1

CHAPTER 1
INTRODUCTION

CHAPTER 1
INTRODUCTION

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.
Receivables

may b e r ep re s e n te d b y 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.

Capital Cost
There is no denying that maintenance of receivables by a firm leads to
blockage of its financial resources due to the tie log that exists between the date of
sale of goods to the customer and the date of payment made by the customer. But
the bitter fact remains that the firm has to make several payments to the
employees, suppliers of raw materials and the like even during the period of time
lag. Thus, a firm in the course of expanding sales through receivables makes way
for additional capital costs.

Production and Selling Cost

These costs are directly proportionate to the increase in sales volume. In
other words, production and selling cost increase with the very expansion in the
quantum of sales. In this respect, a firm confronts two situations; firstly when the
sales expansion takes place within the range of existing production capacity, in
that case only variable costs relating to the production and sale would increase.
Secondly, when the production capacity is added due to expansion of sales in
excess of existing production capacity. In such a case incremental production and
selling costs would increase both variable and fixed costs.

Delinquency Cost
This type of cost arises on account of delay in payment on customer's
part or the failure of the customers to make payments of the receivables as and
when they fall due after the expiry of the credit period. Such debts are treated as
doubtful debts. They involve: (i) Blocking of firm's funds for an extended period of time,
(ii) Costs associated with the collection of overheads, remainders legal expenses
and on initiating other collection efforts.

Default Cost
Delinquency cost arises as a result of customers delay in payments of
cash or his inability to make the full payment from the firm of the receivables due
to him. Default cost emerges a result of complete failure of a defaulter (customer)
to pay anything to the firm in return of the goods purchased by him on credit.
When despite of all the efforts, the firm fails to realize the amount due to its debtors
because of him complete inability to pay for the same. The firm treats such debts as
bad debts, which are to be written off, as cannot be recovers in any case.

FACTORS AFFECTING THE SIZE OF RECEIVABLES:

Common factors determining the level of receivables

The size of receivables is determined by a number of factors for

receivables being a major component of current assets. As most of them varies
from business the business in accordance with the nature and type of business.
Some main and common factors determining the level of receivable are presented
by way of diagram in figure given below and are discuses below :

Stability of Sales
Stability of sales refers to the elements of continuity and consistency in
the sales. In other words the seasonal nature of sales violates the continuity of

sales in between the year. So, the sale of such a business in a particular season
would be large needing a large a size of receivables. Similarly, if a firm supplies
goods on installment basis it will require a large investment in receivables.

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 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.

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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.

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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 well-established
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.
In the light of this quotation, the principles of receivables management can
be stated as:
1. Allocation or Authority
2. Selection of Proper Credit Terms
3. Credit Investigation
4. Sound Collection Policies and Procedures
OBJECTIVES OF CREDIT MANAGEMENT:

To attain not maximum possible but optimum volume of sales

To exercise control over the cost of credit and maintain it on a minimum

possible level.

To keep investment at an optimum level in form of the receivables

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To plan and maintain a short average collection period.

The period goal of receivables management is to strike a golden mean

among risk, liquidity and profitability turns out to be effective marketing tool. As
it helps in capturing sales volume by winning new customers besides retaining to
old ones.

CREDIT POLICY:
Credit policy of every company is at large influenced by two conflicting
objectives irrespective of the native and type of company. They are liquidity and
profitability. Liquidity can be directly linked to book debts. Liquidity position of
a firm can be easily improved without affecting profitability by reducing the
duration of the period for which the credit is granted and further by collecting the
realized value of receivables as soon as they fails due. To improve profitability
one can resort to lenient credit policy as a booster of sales, but the implications
are: 1. Changes of extending credit to those with week credit rating.
2. Unduly long credit terms.
3. Tendency to expand credit to suit customer's needs; and
4. Lack of attention to over dues accounts.
The three important decisions variables of credit policy are:

1. Credit terms,
2. Credit standards, and
3. Collection policy.

1. Credit Terms
Credit terms refer to the stipulations recognized by the firms for making
credit sale of the goods to its buyers. In other words, credit terms literally mean
the terms of payments of the receivables

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There are two important components of credit terms which are detailed below:(A) Credit period and
(B) Cash discount terms
A) Credit period
"Credit period is the duration of time for which trade credit is extended.
During this time the overdue amount must be paid by the customers."
While determining a credit period a company is bound to take into
consideration various factors like buyer's rate of stock turnover, competitors
approach, the nature of commodity, margin of profit and availability of funds etc.
The general way of expressing credit period of a firm is to coin it in
terms of net date that is, if a firm's credit terms are "Net 30", it means that the
customer is expected to repay his credit obligation within 30 days.
A firm may tighten its credit period if it confronts fault cases too
often and fears occurrence of bad debt losses. On the other side, it may
lengthen the credit period for enhancing operating profit through sales expansion.
Anyhow, the net operating profit would increase only if the cost of extending
credit period will be less than the incremental operating profit. But the increase
in sales alone with extended credit period would increase the investment in
receivables too because of the following two reasons: (i) Incremental sales result into incremental receivables,
(ii) The average collection period will get extended, as the customers will
be granted more time to repay credit obligation.
(B) Cash Discount Terms
The cash discount is granted by the firm to its debtors, in order to
induce them to make the payment earlier than the expiry of credit period allowed
to them. Granting discount means reduction in prices entitled to the debtors so as
to encourage them for early payment before the time stipulated to the i.e. the
credit period.
Cash discount is expressed is a percentage of sales. A cash discount term

