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2015

Receivables
Management

Submitted by,
GROUP-13
Megha J
Rohit Mohan
Rohan Sachdeva

231089
231103
231118

Table of Contents
Executive Summary................................................................................................................................. 3
APPLICATION: .......................................................................................................................................... 4
RECEIVABLES MANAGEMENT POLICY AT TATA STEEL: ....................................................................... 4
Innovations: ............................................................................................................................................ 6
Cloud Computing ................................................................................................................................ 6
FI-AR Credit Management .................................................................................................................. 6
NEWSPAPER ARTICLES ............................................................................................................................ 7
Article 1: .............................................................................................................................................. 7
Article 2: .............................................................................................................................................. 8
RESEARCH PAPER-1: ................................................................................................................................ 9
Research Paper-2: ................................................................................................................................. 13

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

Application in Business.
News in the media relating to Receivable Management within 2 year.
Innovations in Receivables Management.
Research Paper relating to Receivables Management within last 3 years

The real life application included in the report is of TATA STEEL. TATA STEEL has entered
into an arrangement whereby it made HDFC Bank its factoring agent. It also insured all its
debtors from The New India Assurance Co. Ltd. This arrangement assured the company of
making good all the losses that it may suffer as a result of failure in payment of its debtors
and managing its working capital efficiently. It also saves the companys time and cost
involved.
The news covered in the report is of Trade Receivables Discounting System which has
recently implemented by RBI which allows an exchange where an MSME that has some
receivables pending from a large corporate will be able to trade the bill.
The second article says that minimum capital of Rs.25 crore for entities setting up
and operating the Trade Receivables Discounting System (TReDS).

There are 2 Research Papers, the 1st one is of Study of Pharmaceutical Industry by Ashish
Mohanty ,Dr Lalat K Pani and Sukhamaya Swain which was published in January 2014. The
objectives of this study was to analyze the efficiency of Receivables Management, analyzes
the financial position in terms of receivables, study aims at finding the size and growth of
receivables & sales and study of detail analysis of the composition of receivables like
debtors and loans & advances.
The 2nd research paper was study of The Impact of Effective Management of Credit Sales
on Profitability and Liquidity of Food and Beverage Industries in Nigeria by By M.S.K.
Ifurueze in year 2013. The objectives
To examine the impact of effective and efficient management of credit sales on
profitability and liquidity of Food and Beverage industries in Nigeria.
To establish the correlation between the level of credit granted to customers and
operating profit of the companies.
And the inferences were:
Effective management of credit sales has a positive relationship with the operating
profit of the companies in the Food and Beverage Sector.
A favourable debtors turnover would result to favourable liquidity position.
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APPLICATION:
RECEIVABLES MANAGEMENT POLICY AT TATA STEEL:
TATA STEEL, recently, entered into an arrangement whereby it made HDFC Bank its
factoring agent. It also insured all its debtors from The New India Assurance Co. Ltd. This
relieved TATA STEEL of any bad debts because, now, in exchange for a factoring commission
to HDFC Bank and an insurance premium to The New India Assurance Co. Ltd., all the
responsibility of collecting payments from debtors was passed on to the Factor(in this case
HDFC Bank). This arrangement assured the company of making good all the losses that it
may suffer as a result of failure in payment of its debtors and managing its working capital
efficiently. It also saves the companys time and cost involved in employment of credit
rating agencies for the assessment of credit to be extended.
TATA STEEL will be able to reduce the following costs due to the triangular arrangement
done.
Collection costs (administrative costs incurred in collecting the receivables from
customers to whom credit sales have been made) will be reduced because HDFC bank will
be responsible in collecting the receivables.
Capital cost: Additional capital which would have been locked in with the customers
could be used somewhere else as the bank will pay TATA STEEL the entire value of invoices
upfront
Delinquency cost: Blocking up of funds for extended period and costs associated with
steps that have to be initiated to collect over dues such as reminders and other collection
efforts such as legal charges whenever necessary would be saved.
Default Cost: Since the agreement is without recourse, TATA STEEL will not be
responsible for any default by customers. So the default cost would also be saved.
The policy is assigned in the name of HDFC BANK LTD., the banker of TATA STEEL. This
makes it the sole beneficiary under this policy and henceforth all claims or recoveries made
thereof are paid directly to the Assignee. However, it might be that TATA STEEL receives the
claims directly from the insurer at times; in that case it has to inform the bank.
The sales are made to the customers as per their respective credit limits which are decided
keeping in mind three points namely:
1) Credit rating of the debtors done by an independent credit rating agency.
2) Debtors bankers report, and

