the
absence of such commitment.

Cost of Maintaining Receivables

Receivables are a type of investment made by a firm. Like other
investments, receivables too

feature a drawback, which are required to be

maintained for long that it known as credit sanction. Credit sanction means tie up of
funds with no purpose to solve yet costing certain amount to the firm. Such costs
associated with maintaining receivables are detailed below: -

Administrative Cost
If a firm liberalizes its credit policy for the good reasons of either maximizing
sales or minimizing erosion of sales, it incurs two types of costs:
(A) Credit Investigation and Supervision Cost:
As a result of lenient credit policy, there happens to be a substantial increase
in the number of debtors. As a result the firm is required to analysis and supervises a
large volume of accounts at the cost of expenses related with acquiring credit
information either through outside specialist agencies or form its own staff.
(B) Collection Cost:
A firm will have to intensify its collection efforts so as to collect the
outstanding bills especially in case of customers who are financially less sound. It
includes additional expenses of credit department incurred on the creation and
maintenance of staff, accounting records, stationary, postage and other related items.

Terms of Sale
A firm may affect its sales either on cash basis or on credit basis. As a
matter of fact credit is the soul of a business. It also leads to higher profit level through
expansion of sales. The higher the volume of sales made on credit, the higher will be
the volume of receivables and vice-versa.

The Volume of Credit Sales

It plays the most important role in determination of the level of receivables. As
the terms of trade remains more or less similar to most of the industries. So, a firm
dealing with a high level of sales will have large volume of receivables.

Credit Policy
A firm practicing lenient or relatively liberal credit policy its size of
receivables will be comparatively large than the firm with more rigid or signet credit
policy. It is because of two prominent reasons: A lenient credit policy leads to greater defaults in payments by financially
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weak customers resulting in bigger volume of receivables.

A lenient credit policy encourages the financially sound customers to delay
payments again resulting in the increase in the size of receivables.

Terms of sale
The period for which credit is granted to a customer duly brings about
increase or decrease in receivables. The shorter the credit period, the lesser is the
amount of receivables. As short term credit ties the funds for a short period only.
Therefore, a company does not require holding unnecessary investment by way of
receivables.

Cash
Cash discount on one hand attracts the customers for payments before the
lapse of credit period. As a tempting offer of lesser payments is proposed to the
customer in this system, if a customer succeeds in paying within the stipulated period.
On the other hand reduces the working capital requirements of the concern. Thus,
decreasing the receivables management.

Collection policy
The policy, practice and procedure adopted by a business enterprise in granting
credit, deciding as to the amount of credit and the procedure selected for the collection
of the same also greatly influence the level of receivables of a concern. The more
lenient or liberal to credit and collection policies the more receivables are required for
the purpose of investment.

Collection collected
If an enterprise is efficient enough in encasing the payment attached to the
receivables within the stipulated period granted to the customer. Then, it will opt for
keeping the level of receivables low. Whereas, enterprise experiencing undue delay in
collection of payments will always have to maintain large receivables.

Bills discounting and endorsement

If the firm opts for discounting its bills, with the bank or endorsing the bills
to the third party, for meeting its obligations. In such circumstances, it would lower
the level of receivables required in conducting business.

Quality of customer
If a company deals specifically with financially sound and credit worthy
customers then it would definitely receive all the payments in due time. As a result
the firm can comfortably do with a lesser amount of receivables than in case where a
company deals with customers having financially weaker position.

Miscellaneous
There

are

certain

general

factors

such

as

price

level

variations,

attitude of management type and nature of business, availability of funds and

the

lies

that

play considerably important role in determining the quantum of

receivables.

PRINCIPLES OF CREDIT MANAGEMENT:

In order to add profitability, soundness and effectiveness to receivables
management, an enterprise must make it a point to follow certain wellestablished and duly recognized principles of credit management.
The first of these principles relate to the allocation of authority
pertaining to credit and collections of some specific management.
The second principle puts stress on the selection of proper credit terms.
The third principles emphasizes a through credit investigation before a
decision on granting a credit is taken. And the last principle touches
upon the establishment of sound collection policies and procedures.

1.2. PROBLEM STATEMENT:

The main problem of the study is that the company faces the difficulties of
receiving payments from their customers.
To determine the reason for the delay in receiving payments from the
debtors. To check whether their customers are paying the amount correctly
from the actual date of receipt within the payment due date.
To find out the number of days delay in receiving payment. Ratio is
determined to indicate payment period, collection period, return on owner
equity. It throws light on financial strength of the company and whether the
trend over the years is favorable or not.
In this study, ratios are used for credit analysis. From the given secondary
data, trend analysis of sales and debtors for 3 years is to be determined for
knowing the impact of receivable in financial liquidity.