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is accompanied by (a) the rate of cash discount, (b) the cash discount period, and
(c) the net credit period. For instance, a credit term may be given as "1/10 Net 30"
that mean a debtor is granted 1 percent discount if settles his accounts with the
creditor before the tenth day starting from a day after the date of invoice. But in
case the debtor does not opt for discount he is bound to terminate his obligation
within the credit period of thirty days.
To make cash discount an effective tool of credit control, a business
enterprise should also see that is allowed to only those customers who make
payments at due date. And finally, the credit terms of an enterprise on the receipt
of securities while granting credit to its customers. Credit sales may be got secured
by being furnished with instruments such as trade acceptance, promissory notes or
bank guarantees

2. Credit Standards
Credit standards refers to the minimum criteria adopted by a firm for the
purpose of short listing its customers for extension of credit during a period of
time. Credit rating, credit reference, average payments periods a quantitative basis
for establishing and enforcing credit standards. Optimum credit standards can be
determined and maintained by inducing tradeoff between incremental returns and
incremental costs.

Analysis of Customers
The quality of firm's customers largely depends upon credit standards. The
quality of customers can be discussed under too main aspects; average collection
period and default rate.
(i)

Average Collection Period

(ii)

Default Rate

I.M. Pandey has cited three Cs of credit termed as character,

capacity and condition that estimate the likelihood of default and its effect
on the firms' management credit standards. Two more Cs has been added to the

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three Cs of I.M. Pandey, namely; capital and collateral.

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 & SCOPE 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.
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
carefully

too much credit, or not managing the credit policy

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.

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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

1.4. 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.

1.5. RESEARCH METHODOLGY

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.
1.5.1. RESEARCH DESIGN

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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.
1.5.2. 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.
For this research, the data is collected from the annual reports of the
company from the year 2008-09 to 2012-13. The annual report can be considered
as the most important and reliable source of financial data.

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1.5.3. 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 2012- Apr 2013)
Trend of sales (from Mar 2012- Apr 2013)

1.6. CHAPTERISATION
The project consists of five chapters as described below:
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.

19

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.
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.
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

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CHAPTER 2
LITERATURE REVIEW

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CHAPTER 2
LITERATURE REVIEW

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

22

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.
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.

23

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.
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

24

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.
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

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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
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

26

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.
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

27

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.
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.

28

CHAPTER 3
PROFILE

29

CHAPTER-3
PROFILE
INDUSTRY PROFILE
India has been known as the original home of sugar and sugarcane. Indian
mythology supports the above fact as it contains legends showing the origin of
sugarcane. India is the second largest producer of sugarcane next to Brazil. Presently,
about 4 million hectares of land is under sugarcane with an average yield of 70
tonnes per hectare.
India is the largest single producer of sugar including traditional cane sugar
sweeteners, khandsari and Gur equivalent to 26 million tonnes raw value followed by
Brazil in the second place at 18.5 million tones. Even in respect of white crystal
sugar. Indian has ranked No. 1 position in 7 out of last 10 years.
Traditional sweeteners Gur & Khandsari are consumed mostly by the rural
population in India. In the early 1930s nearly 2/3rd of sugarcane production was
utilized for production of alternate sweeteners, Gur & Khandsari. With better
standard of living and higher incomes, the sweetener demand has shifted to white
sugar. Currently, about 1/3rd sugarcane production is utilized by the Gur &
Khandsari sectors. Being in the small scale sector, these two sectors are completely
free from controls and taxes which are applicable to the sugar sector.
The advent of modern sugar processing industry in India began in 1930 with
grant of tariff protection to the Indian sugar industry. The number of sugar mills
increased from 30 in the year 1930 - 31 to 135 in the year 1935-36 and the
production during the same period increased from 1.20 lakh tonnes to 9.34 lakh
tonnes under the dynamic leadership of the private sector.
The era of planning for industrial development began in 1950-51 and
Government laid down targets of sugar production and consumption, licensed and
installed capacity, sugarcane production during each of the Five Year Plan periods.

30

COMPANY PROFILE
EID Parry Limited is a public company headquartered in Chennai, South
India that has been in business for more than 225 years. It has many firsts to its
credit, including the manufacturing of fertilizers (1906) for the first time in
the Indian subcontinent. The company is currently engaged in the manufacture and
marketing of sugar and bio-products. Parry's is the oldest surviving mercantile name
in Chennai.
ORIGIN

EID Parry is one of the oldest business entities of the Indian subcontinent and
was originated by Thomas Parry, a Welshman who came to India in the late
1780s. On 17 July 1788, he started a business of banking and piece goods.