3) Their trading experience with the company and other related parties.
In case of any default or some debtor becoming insolvent, the bank communicates the
matter to the insured before filing the claim to the insurance company.
The interest on the difference between the claim amount and the settlement amount has to
be borne by TATA STEEL along with the discounting charges
STEP BY STEP PROCESS:
1st Step
TATA STEEL recommends customers along with their credit limits and provide necessary
details to HDFC Bank.
New India Assurance Co Ltd. will do a credit appraisal and inform TATA STEEL the
percentage of whole turnover that they will insure (insurable turnover) & charges TATA
STEEL a premium on insured turnover.
HDFC Bank does a credit appraisal and informs the company about the category in which
the customer shall fall.
On completion of the documentation, the transaction starts.
2nd Step
TATA STEEL sends a soft copy of the invoices uploaded through Ethernet and follow up
mails.
The company retains the original invoices with it.
The Bank makes the payment to the company for the sale value on behalf of the
customer.
The Bank deducts invoice discounting charges from the companies account for the
number of days of discounting made.
The Bank confirms the transaction through MIS reports to TATA STEEL.
The Bank receives the payment from the customer after the expiry of the credit period.
3rd Step
The company has entered into an insurance arrangement with New India to safeguard its
interest in case of a default being made by the customer to pay the bank after the expiry of
the credit period.

Innovations:
Cloud Computing
Software solutions have transformed the workplace, and with SaaS applications being
available anytime anywhere all users can be guaranteed to share the same information. This
is why these solutions are particularly suitable for credit risk management. Easy to deploy
on several sites worldwide, they allow data to be shared between the head office of a
company and its different subsidiaries and between all the relevant parties within the
organisation. All the functions of the order-to-cash cycle benefit from centralised tasks and
automated solutions, from the sales team and administrators, the supply chain department,
deliveries and finally the client accounting and financial staff. Various stakeholders including
brokers, insurers, factoring companies and advisers can also benefit from a system that
automates and streamlines all procedures linked to credit management. With access to
critical data in real time, it is much easier to track exposure to risk, accrued provisions, and
cash flow, not just on a daily basis, but hourly, and be informed if a customers own financial
situation deteriorates and put in place measure to limit the financial impact. A software
solution for credit risk management helps to reduce DSO, secure cash flow, underline credit
management policy and increase productivity. Thanks to its flexibility and responsiveness, it
makes the company more proactive in managing and preventing risks, allows optimisation
of costs and supports the performance of the credit insurance programme whilst also
ensuring that all defined governance rules are applied on a daily basis. In our recent poll
amongst credit managers, when asked for their wish list to better support their credit
management, just over half said that they would change or improve their system software .

FI-AR Credit Management


If you implement the Accounts Receivable (FI-AR) application component to manage your
receivables, but a non-SAP system for sales and distribution processing, Credit Management
enables you to assign a credit limit to each customer. When you post an invoice (in FI-AR)
the system then checks whether the amount exceeds the credit limit. Facilities like the
credit master sheet or early warning list help you monitor the customers credit situation.
If you implement both the Accounts Receivable (FI-AR) and Sales and Distribution (SD)
application components, you can specify in Customizing when (at the point of order,
delivery, goods issue and so on) and to what extent a check on the customers credit limit is
to take place.
Features
If you implement both SD and FI-AR, Credit Management provides the following facilities:
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You can define automatic credit limit checks according to a range of criteria and in line
with your companys requirements You can also define at what point the system carries
out these checks (order, delivery, goods issue, and so on).
The credit representative is automatically alerted to a customers critical credit situation
as soon as order processing starts.
The relevant employees can be automatically notified of critical credit situations via
internal mail.
Your credit representatives are able to check a customers credit situation quickly and
reliably, and, in line with the appropriate credit policy, to decide whether the customer
should be granted credit.
Using Credit Management you can work in distributed systems. A distributed system is
one with central financial accounting and non-central sales and distribution on several
sales and distribution computers.

NEWSPAPER ARTICLES:
Article 1:
RBI announces norms for trade receivables discounting system
Mumbai, Dec 4, 2014
To make it easier and faster for micro, small and medium enterprises (MSMEs) to get their
dues, the RBI put out final guidelines for setting up of a Trade Receivables Discounting
System (TReDS).
TReDS will be like an exchange where an MSME that has some receivables pending from a
large corporate will be able to trade the bill. So, if an MSME has to realise 100 from a
corporate, it can exchange the bill with one of the participating entities on the exchange for,
say, 95. The buyer of the bill will then recover the 100 from the corporate concerned,
pocketing the profit of 5.
Better price
The MSME will benefit because its credit cycle is shortened and it will get a better price on
the bill due to competition.
MSME sellers, corporate buyers and financiers both banks and non-bank (NBFC factors)
will be direct participants in the TReDS, the RBI said.
The central bank, while inviting applications from the interested entities, said that it will
receive applications till February 13, 2015

