Title of the Article

RECEIVABLES MANAGEMENT IN A PUBLIC

LIMITED COMPANY - A CASE STUDY

Name of the Author

M. KANNADHASAN, MBA, MFT, M.Phil, (Ph.D)

Designation

Faculty Member

Office Address

Bharathidasan Institute of Management (BIM),

Post Box No.12, MHD Complex, BHEL Campus,
Trichy 620 014 (Tamil Nadu)

House Address

68A, Thiruvalluvar Street,

Edamalapattipudur,
Trichy 620 012 (Tamil Nadu)

Phone

0431 2520502/796

Fax

0431- 2520733

Mobile

9443349987

E-mail

Kannadhasan_m@bim.edu

1
Electronic copy available at: http://ssrn.com/abstract=1819024

RECEIVABLES MANAGEMENT IN A PUBLIC LIMITED

COMPANY - A CASE STUDY

Abstract
No business can be successfully run without adequate amount of working capital which is
concerned with two factors namely, current assets to be held and the type of assets and the
methods by which these assets are financed. This occupies much of the finance managers time in
taking decisions. Investment in current assets represents a very significant portion of the total
investment in assets. The finance managers have to be very careful, while making any investment
decisions especially short term i.e. working capital. Empirical results show that ineffective
management of working capital is one of the important factors causing industrial sickness.
There is a direct relationship between a firms growth and its working capital needs. As
sales grow, the firm needs to invest more in inventories and debtors. The finance manager should
determine levels and composition of current assets, which will help to run the business smoothly.
Account receivables are one of the major components of working capital. Receivables are a direct
result of credit sales. The sale of goods on credit is an essential part of the modern competitive
economic system. The objective of credit sales is to promote sales and thereby achieving more
profits. At the same time, credit sales result in blockage of funds in accounts receivable.
Moreover, increase in receivables will increase the investments and also increases chances of bad
debts. Hence, if the receivables is managed effectively, monitored efficiently, planned properly
and reviewed periodically at regular intervals to remove bottle necks if any, the company cannot
earn maximum profits and increase its turnover. With this as the primary objective of the study,
the study made an effort to assess the receivables management. This study concludes that the
efficiency of the receivables management of this company was satisfactory.

2
Electronic copy available at: http://ssrn.com/abstract=1819024

INTRODUCTION
The major objective of any organisation is to make profits regularly. The objectives can
be achieved by making sufficient sales. This is possible only when there is no disruption in the
supply of required goods. The required goods may be supplied to the market, only if there is no
disruption in the production of these goods by the organization. There will be no disruption in the
production of goods only if there is sufficient machinery through permanent capital and if the
firm has enough working capital. Thus working capital forms the basis to make an organisation
successful by achieving its objectives.
Working capital is the life blood and controlling nerve of a firm. No business can be
successfully run without adequate amount of working capital. In ordinary parlance working
capital is taken to be the fund available for meeting day to day requirements of an organisation.
Working capital management is concerned with two factors namely, current assets to be held and
the type of assets and the methods by which these assets are financed. This occupies much of the
finance managers time in taking decisions. Empirical observations show that the financial
managers have to spend much of their time on the daily internal operations, relating to current
assets of the firm. As the largest portion of the financial managers valuable time is devoted to
working capital problems, it is necessary to manage working capital in the best possible way to
get the maximum benefit (Pandey, 2005). Thus, Investment in current assets represents a very
significant portion of the total investment in assets. The finance managers have to be very careful,
while making any investment decisions especially short term i.e. working capital. Empirical
results show that ineffective management of working capital is one of the important factors
causing industrial sickness (Yadav, 1986).
There is a direct relationship between a firms growth and its working capital needs. As
sales grow, the firm needs to invest more in inventories and debtors. The finance manager should
determine levels and composition of current assets, namely, Inventory, Receivables, Cash, and
Marketable securities, which will help to run the business smoothly. Account receivables are one
of the major components of working capital. The receivables are a result of credit sales which
helps to increase the profits. At the same time, credit sales result in blockage of funds in accounts
receivable and an increased chance of bad debts. In order to minimise the bad debts, it needs
careful analysis and proper management. Evaluating the credit worthiness of the customer is one
among the key factor in proper credit management. A mismatch can cause significant errors in
receivables management. Therefore the finance manager should always be careful and adapt the
proper evaluation before extending the credit facility to their customers.
Previously, the finance manager assessed the customers character such as, financial
position, liquidity position, collateral security offered and general economic conditions in which
business operates. Whereas, now a days, trade reference, credit bureaus, bank reference, balance
sheet information and direct information by sales men are the major indicators. However,
whatever may be method; it may not be proved hundred per cent fault free. In spite of this
problem, in the modern world, selling goods on credit is the most prominent force of the todays
business. The purposes of adopting this method are achieving growth in sales, increasing profits
and meeting competition which many research studies have proved. However, on the other hand,
the longer the period of credit, the greater level of debt, and greater the strain on the liquidity of
the company. Hence it is necessary to have receivables management in any organization and the
need for this study.