By 1819, a partnership firm named "Parry and Dare" Company was founded
by Thomas Parry and John William Dare. Parry's Corner, one of the most
prominent central business districts of Chennai, derives its name from Parry.
Over a period of time, the business established by Parry continued to grow, and
its flagship company EID Parry emerged.

In 1908 Parry & Company set-up The Pottery unit in Ranipettai. Over the
years it was named as "Parryware".

Parry & Company Limited and East India Distileries & Sugars Limited were
merged to form EID Parry India Limited. In its more than 200 year existence,
this house remained active and operated many businesses.

The Murugappa Group took over EID Parry in 1981 from financial & public
institutions such as Life Insurance Corporation Of India, United Assurance Co,
and Unit Trust of India.

31

Sugar
E.I.D Parry along with its subsidiaries has nine sugar plants spread across South
India of which four are in Tamil Nadu, one in Puducherry, three in Karnataka and
one in Andhra pradhesh. The company has sugarcane crushing capacity of 34,750
TCD and cogeneration capacity of 146 MW across its sugar mills. The integrated
sugar units have been designed to optimize process efficiencies, increase sugarcane
recovery ratio and increase energy efficiency through reduced steam and power
consumption.
E.I.D Parry continues to be one of the low cost producers of international quality
sugar, through its innovative process and farmer centric practices.
South India and Tamil Nadu in particular has many advantages for sugar production
and E.I.D Parry is able to capitalize on these advantages:

Cane productivity and sugar recovery per unit area is highest. The average
farm size is less than a hectare and is owned by farmers. Geographically,
Tamil Nadu has the advantage of good soil and abundant water and yield is

highest among the various states in India.

Farmers are willing to adopt new farming practices and cultivation

methodologies, including mechanization, to improve yield

Access to ports to reach export market and improved development of

infrastructure facilities.
Direct relationship with cane growers to ensure adequate cane availability

and supply
Sugarcane breeding remains the focus to ensure timely availability of never
varieties of cane.

Cane and manufacturing

New technologies are implemented in all the milling process, for efficient
process. Factories in Tamil Nadu are integrated with co-generation and distillery
operating at Nellikuppam & Sivaganga. In the sugar process, different types viz. raw
sugar, white sugar and value added products are produced.

32

To make the value chain sustainable, in-house Cane R&D and Cane
Extension are driving the technology to field for the better yield, recovery
improvement and cost reduction. Information technology developments are fully
utilized for efficient data system management and process monitoring.
Value added products
E.I.D Parry has been retailing its brand sugar in South India. Apart from
branded retail sugar, the company is moving up with the value chain to products like
pharma grade sugar which improve the margins. Investments are being made not
only in appropriate manufacturing facilities, but also in branding and offering
customized solutions for institutional customers.
Co-products
Indias demand for the power and the blending of ethanol with petrol opens
the opportunity for co products.

Co-generation of power (Cogen): The growing energy consumption in India

allows the sugar industry to play an increasingly important role in the energy
economy. Additionally, the power generated and exported by the cogen unit is
environment friendly and made available to rural areas where the mills are
located, by a de-centralized infrastructure. Thus, sugarcane is increasingly
becoming an energy crop. The former is in line with Clean Development
Mechanism (CDM) methodologies for cogen power and as a result carbon
credits have started flowing into the company.

Molasses and alcohol: Molasses, the by-product of sugarcane, can be

converted into various types of alcohols like Rectified Spirit, ENA and Fuel
Ethanol, providing another earning stream for the business.
Both these businesses are green considering their renewable nature
and, more importantly, given the relatively steady demand; help reduce the
vulnerability of the company, which is exposed to the cyclicality of the sugar
business.

33

SUGAR
E.I.D Parry set up Indias first sugar plant at Nellikuppam in 1842. The
Pioneering spirit has seen E.I.D Parry setting up the first fully automated sugar plant
at Pudukottai in 2000, a distillery, and more recently, zero waste integrated sugar
complexes.
E.I.D Parry produces variety of sugars at its four fully automated plants in
Tamil Nadu and a fifth one at Puducherry. These cater to the food, bakery,
confectioneries and beverage manufacturing industries, and are also used in pharma
applications.

BIO-PRODUCTS

The Bio-products division of E.I.D Parry is committed to helping farmers

produce profitable agricultural produce through safe and sustainable agricultural
inputs.
The division has a state-of-the-art Azadirachitin manufacturing facility in
Tamil Nadu, to produce Neemazal, an Eco-friendly botanical Bio-pesticide. The ISO14001 certified manufacturing unit is the worlds largest Azadirachitin extraction
plant. Besides these, theres also Neemazal and Abda a granular plant vitaliser
formulation for early establishment, crop vigour and higher yields. Envisaging active
participation in the global green drive, new non-azadirachitin, organic/ green agri
inputs are also being pursued for introduction in future.