Article 2:
Rs.25 crore minimum capital for Trade Receivables Discounting System
Chennai, Dec 20, 2014: The Reserve Bank of India (RBI) Wednesday stipulated a minimum
capital of Rs.25 crore for entities setting up and operating the Trade Receivables Discounting
System (TReDS).
According to the guidelines issued by the RBI, the start-up capital for TReDS outfits will be a
minimum of Rs.25 crore and entities other than promoters will not be permitted to have
shareholding over 10 percent of the equity capital.
The guideline said the promoters/promoter groups should be "fit and proper" to operate
TReDS.
The RBI would assess the "fit and proper" status of the applicants on the basis of their past
record of sound credentials and integrity; financial soundness and track record of at least five
years in running their businesses.
The RBI may also seek feedback on the applicants on these or any other relevant aspects
from other regulators, and enforcement and investigative agencies like Income Tax, CBI,
Enforcement Directorate, SEBI and others.
Since technology is going to play an important role in its operations, the RBI has stipulated
that TReDS shall be able to provide electronic platform for all the participants; information
about bills/invoices, discounting and quotes should be communicated on real time basis.
The TReDS shall have a suitable Business Continuity Plan (BCP) including a disaster
recovery site and also have an online surveillance capability to monitor positions, prices and
volumes in real time so as to check system manipulation.
Micro, small and medium enterprises (MSMEs), face constraints in obtaining adequate
finance, particularly in terms of their ability to convert their trade receivables into liquid
funds.
In order to address this pan-India issue through setting up of an institutional mechanism for
financing trade receivables, the RBI in March published a concept paper on MSME
Factoring-Trade Receivables Exchange.
Based on the comments received, the central bank came out with its guidelines
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RESEARCH PAPER-1:
Study of Pharmaceutical Industry
Volume: 4 | Issue: 1 | Jan 2014 | ISSN - 2249-555X
Ashis Mohanty
Sr. Lecturer (Finance), Bhadrak Institute of Engineering & Technology,Barpada,Bhadrak
(Odisha)
Dr Lalat K Pani
Retd. Reader of Commerce, Bhadrak Autonomous College, Bhadrak
Sukhamaya Swain
Circle Business Banking Head, Odisha Circle, AXIS Bank

Objectives of the Study:

The main thrust of this study is to analyze the efficiency of Receivables


Management in the selected sample pharmaceutical companies of India.
The study also analyzes the financial position in terms of receivables of selected
pharmaceutical companies as a whole.
Besides, the study aims at finding the size and growth of receivables & sales
The study also includes detail analysis of the composition of receivables like debtors
and loans & advances

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

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Accounting Tools used:


A. Receivables to Current Asset Ratio
This Ratio of Receivables as a percentage of Current Assets would reveal the size of
receivables with reference to Current Asset and the opportunity cost associated with the
same. When the percentage of current asset is higher, it indicates the cost of carrying the
Receivables is higher. It is therefore advised that a firm needs to carry the least percentage
of Receivables without affecting the sales volume. The ratio is calculated as follows.
Current Assets Ratio = [(Closing Receivables)/ (Current Assets)] X 100
B. Receivables to Total Asset Ratio
The Ratio of Receivables to Total Assets depends on the industry, but generally a low
number indicates that the company has too much money tied up with total assets that are
not contributing to sales. It is a Ratio of Receivables /total assets (or Total Average Assets).
The profit margins are an important consideration while analyzing this number. The
percentage of Receivables to total assets is found out by using the following formula.
Receivables to Total Asset Ratio = [(Closing Receivables) / (Total Assets)] X 100
C. Receivables to Sales Ratio
It indicates the amount of Receivables held by the business firm as a percentage of sales
during a particular period. The main purpose of this ratio is to work out the efficiency of Receivables Management in the business organization. High ratio indicates that the business
firm is doing business with huge debtors. Higher the sales and lower the debtors indicate
that the company has a high rate of collection. This ratio is calculated with the following
formula.
Receivables to Sales Ratio = [(Closing Receivables) / (Sales)] X 100
D. Debtors Turnover Ratio
Debtors Turnover Ratio is termed as Receivables Turnover Ratio or Debtors Velocity. It
indicates the number of times the Receivables or turn over in business during a particular
period. In other words, it indicates how quickly debtors are converted into cash. This ratio
establishes the relationship between Receivables and Sales. Debtors Turnover Ratio
measures the liquidity of debtors of a business firm and average collection period. It
indicates the average time lag in days between sales and collection. Higher Receivables
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turnover ratio and lower debtor collection period reflect the firms ability to manage a
larger volume of business without corresponding increase in Receivables and vice versa. This
ratio is calculated with the following formula.
Debtors Turnover Ratio = (Sales) / (Average Account Receivables)
*Average Account Receivables = (Opening receivable + Closing receivable) / 2
E. Average Collection Period
The average collection period is otherwise called Debt Collection Period. This technique of
computation of average collection period indicates the efficiency of the debt collection
period and the extent to which the debt have been converted into cash. Both the
techniques are used to measure the quality of Accounts Receivable. It indicates the liquidity
of trade debtors i.e., higher turnover ratio and shorter debt collection period indicate the
prompt payment by debtors. Similarly, the low turnover ratio and higher collection period
implies that payment of trade debtor are delayed. The Debt Collection Period can be
determined as follows: Average Collection Period = (365 days) / Receivables Turnover Ratio
Table 2: Receivables Management Ratio
Receivables
to
Current
Company
Asset
Ratio (%)
1 Ranbaxy Laboratories Ltd.
56.11
2 Cipla Ltd.
63.74
3 Dr. Reddys Laboratories Ltd. 57.33
4 Nicholas Piramal India Ltd.
69.49
5 Aurobindo Pharma Ltd.
63.88
Glaxosmithkline
6 Pharmaceuticals Ltd.
26.60