RATIONALE FOR THE STUDY

As mentioned above, Receivables are a direct result of credit sales. The sale of goods on
credit is an essential part of the modern competitive economic system. The objective of credit
sales is to promote sales and thereby achieving more profits. At the same time, credit sales result
in blockage of funds in accounts receivable. Moreover, increase in receivables will increase the
investments and also increases chances of bad debts. Hence, if the receivables is managed
effectively, monitored efficiently, planned properly and reviewed periodically at regular intervals
to remove bottle necks if any, the company cannot earn maximum profits and increase its
turnover. With this as the primary objective of the study, the following further objectives are
framed for in-depth analysis.
REVIEW OF LITERATURE
Many studies have been conducted on the topic of Working capital Management. An
empirical research works in this area gave an outstanding view about the exploration of this topic
in different dimensions. Raghunatha Reddy & Kameshwari (2004) opines that the working capital
was effectively utilized for, generating funds from sales in the sample company. Santanu Ghosh
& Maji (2004) assessed the efficiency of working capital management of the Indian Cement
companies during 1992-93 to 2001-2002. Instead of using the common method of analyzing
different working capital management ratios, three index values representing the average
performance of the components of current assets, the degree of utilization of the total current
assets in relation to sales and the efficiency in managing the working capital, have been computed
for the selected firms over the ten year study period. They concluded that the Indian cement
industries did not perform remarkably during the period.
Reddy & Patkar (2004) studied the size and its components and liquidity management in
factoring companies. Also they attempted to study the correlation between the liquidity and
profitability of factoring companies. They concluded that the sundry debtors and amount due to
creditors are three major components of current assets and current liabilities respectively in
determining the size of the working capital. Prasad (2001) conducted a research study in paper
industry. He found that the chief executives properly recognized the role of efficient use of
working capital in liquidity and profitability, but in practice they could not achieve it. And also
identified that the fifty percent of the executives followed budgetary method in planning working
capital and working capital management was efficient due to sub-optimum utilization of working
capital. Sarvanan (2001) made a study on working capital management in 10 selected nonbanking financial companies. He concluded that the sample firms had placed more importance
upon the liquidity aspect compared to that of the profitability aspect with the help of statistical
tools. Dulta (2001) observed that the various components of working capital of HPMC had not
been used efficiently and net working capital position has worsened continuously during the
period of the study.
Debasish Sur et al. (2001) attempted to study the association between the liquidity and
profitability of Indian Private Sector enterprises as a case of Alumninium producing industry. He
identified that there is a very high degree of positive correlation between liquidity and
profitability of selected companies. They also observed that liquidity variables jointly influences
of profitability of the selected companies. Hyderabad (1999) found that long-term funds were
used for working capital and observed that flexibility and adjustment in the requirement of
working capital depends on the availability and cost of working capital. Debasish Sur, (1997)
conducted a study about in Working capital management in Colgate (Palmolive) India Ltd. He
observed that working capital management is not satisfactory while compared with the
conventional standard. This study has identified that the research gap for further research from
the above reviews that this study can be viewed in component wise which could be researched in
this study.