NUTRACEUTICALS

A division of E.I.D Parry (India) Ltd, Parry Nutraceuticals is a world leader in

nutritional food supplements- the only producer of 100% Vegetarian Certified
Organic Spirulina. It is the only one in the world to commercially produce three
different species of micro algae at large scale. Parry Nutraceuticals exports to over 38

34

countries, the main markets being North America, the EU, Japan, Korea, Malaysia,
Russia, Australia and New Zealand.
With the global trend moving towards preventive healthcare, Parry
Nutraceuticals is at the threshold of a dynamic growth era.

Credit Control Policy and Procedures OF E.I.D Parry Limited

1.Introduction

As the organization grows, it will be difficult to address individual issues

in the absence of clear-cut policies and procedures on all major business activities
of the organization. Such policies, apart from serving as references to the functional
managers will also help new comers to understand the organizations culture and
practices and integrate smoothly into the working of the organization.

Credit being one of the major tools of marketing and risk management a
major focus area for organization as a whole, it is very important to have a welldefined policy on credit control and risk management.

2. Objectives

To determine the criteria for evaluating the creditworthiness of customers of

different categories

To develop guidelines for fixing credit limits for individual customers both in
terms of quantum and age.

3. Creditworthiness

Creditworthiness of a customer is determined based on the following

criteria. Customers are rated on each of these criteria and are awarded points based

35

on their standing. The sum total of the points obtained by a customer (Max 200)
will form the basis for awarding credit ratings to customers ranging from E
(Lowest) to AAA (Highest).
3.1. Constitution of the customer
While Govt. undertakings are most secure, proprietary concerns/partnership
firms rank low in the list. Suggested ratings are
Govt. undertakings
Public Ltd. companies-Listed
Public Ltd. companies-Unlisted
Private limited companies
Partnership firms
Proprietary concerns

20 (max)
18
16
16
14
12

3.2. Subsistence in business:

Based on the customers existence in business ratings are given as under:
Existence in business
More than 10 years
8 10 years
5 8 years
1 5 years
Less than 1 year

Rating
20
16
12
8
4

4. Credit Limits

Base Credit limit for each customer would be equivalent to the average
actual sales value attributable to the approved credit days fixed for the customer.
e.g., a customer whose monthly average sales is 18 lacs and agreed credit period
120 days would be fixed with a Base credit limit of Rs 72 lacs (off take of four
months). For this purpose, Average sales per month would be arrived at based

36

on actual sales made to the customer for the past one year from the date of
assessment.
Based on the rating of each customer, the credit limit would be fixed as given
below:
Customer

Credit Limit

Rating
AAA

110% of base credit limit

AA

100% of base credit limit

80% of base credit limit

70% of base credit limit

60% of base credit limit

50% of base credit limit

30% of base credit limit

5. Periodicity of revising Customer credit limits

Customer credit limits assessment will be revised every year in the month
of December.

6. Template for credit limit evaluation

Spread sheet Attached

7. Responsibility of Credit Limit Fixation in SAP

Finance team will send the customer wise base credit limits to marketing
team seeking their inputs on evaluation of other parameters like profits of
customers etc.,
Customer wise credit limit assessed for next year would be uploaded in
SAP by Business Finance head with the approval of Head of Sales and Marketing

37

and Business Head.

8. Approval authority for mid-term credit limit enhancement / reduction
Mid-term credit limit enhancement / reduction for any customer have to
be approved by Business head based on the recommendation of Head of Sales &
Marketing and Business Finance.

38

CHAPTER 4
DATA ANALYSIS AND INTERPRETATION

39

CHAPTER 4
DATA ANALYSIS AND INTERPRETATION

RATIO ANALYSIS
Ratio Analysis is the basic tool of financial analysis and financial analysis
itself is an important part of any business planning process as SWOT (Strengths,
Weaknesses, Opportunities and Threats), being the basic tool of the strategic analysis
plays a vital role in a business planning process and no SWOT analysis would be
complete without an analysis of companys financial position. In this way Ratio
Analysis is very important part of whole business strategic planning.
A. LIQUIDITY
4.1. Current ratio:
Current ratio is the ratio of current assets of a business to its current
liabilities. It is the most widely used test of liquidity of a business and measures the
ability of a business to repay its debts over the period of next 12 months.

(4.1)
Current Ratio = Current Assets/ Current liabilities

4. 1. TABLE SHOWING THE CURRENT RATIO FROM THE YEAR 2009 TO

2013

40

YEAR

CURRENT
ASSETS

CURRENT
LIABILITIES

CURRENT
RATIO

2013

1,31,440

1,39,468

0.94

2012

71,845

76,785

0.94

2011

76,559

49,616

1.54

2010

58,980

31,419

1.88

2009

51,997

25,413

2.05

4. 1. CHART SHOWING THE CURRENT RATIO FROM THE YEAR 2009

TO 2013
CURRENT RATIO
2.50
1.88

2.00
CURRENT RATIO

1.50
1.00

0.94

2.05

1.54

0.94

0.50
0.00

Current assets are enough to settle current liabilities. High value of current
ratio may indicate existence of idle or underutilized resources in the company.