1.3. NEED OF THE STUDY

Measurement

is

another

component

within

account

receivable

management. Traditional ratios, such as turnover will measure how many

times you were able to convert receivables over into cash.
Measurements may need to be modified to account for wide fluctuations
within the sales cycle. The use of weights can help ensure comparable
measurements.

1.4. SCOPE OF THE STUDY

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The following are the scope:

1. Fostering credit awareness
2. Understanding the need for a credit policy
3. Understanding financial statements
4. Applying financial analysis of financial statements
5. Allowing too much credit, or not managing the credit policy carefully
enough, could result in irrecoverable debts. This represents a loss of
income to the company, affecting both profitability and cash flow. So
credit management has to be done.
6. To reduce administrative cost and enhance office productivity
7. To manage your sales process more effectively by measuring trends and
analyzing performance.
8. How the managed calculations to fit your business needs.

1.5. OBJECTIVE OF THE STUDY

Primary objective:

The objective of the receivables management is to promote sales and profits. Also
it focuses on how to augment money to meet the companys working capital
requirements.

Secondary Objective:
i) To examine the receivables management practices followed by the company
ii) To determine the relationship of receivables and sales
iii) To Compare Actual Date of Receipt from customers with the Payment Due
Date.
iv) To find out the reasons for the delay in getting the Payment
v) To find out the impact in the working capital of the company
vi) To offer suggestion to improve the receivables position.

1.6. RESEARCH METHODOLGY

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The data that has been collected from various sources and presented in the form of
materialistic information is known as research methodology. Research methodology is a
systematic way to solve any research problem. It may be understood as a science of
studying how research is done scientifically.

1.6.1. RESEARCH DESIGN

This research study adopts an Empirical research methodology. Such research is
often conducted to answer a specific question or to test a hypothesis. Any conclusions
drawn are based upon hard evidence gathered from information collected from real life
experiences or observations. This helps to understand and respond to dynamics of
situations. This research is widely used in stock market research, analysis of financial
statement, and other socio-science related researches.

1.6.2. DATA COLLECTION METHOD

Data collection methods are an integral part of research design. Problems
researched with the use of appropriate methods greatly enhance the value
of the research
In this study, the data are collected from the secondary sources. Secondary
data are indispensable for most organizational research. Such data can be
internal or external to the organization and accessed through the internet or
perusal of recorded or published information.
Secondary data can be used, among other things, for forecasting sales by
considering models based on past sales figures, and through extrapolation.
There are several sources of secondary data, including books and
periodicals, government publications of economic indicators, census data,
statistical abstracts, databases, the media, annual reports of companies, etc.
Also included in secondary sources are schedules maintained for or by key
personnel in organizations, the desk calendar of executives, and speeches
delivered by them. Much of such internal data, though, could be proprietary
and not accessible to all.
The advantage of seeking secondary data sources is savings in time and
costs of acquiring information. Hence it is important to refer to sources that
offer current and up-to-date information.
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 For this research, the data is collected from the annual reports of the
company from the year 20011-12 to 2014-15. The annual report can be
considered as the most important and reliable source of financial data.

1.6.3. TOOLS USED

The following are the financial tools used for analysis and interpretation of this
study which is based on receivables management.
Ratio analysis tools used here are
1. Liquidity
a) Current ratio
b) Quick ratio
c) Net working capital to sales ratio
2. Profitability
d) Gross profit margin
e) Net profit margin
3. Activity
f) inventory turnover ratio
g) accounts receivable turnover ratio
h) average collection period
Trend Analysis of Debtors ( in months i.e. from Mar 2014- Apr 2015)
Trend of sales (from Mar 2014- Apr 2015)

1.7. LIMITATIONS OF THE STUDY

1. The study is based on the accounting information. Therefore it is subject to
change based on the market to demand conditions.

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2. The study is basically based on the secondary information that is annual

reports of the company. Hence it is difficult to state that the study is
flawless when most of the study is based on the secondary data.
3. The figures used in reports are taken from annual reports are taken from the
annual reports and has it does not have any impact on the current
transactions.
4. The whole study is based on observations in the past, which can only be
related to laws that operated in the past, as there is no evidence that the
laws will continue to operate in future also.

1.8. CHAPTER SCHEME

The project consists of five chapters as described below:

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Chapter 1: Chapter 1 deals with introduction to the study, problem statement,

need and

scope of the study, Objectives of the study, Research methodology and

Limitations of the study.

Chapter 2: Chapter 2 deals with review of literature.
Chapter 3: Chapter 3 includes the industry profile and the company profile.
Chapter 4: Chapter 4 includes the data analysis and interpretation of the study.
Chapter 5: Chapter 5 deals with the summary of findings, suggestions and
conclusion of the study.