OBJECTIVES OF THE STUDY

Keeping the primary objective as stated above, the following are other objectives of the
study.
1.
2.
3.
4.

To assess the credit policy of the company.

To identify the actual performance in terms of sales and profitability.
To examine the major financial parameters connected to receivables management.
Suggestions for better receivables management.

HYPOTHESES OF THE STUDY

Having identified the objectives of this study, the following hypotheses have been
formulated and tested during the period of study: 1.There is no significant difference between the
five years average current ratio of this company to the standard 2.Correlation between working
capital and sales of this company is not significant 3.Correlation between debtors and sales of this
company is not significant
RESEARCH METHODOLOGY
The study had been done in one of the leading public limited company. To maintain
anonymity, the name of the company is not mentioned in the study and it had been mentioned
only as the company. This study was based on secondary data, which was obtained from the
published sources i.e. Annual report for the period of Five years (1999 to 2003). The collected
data has been analysed with the help of ratio analysis, and also through the application of
statistical tools such as t test, Correlation, Mean, Standard Deviation, and Simple Percentage
analysis.
RESULTS AND DISCUSSIONS
This part deals with results and discussions for this study. With a view to know the
efficiency of the receivables management in a sample company, the evaluation was done with the
financial statement for the five years which has been given in this context.
Current Ratio: The current ratio is a measure of the firms short-term solvency. Current
assets represent those assets which could be converted into cash within a period of one
year to take care of current liabilities. A norm of 2:1 ratio represents a healthy trend in the
organization. As can be clear from the above table, though the companys current ratio is
increasing trend which was lower than the conventional norm. The solvency of the firm
was considered satisfactory and it shows that the firm is in a position to meet its current
liabilities in time. On an average this companys current ratio is 1.31 and the SD is 0.15.
The CR position is tested using the following hypothesis:
H0 = there is no significance difference between the 5 years average current ratio to the
standard
Since the calculated value (1.923) is less than the table value (2.13). Hence, Null
hypothesis is accepted at 5 per cent level and hence concluded that the mean current ratio
does not differs significantly for the standard.

Table 1: Selected Receivables Management Ratios and its Descriptive Statistics

Year

CR

LR

WTR

CSTS

DTR

ACP

CTR

APP

1999

1.156

0.940

18.26

0.75

30.71

12

2.915

125

2000

1.189

0.824

24.55

0.75

20.41

18

2.344

155

2001

1.396

0.875

13.32

0.80

10.92

33

2.607

140

2002

1.533

0.992

9.16

0.80

6.69

55

2.484

146

2003

1.287

0.814

15.23

0.85

6.00

57

2.231

163

Mean

1.312

0.889

16.104

0.79

14.945

35

2.516

146

SD

0.155

0.076

5.760

0.042

10.521

20.652

0.264

15.55

CV

11.805

8.577

35.768

5.295

70.39

59.001

10.502

9.979

Source: 1. Complied from annual Reports of the company concerned.