4.2. Quick ratio:

41

Quick ratio or Acid Test ratio is the ratio of the sum of cash and cash
equivalents, marketable securities and accounts receivable to the current liabilities of
a business. It measures the ability of a company to pay its debts by using its cash and
near cash current assets (i.e. accounts receivable and marketable securities).

(4.2)
Quick ratio = Liquid assets/ Current liabilities

4. 2. TABLE SHOWING THE QUICK RATIO FROM THE YEAR 2009 TO

2013

YEAR

LIQUID
ASSETS

CURRENT LIABILITIES

QUICK RATIO

2013

1,09,896

1,39,468

0.79

2012

46,302

76,785

0.60

2011

57,513

49,616

1.16

2010

39,921

31,419

1.27

2009

37,075

25,413

1.46

4. 2. CHART SHOWING THE QUICK RATIO FROM THE YEAR 2009 TO

2013

42

QUICK RATIO

2.00

1.60

3.00

1.27
1.16

1.20

0.80
0.60

5.00
1.46

1.40

1.00

4.00

1.00
0.79

QUICK RATIO
0.60

0.40
0.20
0.00

This ratio helps us to determine whether a business would be able to pay off
all its debts by using its most liquid assets. A quick ratio of less than one indicates
that a business would not be able to repay all its debts by using its most liquid assets.
A higher quick ratio is preferable because it means greater liquidity. However
a quick ratio which is quite high, say 4.00, is not favorable to a business as whole
because this means that the business has idle current assets which could have been
used to create additional projects thus increasing profits. In other words, very high
value of quick ratio may indicate inefficiency.

4.3. Net working capital to sales ratio:

43

Working capital is a measure of liquidity of a business. If current

assets of a business at the point in time are more than its current liabilities the
working capital is positive, and this tells that the company is not expected to
suffer from liquidity crunch in near future.
(4.3)
Net working capital to sales ratio = net working capital/ sales
4.3. TABLE SHOWING NET WORKING CAPITAL TO SALES RATIO

YEAR

NET
WORKING
CAPITAL

SALES

NET WORKING CAPITAL

TO SALES RATIO

2013

-8,028

1,99,249

-0.04

2012

-4,940

1,54,179

-0.03

2011

26,943

1,27,141

0.21

2010

27,561

1,14,732

0.24

2009

26,584

75,557

0.35

2009
26,584
FROM THE YEAR 2009-2013

75,557

0.35

4.3. CHART SHOWING NET WORKING CAPITAL TO SALES RATIO

FROM THE YEAR 2009-2013

44

NET WORKING CAPITAL TO SALES RATIO

0.40

1.00

2.00

3.00

4.00

5.00
0.35

0.35
0.30
0.25
0.20

0.21

0.24

NET WORKING CAPITAL TO SALES RATIO

0.15
0.10
0.05
0.00
-0.05

-0.04

-0.03

-0.10

If current assets are less than current liabilities the working capital is
negative, and this communicates that the business may not be able to pay off its
current liabilities when due.

B. PROFITABILITY
4. 4. Gross Profit Margin:
Gross margin ratio is the ratio of gross profit of a business to its revenue. It is
a profitability ratio measuring what proportion of revenue is converted into gross
profit (i.e. revenue less cost of goods sold).

Gross profit margin = Gross profit / Sales * 100

(4.4)

4. 4. TABLE SHOWING GROSS PROFIT MARGIN FROM THE YEAR 20092013

45

YEA
R

GROSS
PROFIT

GROSS PROFIT
MARGIN %

SALES

2013

36,107

1,99,249

0.18

2012

13,607

1,54,179

0.09

2011

6,740

1,27,141

0.05

2010

24,746

1,14,732

0.22

2009

88,840

75,557

1.18

4. 4. CHART SHOWING GROSS PROFIT MARGIN FROM THE YEAR

2009-2013
GROSS PROFIT MARGIN

2.00

1.40

3.00

4.00

1.18

1.20
1.00

5.00

1.00
GROSS PROFIT
MARGIN

0.80
0.60
0.40
0.20

0.18

0.22
0.09

0.05

0.00

Gross margin ratio measures profitability. Higher values indicate that more
cents are earned per dollar of revenue which is favorable because more profit will be
available to cover non-production costs. In this case higher gross margin ratio means
that the retailer charges higher markup on goods sold. But in the year 2013 it seems
to be very low.
4. 5. Net profit margin:

46

It is a popular profitability ratio that shows relationship between net profit after
tax and net sales. It is computed by dividing the net profit (after tax) by net sales.

Net Profit Margin = Net Profit after Tax / Net Sales * 100

(4.5)

4. 5. TABLE SHOWING THE NET PROFIT MARGIN FROM THE YEAR

2009-2013

YEAR

4.

NET PROFIT

NET PROFIT
MARGIN
%

SALES

2013

33,171

1,99,249

0.17

2012

13,732

1,54,179

0.09

2011

7,926

1,27,141

0.06

2010

20,528

1,14,732

0.18

2009

69,196

75,557

0.92

CHART SHOWING THE NET PROFIT MARGIN FROM THE YEAR 20092013

5.