CHAPTER - 2
REVIEW OF LITERATURE

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Mamo, David, (1994), Receivables financing as a source of working capital, Nursing

Homes, 8, vol.43, 28
Financing through a securitization of receivables does not create a liability. An
assetthe receivables --is sold for cash; no loan has been granted.
Banks and finance companies are the most obvious source of receivables
financing. Their lending decision is generally driven by an analysis of a borrower's
financial statements. Consequently it is common for a company's line of credit to be
limited by how its debt compares to its equity base (the ratio of debt-to-worth) or for the
lender to set minimum levels of solvency for the company (the current ratio or acid-test
ratio).
Under these covenants, a lender limits his willingness to lend funds beyond a
predetermined point at which the company would be deemed either excessively indebted
or too short of cash for the payments it must meet. The receivables function as part of the
total collateral that the company pledges in order to strengthen its corporate commitment
to eventually repay the loan. In support of this, the company usually must periodically
produce a report (the borrowing base report) showing how much in receivables it carries
on its balance sheet.
Strischek, Dev, (2001), Looking for a vital sign in contractor accounts: The
receivables ratio, The RMA Journal, 10,vol. 83, 62-66
A contractor's receivables represent two significant elements of contractor cash
flow and working capital. Receivables constitute the major source of cash inflow, and
payables absorb a big share of cash outflow. A construction company's ability to extend
credit to its customers depends on its own trade creditors' willingness to wait for their
payments from the contractor's collection of its progress billing receivables. The delicate
balance of receivables and payables is key to the financial success of the contractor.
Contract receivables take longer to collect, and the trade creditors expect prompt
payment. The receivables ratio is a quick-and-easy test of contractor viability.

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Colabella, Patrick; Fitzsimons, Adrian P; Shoaf, Victoria,(2009), FASB Proposes

Disclosures About the Credit Quality of Financing Receivables and the Allowance
for Credit Losses, Commercial Lending Review, 5,vol. 24, 35-40
Specifically, the proposed FAS would require a creditor to disclose information
that would allow credit analysts and other financial statement users to understand the
following:
* The nature of credit risk inherent in the creditor's portfolio of financing receivables
* How that risk is analyzed and assessed in arriving at the allowance for credit losses
* The changes and reasons for those changes in both the receivables and the allowance
for credit losses
The proposed FAS would apply to all financing receivables held by creditors,
including all public and nonpublic entities that prepare financial statements.
The FASB states that the term "financing receivables" would include loans defined
as a contractual right to receive money on demand or on fixed or determinable dates that
are recognized as an asset in the creditor's statement of financial position, whether
originated or acquired.
Black, Tom, (1998), Using receivables purchasing to improve cash flow for small
businesses, Commercial Lending Review, 4, vol.13, 70-74
Within the last decade, a growing number of bankers have begun supplementing
their commercial product line with receivables purchasing programs, boasting both
exceptional yields and stable, satisfied customers.
By adhering to these 4 risk-management principles, bankers can significantly
mitigate risk in receivables purchasing: 1. Making a prudent initial credit decision, 2.
maintaining accurate and timely account information, 3. controlling the cash, 4.
Implementing effective monitoring procedures, and 5.providing protection against
changing credit circumstances.

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Receivables purchasing has great potential for community banks. For bankers
willing to dig every day into invoices, payment terms, and billing statements, receivables
purchasing is a way to create profits.
Because receivables are the fastest-moving noncash asset a business has, effective
and consistent monitoring is the backbone of any credit facility based on accounts
receivable.
Paul, Salima Y, (2007), Organizing the credit management function, Credit
Management, 26-28, 30-31
If accounts receivable constitute one of the biggest but riskiest assets the company
is likely to have, one would expect special attention to be given to its management. The
way the credit function is organized has an effect on credit management. So the
management of this function should be part of the overall objectives and should fit into
the strategy of the business
It is widely accepted in credit management literature that factors such as the nature
of the product, the channels of distribution and whether companies can benefit from
economies of scale can affect the management of the credit function
Other factors affecting the credit management function is that it is widely accepted
that investment in the credit function and the time spent on each activity of the credit
management process have an impact on corporate performance.
The integration of the credit function within another department may be desirable.
Nevertheless, there may be a conflict of interest between credit objectives and others.
There may be incentives for the sales department, for instance, to maximise the turnover
and thus sales staff may offer more generous credit terms than the industry norm or offer
credit to risky customers. Consequently, more time and resources are spent on back-end
activities such as chasing unpaid bills, and the role of credit mangers/controllers shifts to
one of retrospective credit collection rather than credit management and cannot be used
proactively to contribute to the enhancement of the company's performance.