2. Statistical computations has been done through MS-Excel Spread Sheets
Quick Ratio (LR): Quick ratio establishes a relationship between quick, or liquid, assets
and current liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset. Other assets,
which are considered to be relatively liquid and included in quick assets, are debtors and
bills receivables and marketable securities. A quick ratio of 1:1 is usually considered
adequate. In during the study period, this company maintained a satisfactory financial
position in this regard.
Working Capital Turnover Ratio (WTR): A firm may also like to relate net current
assets (or net working capital gap) to sales. It may thus compute net working capital
turnover by dividing sales by net working capital. It indicates the efficiency of the
company in utilising the working capital in business. High ratio denotes more efficient
use of working capital in the business and vice versa. From the table 1 indicates that the
ratio varies 9.16 to 24.55 and was fluctuating every year. On an average, this companys
working capital turnover ratio was 16.104 which is less than the desired level. The
correlation coefficient of working capital and sales of this company was positive (0.714).
It implies that as the amount of working capital increases, the amount of sales also
increases which was tested with the help of the following hypothesis.
H0 = Correlation between working capital and sales of this company is not significant.
Since the calculated value (1.78) is less than the critical value (2.132), Null hypothesis is
accepted and hence concluded the correlation between the working capital and sales is
insignificant.
Credit Sales to Total Sales (CSTS): This ratio portrays the impact of credit system
followed by the organization in its total sales. It is safe for the organization, if it
maintains 50: 50 ratios as for as cash and credit sales are consider. A higher ratio of
credit sales is a result of improper credit management. Form the above table shows the
ratio between sales to credit sales. It is found that credit sales range from 75 percent to 85
percent. Latest, it was 85 percent which implies that the company increases the credit
sales and its affects liquidity.

Debtors Turnover Ratio (DTR): The debtors velocity indicates the number of times
the debtors are turned over during a year. Generally, the higher the value of debtors
turnover is the more efficient in the management of debtors. Similarly, lower debtors
turnover implies less efficient in the management of debtors and less liquid debtors. Here
the company, the debtors turnover ratio is decreasing every year, except 2001 and 2002
turnover more than 11 times. But at the latest, it comes to 6. It shows that the company
debtors level of turnover is somewhat satisfactory level. The correlation coefficient of
debtors and sales was positive and it reveals the amount of sales increases and the amount
of debtors also increases. The coefficient of correlation between debtors and sales of this
company was 0.95; this was tested through the following hypothesis.
H0 = Correlation between debtors and sales of this company is not significant.
Since the calculated value (5.51) is greater than the Critical value (2.132); Null
hypothesis is rejected and hence concluded that the correlation between debtors and sales
is significant.
Average Collection Period (ACP): This type of ratio for measuring the liquidity of a
firms debtors is the average collection period. This is, in fact, interrelated with, and
dependent upon, the receivables turnover ratio. It is calculated dividing the days in a year
by the debtors turnover. The table 1 shows that the firm average collection period is
increasing trend in every year. It is because of the stiff market competition and also
liberalizing the credit standards. On an average, the company is maintaining the credit
period was 35 days; the collection effort of this company was satisfactory level and it
needs more attention.
Creditors Turnover Ratio (CTR): It is a ratio between net credit purchases and the
average amount of creditors outstanding during the year. A low turnover ratio reflects
liberal credit terms granted by suppliers, while a high ratio shows that accounts are to be
settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can
reduce its requirement of current assets by relying on suppliers credit. As it can be
observed from the table 1, the ratio is decreasing trend. The highest ratio is 2.915 in 1999
and the lowest ratio is 2.231 in 2003 which implies that creditors tightening the credit
standards.
Average Payable Period: This shows the strength of the company that is avail maximum
credit for its purchases and allows less credit on its sales so as to make margin out of its
interest burden and cash out flow. The average payable period of this company varies
from 125 days to 163 days. Generally, the companys payable period should be greater
than the average collection period which will be appreciable. The company payable
management was good.
In addition to mean and SD, an effort has also been made to measure the consistency
among all eight parameters of receivables management more precisely by applying the coefficient
of variation (CV). The variable for which the CV is greater that indicates the variables is to be
more fluctuating or conversely less consistent, less stable or less uniform. On the other hand, the
variable for which the CV is less that indicates the variables is to be is regarded as less
fluctuating, more consistent, more stable or more homogenous. Table 1 reveals that out of the
eight different parameters of receivables management of the sample company, the CSTS is most
consistent and stable followed by LR, CTR, APP, CR, WTR, ACP and DTR respectively.
Amongst the eight variables, DTR and ACP are the highest variable and inconsistent.