47

1.00

1.00

2.00

NET PROFIT MARGIN

3.00

4.00

5.00
0.92

0.90
0.80
0.70

NET PROFIT MARGIN

0.60
0.50
0.40
0.30
0.20

0.18

0.17
0.09

0.10

0.06

0.00

Comparing the ratio with the previous years ratio, the industrys average and
the budgeted net profit ratio. A high ratio indicates the efficient management of the
affairs of business.

C. ACTIVITY
4. 6. Inventory Turnover Ratio:
Inventory turnover is the ratio of cost of goods sold by a business to its
average inventory during a given accounting period. It is an activity ratio measuring
the number of times per period; a business sells and replaces its entire batch of
inventory again.
Inventory Turnover Ratio = Inventory / Net Sales

(4.6)

48

YEAR

SALES

AVERAGE INVENTORY

INVENTORY
TURNOVER RATIO
(times)

2013

1,99,249

51,898

3.84

2012

1,54,179

22,295

6.92

2011

1,27,141

19,053

6.67

2010

1,14,732

16,991

6.75

2009

75,557

16,513

4.58

4. 6. TABLE SHOWING THE INVENTORY TURNOVER RATIO FROM THE

YEAR 2009 TO 2013

4. 6. CHART SHOWING THE INVENTORY FROM THE YEAR 2009 TO

2013
INVENTORY TURNOVER RATIO
8.00

6.92

7.00

6.67

6.75

6.00
5.00
4.00

1.00

INVENTORY TURNOVER
RATIO

3.00

3.00
2.00

4.00

3.84

5.00
4.58

2.00
1.00

0.00

A higher value of inventory turnover indicates better performance and lower

value means inefficiency in controlling inventory levels. A lower inventory turnover
ratio may be an indication of over-stocking which may pose risk of obsolescence and
increased inventory holding costs. However, a very high value of this ratio may be
accompanied by loss of sales due to inventory shortage.
4. 7. Accounts Receivable Turnover Ratio:

49

Accounts receivable turnover is the ratio of net credit sales of a business to its
average accounts receivable during a given period, usually a year. It is an activity
ratio which estimates the number of times a business collects its average accounts
receivable balance during a period.

Accounts receivable turnover ratio = Net Credit Sales/ Average Accounts

Receivable

(4.7)

4. 7. TABLE SHOWING THE ACCOUNTS RECEIVABLE RATIO FROM

THE YEAR 2009 TO 2013

YEAR

NET CREDIT
SALES

AVERAGE ACCOUNTS
RECEIVABLE

ACCOUNTS
RECEIVABLE
TURNOVER
RATIO (times)

2013

1,99,249

21,790

9.14

2012

1,54,179

17,955

8.59

2011

1,27,141

12,310

10.33

2010

1,14,732

12,592

9.11

2009

75,557

11,957

6.32

50

4. 7. CHART SHOWING THE ACCOUNTS RECEIVABLE RATIO FROM

THE YEAR 2009 TO 2013
ACCOUNTS RECEIVABLE TURNOVER RATIO
12.00
10.33
10.00

9.14

9.11

8.59

8.00
ACCOUNTS RECEIVABLE TURNOVER RATIO

6.32

6.00

5.00
4.00

4.00
2.00

3.00
2.00
1.00

0.00

Generally a high value of accounts receivable turnover is favourable and

lower figure may indicate inefficiency in collecting outstanding sales. Increase in
accounts receivable turnover overtime generally indicates improvement in the
process of cash collection on credit sales. A very high value of this ratio may not be
favourable, if achieved by extremely strict credit terms since such policies may repel
potential buyers.

4. 8. Average collection period:

It is also called Days' sales outstanding ratio which is used to measure the
average number of days a business takes to collect its trade receivables after they
have been created. It is an activity ratio and gives information about the efficiency of
sales collection activities.
Average Collection Period = Accounts Receivable/ Credit Sales
* Number of Days

(4.8)

51

4. 8. TABLE SHOWING THE AVERAGE COLLECTION PERIOD FROM

THE YEAR 2009 TO 2013
NO. OF
WORKING

ACCOUNTS

AVERAGE

RECEIVABLE

COLLECTION

YEAR
DAYS
TURNOVER RATIO
PERIOD (days)
2013
365
9.14
40
2012
365
8.59
42
2011
365
10.33
35
2010
365
9.11
40
2009
365
6.32
58
4. 8. CHART SHOWING THE AVERAGE COLLECTION PERIOD FROM
THE YEAR 2012 TO 2013
AVERAGE COLLECTION PERIOD
70

58

60
50
40

40

42
35

AVERAGE COLLECTION
PERIOD

40

30
20
10
0

Since it is profitable to convert sales into cash quickly, this means that a lower
value of Days Sales Outstanding is favorable whereas a higher value is unfavorable.
However it is more meaningful to create monthly or weekly trend of DSO. Any
significant increase in the trend is unfavorable and indicates inefficiency in credit
sales collection.
4. 9. TABLE SHOWING TURNOVER OF VARIOUS BUSINESS SEGMENTS
OF E.I.D PARRY LTD