17

Investing in the credit function is very important and may help trade credit not just
to remain a collectable asset but also to become one that is converted into cash within the
terms
Stevenson, Paul, (2005), Credit management policy, Credit Management, 8-18
The function of credit management is to maximize profitable sales, through the
prudent extension of credit, the balancing of financial risk and the efficient collection of
sales income within a framework of customer care. The primary objectives of credit
management include:
1. To ensure that all amounts due are collected according to the agreed payment terms and
that the most efficient methods of payment are used.
2. To identify high risk or marginal customers at an early stage, especially those likely to
get into financial difficulties and to take whatever action is thought necessary to
safeguard further sales to those customers.
3. Ensure that the cost of providing the goods/services on credit terms is at a level that
maximizes turnover with the minimum of risk.
4. Ensure that monthly cash collection targets are achieved.
5. Maintain a high quality of accounts receivable.
6. Develop a compatible working relationship with Sales, so that the needs of all
departments involved are satisfied to the benefit of the company as a whole.
Byl, Calvin D, (1994), Reporting accounts receivable to management, Business Credit,
9, vol.96, 43
Managers need to have timely, accurate, and useful information to understand and
respond to the impact that the usually sizeable investment in accounts receivable has on
the cash flow and profitability of their operating units.
To determine what criteria for reporting on accounts receivable portfolios are
requested by management or used by credit departments in other companies in the
industry, a survey of credit managers from 34 agricultural companies was conducted
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The survey participants were asked, "What do you consider to be the two primary
criteria for reporting the status of your accounts receivable to management?" Their
responses, though varied in detail, generally could be classified into five broad categories:
1. Accounts Receivable Aging
2. Exception Reports
3. Days Sales Outstanding
4. Ratio Analysis
5. Trends Analysis Reports.
The responses from the seven survey participants using one criterion for their
reports fell into three different categories. Two used the Accounts Receivable Aging. Two
more used similar Ratio reports regarding the percentage of sales collected. The other
three used Exception Reports, but they were each a little different.
One of the participants reviewed only those accounts that were over their credit
lines as established by the credit department. Another participant reviewed all accounts
over 30 days past due. The other participant reviewed a watch list of accounts that are of
particular concern. The parameters for getting on this list were not given.
Kerwin, Richard J, (1992), Field Examinations of Accounts Receivable, The Secured
Lender, 2, vol.48, 28
The best way to determine whether accounts receivables are fairly stated is
through a field examination. Risks involved in financing accounts receivable that increase
the lender's exposure for loss include: 1. the client may bill and hold. 2. The client may
pre-bill. 3. Returns, allowances, or other credits may dilute the value of receivables. 4.
The client may produce fictitious receivables. The auditor must ensure that the
receivables are valid and collectible.
Although each client employs different accounting methods and controls, some
general standards exist that can be adjusted as circumstances require.
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The scope of the field examination includes:

* Reconciling the accounts receivable aging to the general ledger and the financial
statement.
* Reconciling the accounts receivable aging to reports produced by the client to the
lender.
* Verifying the aging.
* Verifying shipment of the goods.
* Reviewing the timeliness of the posting of payments and credit memos.
* Determining the concentration of customers.
* Determining if any pre billing or bill and holding exists.
* Reviewing credit approval procedures.
* Reviewing collection procedures.
Sims, C Paul, Jr; True, Patrick, (1997), Five keys to relying on accounts receivable as a
repayment source, The Journal of Lending & Credit Risk Management, 1, vol.80, 40-44
Accounts receivable can represent a very sound repayment source because they
will typically convert to cash faster than any other asset on the balance sheet. For the
same reason, accounts receivable also can represent additional risks.
There are 5 keys to relying on accounts receivable as a repayment source: 1.
making a prudent initial credit decision, 2. maintaining accurate and timely information,
3. ensuring control of the cash, 4. establishing effective monitoring procedures, and 5.
protecting against changing credit circumstances.
The 5 C's of credit - character, capacity, conditions, capital, and collateral - play a
vital role in any prudent initial credit decision. The need for businesses to free cash from
their receivables is not going to disappear. The banks most successful at capitalizing on
this market opportunity will be those that recognize and control their receivables risk.
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Kontus, Eleonora, (2013), Management of Accounts Receivable in a Company,

Ekonomska Misao i Praksa, 1, vol. 22, 21-38
Accounts receivable is the money owed to a company as a result of having sold its
products to customers on credit. The primary determinants of the company's investment
in accounts receivable are the industry, the level of total sales along with the company's
credit and the collection policies.
The major decision regarding accounts receivable is the determination of the
amount and terms of credit to extend to customers. The total amount of accounts
receivable outstanding at any given time is determined by two factors: the volume of
credit sales and the average length of time between sales and collections.
The purpose of this study is to determine ways of finding an optimal accounts
receivable level along with making optimum use of different credit policies in order to
achieve a maximum return at an acceptable level of risk.
We hypothesize that by applying scientifically-based accounts receivable
management and by establishing a credit policy that results in the highest net earnings,
companies can earn a satisfactory profit as well as a return on investment.

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