DISTRIBUTION OF WORKING CAPITAL

An elements wise analysis of working capital enables one to examine in which elements
the working capital funds are locked up and to find out the factors responsible for the significant
changes in working capital of different years. The distribution of working capital among the
elements and its average calculated in percentages for the study period has been presented in the
table 2. Out of the four elements of the working capital, the elements of working capital namely,
inventory and debtors contributed almost equally i.e. 31.75 percent 31.07 per cent respectively,
towards gross working capital whereas the last one i.e. cash & bank contributed the lowest i.e.
12.28 per cent towards gross working capital.

Computation of working capital with respective to percentage

Year

Inventories /
Working
capital

Debtors /
Working
capital

Cash & Bank

Balance/ Working
capital

Loans & Advances/

Working capital

1999

18.66841

4.950404

49.07153

27.309657

2000

30.75632

21.6854

12.80247

34.75580146

2001

37.31506

36.87615

12.41562

13.39317247

2002

35.25719

45.53621

5.820076

13.3865254

2003

36.7575

46.07504

6.277647

10.88981092

Mean

31.7509

31.02464

17.27747

19.94699345

FINDINGS & SUGGESTIONS OF THE STUDY

Here the financial position concept means only the short-term position of finance. The
company has a satisfactory financial position; Short-term financial position indicates the ability of
the company to pay off the current liability within a short-span of time. This company maintained
satisfactory level of current position and more than the optimum level throughout the five years.
Liquidity position is satisfactory and the current assets and liabilities have positive
correlation. The current ratio position of the company is tested and concluded that the
mean current ratio does not differ significantly from the standard.
On an average, this companys working capital turnover ratio was 16.104 which is less
than the desired level. The correlation coefficient of working capital and sales of this
company was positive (0.714) which was tested and concluded the correlation between
the working capital and sales is not significant.
This company increases the credit sales every year. The company debtors level of
turnover is somewhat satisfactory. The correlation coefficient of debtors and sales was
positive, tested through the hypothesis and concluded that the correlation between debtors
and sales is significant.
On an average, the company was maintaining the credit period of 35 days; the collection
effort of this company was satisfactory.

 The companys payable period should be greater than the average collection period which
will be appreciable. The company payable management was good and the company sales
performance is not desired level. It is because of cutthroat competition, poor collection
policy and other external factors.
As this business firm is a profit seeking one, it has to utilise all of its resources to achieve
this goal. This company is trying to enhance the value of its own and thereby that of its
shareholders. While searching for Profitability, the liquidity and solvency position are crucial
elements to be watched carefully. On the basis of the analysis and observation, an attempt is made
to offer some suggestions as below.
The average collection period should be maintained the same level because the debtors
collection period is found to be satisfactory. At the same time, this company payable period is
found to be very high, this will affect the liquidity position positively and it may be call for
low fewer investments in receivables will arrives. So the company should maintain a
proportional changes in collection policies in order strengthen the collection department.
There was decrease in trend in the net profit it is because of investment in all receivables
increased substantially. So the company should increase the sales level in order to achieve the
impressive profit.
CONCLUSION
It could be inferred from the above analysis that, the efficiency of the receivables
management of this company was satisfactory. The competition is a major challenge that every
finance manager encounters during their working capital decision making process for optimum
utilisation of scarce resources. To examine the effects of receivables management, it is important
to note the difference between liberalised credit period and the profitability. It is the change in the
investments in receivables level and costs involved in that creates crucial difference between
these two. Therefore, the finance manager should take into cognizance the effect of credit policy
to manage effectively, monitor efficiently, plan properly and review periodically to remove bottle
necks to reap maximum profits and increase its turnover.

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