52

Bus. Segments
Sugar

2012-13

2011-12

1,53,293

1,19,210

Cogeneration

14,409

13,064

Distillery

20,186

11,508

1,87,888

1,43,782

Bio-pesticides

7,321

7,628

Nutraceuticals

5,731

4,359

408

369

13,460

12,356

2,01,348

1,56,138

Sugar total

Others
Bio & Nutra Total

Total

4. 9. CHART SHOWING TURNOVER OF VARIOUS BUSINESS SEGMENTS

OF E.I.D PARRY LTD

53

TURNOVER OF VARIOUS BUSINESS SEGMENTS

200000
180000
160000
140000
120000
100000
80000
60000
40000
20000
0

Sum of 2012-13
Sum of 2011-12

The total turnover of the Company grew by 29% from 1,56,138 Lakh in the year 2011-12 to
2,01,348 Lakh in the year 2012-13. The increment was the result of the following:

Growth in Sugar divisions sales from 1,43,782 lakh to 1,87,888 Lakh in 2012-13 mainly
driven by increased power export, alcohol sales and merger of Haliyal & Sankili units with
EIDs sugar business.

Growth in Nutraceuticals divisions sales from ` 4,359 lakh to ` 5,731 lakh in 2012-13.

4. 10. TABLE SHOWING THE MONTHLY TOTAL SALES DURING THE

FINANCIAL YEAR 2012-2013

54

SUMMARY OF MONTHS

TOTAL SALES
AMOUNT (RS)

Sum of Apr-12 Total

Sum of May-12 Total
Sum of Jun-12 Total
Sum of Jul-12 Total
Sum of Aug-12 Total
Sum of Sep-12 Total
Sum of Oct-12 Total
Sum of Nov-12 Total
Sum of Dec-12 Total
Sum of Jan-13 Total
Sum of Feb-13 Total
Sum of Mar-13 Total

7575149.36
42780178
98964913
81667999
43150863
81994402
25991279.94
43703675.58
82407937.47
50662451.95
121895947
730894185

4. 10. CHART SHOWING TREND OF SALES FOR THE FINANCIAL YEAR

2012-2013

TREND OF SALES
800000000
700000000
600000000
500000000
400000000
300000000
200000000
100000000
0

trend of sales

From the above chart it indicates that in the month of March-2013the sales is
very high and in the beginning of the year it seems to be lowest and later in the
month of October-2012 again there is a fall in sales value.
4. 11. CHART SHOWING THE TREND OF DEBTORS FOR THE
FINANCIAL YEAR 2012-2013

55

TREND OF DEBTORS
800
Sum of MAR 2013
700

Sum of Feb-13

Sum of Jan-13

Sum of Dec-12

Sum of Nov-12

Sum of Sep-12

Sum of Aug-12

Sum of Jul-12

Sum of Jun-12

600
500
Sum of Oct-12
400
300
200
Sum of May-12
100

Sum of Apr-12

0
Total

This chart indicates that amount due seems too low in the beginning of the
year and subsequently it has increased at the end of the year. In the middle of the
year the debtor value seems to remain constant i.e. in the month of August,
September and October.

4. 12. CHART SHOWING MONTHWISE SUMMARY OF DEBTORS

56

MONTHWISE SUMMARY OF DEBTORS

600
Sum of MAR 2013
500

Sum of Feb-13

Sum of Jan-13

Sum of Dec-12

Sum of Oct-12

Sum of Sep-12

Sum of Aug-12

Sum of Jun-12
east
HO

Sum of May-12
south

Sum of Apr-12
west

400
300
VALUES
Sum of Nov-12
200
100
0
Sum of Jul-12

REGION

The above chart gives a detailed report of the debtors showing their status in
regional level where the highest amount due is indicated in the south region. And the
head office which is in Chennai indicated the lowest.

57

CHAPTER 5
RESULTS AND DISCUSSION

CHAPTER 5

58

RESULTS AND DISCUSSION

5.1. SUMMARY OF FINDINGS

1. High value of current ratio may indicate existence of idle or underutilized
resources in the company.(from table 4.1 and chart 4.1)
2. Quick ratio of less than one indicates that the current assets comprises of too
much non-liquid assets. (from table 4.2 and chart 4.2)
3. Current assets are less than current liabilities the working capital is negative,
and this communicates that the business may not be able to pay off its current
liabilities when due. (from table 4.3 and chart 4.3)
4. Lower value of gross profit margin indicates that fewer cents are earned per
dollar of revenue which is unfavorable because less profit will be available to
cover non-production costs. (from table 4.4 and chart 4.4)
5. Comparing the net profit ratio with the previous years ratio, the industrys
average and the budgeted net profit ratio. A lower ratio indicates the
inefficient management of the affairs of business. (from table 4.5 and chart
4.5)
6. It is observed that in the year 2013 it indicates a lower inventory turnover
ratio, an indication of over-stocking which may pose risk of obsolescence
and increased inventory holding costs. In the year 2012, it indicates a very
high value of this ratio which may be accompanied by loss of sales due to
inventory shortage. (from table 4.6 and chart 4.6)
7. In the year 2011 it is observed that there is a high value of accounts
receivable turnover which is favourable and lower figure may indicate
inefficiency in collecting outstanding sales. (from table 4.7 and chart 4.7)
8. Since it is profitable to augment working capital, this means that a lower
value of Days Sales Outstanding is favorable whereas a higher value is
unfavorable. Here in the year 2013 it is low which favorable. (from table 4.8
and chart 4.8)

59

9. The total turnover of the Company grew by 29% from 1,56,138 Lakh in the
year 2011-12 to 2,01,348 Lakh in the year 2012-13. (from table 4.9 and chart
4.9)

5.2. SUGGESTIONS
From the study made on the receivables position of the Company it is
observed that they are in very have to:1.
2.
3.
4.
5.

Strengthen their management of receivables.

State explicit and articulate credit policies.
An efficient collection program.
Better co ordination between production, sales, and finance departments.
A higher value of inventory turnover indicates better performance efficiency

in controlling inventory levels.

6. A very high value of accounts receivable turnover ratio may not be favorable, if
achieved by extremely strict credit terms since such policies may repel
potential buyers.

5.3. CONCLUSION
This project focuses on the receivables management which plays a crucial
role in the working capital of the company. The analysis of the project reveals that
there is high volatility in extending credit period to customers.
The analysis further reveals that there is great scope in increasing the sales
volume, in managing better collection.
The suggestions offered clearly indicated the efforts to be undertaken in
better receivables management and increasing the turnover.
If these suggestions are taken note of by company, then define rely the
company can very well manage the working capital position with better collection
through increased sales.

60

APPENDIX

Particulars

As at
As at
As at
As at
As at
March 31, March 31, March 31, March 31, March 31,

61

2013

2012

2011

2010

2009

A. EQUITY AND
LIABILITIES
1. Shareholders' funds
(a) Share Capital

1,758

1,737

1,732

1,727

1,722

1,32,930

120,026

1,13,296

1,07,907

95,210

1,34,688

121,763

1,15,028

1,09,634

96,932

2. Non-Current Liabilities
(a) Long Term Borrowings

75,916

33,327

30,888

57,552

53,853

(b) Deferred Tax Liabilities

13,380

12,564

12,689

13,875

10,888

89,296

45,891

43,577

71,427

64,741

3. Current Liabilities
(a) Short Term Borrowings

96,393

45,644

27,921

26,309

18,362

(b) Trade Payables

21,547

12,513

9,511

(c) Other Current Liabilities

20,497

17,801

11,156

1,031

827

1,028

5,110

7,051

1,39,468

76,785

49,616

31,419

25,413

TOTAL

3,63,452

2,44,439

2,08,221

2,12,480

1,87,086

B. ASSETS
1. Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets

1,22,870

76,494

78,272

81,640

79,515

(ii) Intangible Assets

107

18

(iii) Capital Work in

6,201

4,917

3,250

3,578

7,009

Progress
(b) Non Current
Investments

87,110

67,978

42,714

68,282

48,561

(c) Long Term Loans &

15,724

23,200

7,408

(b) Reserves and Surplus

(Net)

(d) Short Term Provisions

Advances

62

2,32,012

172,594

131,662

1,53,500

1,35,085

2. Current Assets
(a) Current Investments
(b) Inventories

78,253

300
25,543

700
19,046

19,059

14,922

(c) Trade Receivables

21,544

22,036

12,910

11,710

13,474

1,692

3,457

4,940

7,403

8,591

Equivalents
(e) Short Term Loans &

23,854

17,543

38,866

20,612

14,942

Advances
(f) Other Current Assets

6,097

2,966

97

196

68

1,31,440

71,845

76,559

58,980

51,997

3,63,452

244,439

2,08,221

2,12,480

4
1,87,086

(d) Cash and Cash

Miscellaneous expenditure
TOTAL

FINANCIAL HIGHLIGHTS TAKEN FROM ANNUAL REPORT OF

2012-2013 OF E.I.D. PARRY (INDIA) LIMITED

63

REFERENCES

64

1. Joy, O.M.: Introduction to Financial Management (Madras: Institute for Financial

Management and Research, 1978), P.210.
2. Robert N. Anthony: Management Accounting, Op. Cit., P.291
3. Prasanna Chandra: Financial Management, Op. Cit., P.291
4. R.K. Mishra: Problems of Working Capital Op. Cit, P.94
5. R.J. Chambers: Financing Management (Sydney: The Law Book Co., Ltd., 1967),
PP.273-274
6. Agarwal, N.K.: Management of Working Capital, Op. Cit., P.54
7. I.M. Pandey : Op. Cit., P.381

E- REFERENCES

http://www.currentratioformula.com/
http://accountingexplained.com/financial/ratios/receivables-turnover
http://www.eidparry.com/investors/annual-reports.aspx
http://www.eidparry.com/
http://www.scribd.com/doc/28065175/Receivables-Management
http://www.investopedia.com/terms/c/credit-control.asp