Receivables Receivable
to
s to
Debtors
Total Asset
Turnover
Ratio
Sales
Ratio
(%)
Ratio (%) (Times)
40.85
48.11
4.86
57.63
51.63
4.84
39.87
53.43
4.05
45.68
34.75
8.03
46.66
52.95
3.31

Average
Collection
Period
(Days)
77.10
83.66
91.46
45.95
115.65

22.78

16.27

24.78

18.15

7 Lupin Ltd.
60.87
8 Cadila Healthcare Ltd.
58.85
9 Sun Pharmaceutical Inds. Ltd. 42.20
10 Wockhardt Ltd.
49.40
11 Aventis Pharma Ltd.
27.93
Orchid
Chemicals
&
Pharmaceuticals
12 Ltd.
47.95
13 Ipca Laboratories Ltd.
59.06
14 Pfizer Ltd.
44.63
15 Novartis India Ltd.
72.60
16 Torrent Pharmaceuticals Ltd. 48.50
17 Abbott India Ltd.
*25.76
18 Cadila Pharmaceuticals Ltd. 58.85
Glenmark Pharmaceuticals
19 Ltd.
81.22
20 Panacea Biotec Ltd.
32.59
21 T T K Healthcare Ltd.
55.74

46.49
31.44
23.12
35.30
30.24

40.28
32.15
43.80
46.11
20.16

4.58
7.74
5.27
5.18
14.74

82.53
50.03
76.42
72.96
25.38

24.47
43.46
57.76
82.72
31.16
20.99
31.44

52.54
33.20
43.74
53.51
26.96
*7.41
32.15

3.45
4.98
10.33
10.72
9.27
21.16
16.31

120.23
73.77
37.27
37.83
45.04
*17.50
28.75

62.13
22.64
67.01

99.66
28.25
27.96

3.12
7.83
7.44

127.79
49.14
64.92
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22 Natco Pharma Ltd.


61.87
Zandu Pharmaceutical Works
23 Ltd
45.87
24 Ajanta Pharma Ltd.
59.69
25 Themis Medicare Ltd.
61.44
26 Amrutanjan
46.25
27 Jupiter Bioscience Ltd
51.80
28 Wanbury Ltd.
79.25
29 Anuh Pharma Ltd.
73.56
30 Suven Life Sciences Ltd.
62.39
31 Medicamen Biotech Ltd.
67.98
Syncom Formulations (India)
32 Ltd.
76.01
Industry Average
55.92

36.89

55.48

4.40

100.14

36.95
38.32
54.28
33.37
*11.16
47.81
87.81
34.53
83.47

17.29
49.09
40.58
19.25
34.71
68.15
32.65
45.23
28.82

*24.83
2.77
3.25
10.00
5.47
3.90
5.68
5.63
4.78

17.73
153.35
113.31
37.31
69.35
100.85
67.07
70.64
79.36

76.01
43.89

38.14
39.83

3.94
8.02

94.20
70.15

Conclusion:

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

Jupiter Bioscience Ltd managed their Receivables (11.16%) better as a part of total
assets. It acquired the lowest percentage of Receivables to Total Assets during the
study period.

Abbott India Ltd with the ratio of 7.41% was considered to be the most efficient firm
by holding less amount of investment in Receivables as percentage of sales.

Zandu Pharmaceutical Works Ltd earned the higher turnover (24.83 times) which
indicates it has high liquidity.

Abbott India Ltd managed better as their collection period is very low (17.50 days)
which shows that it generates cash faster.

Research Paper-2:
The Impact of Effective Management of Credit Sales on Profitability and Liquidity of Food
and Beverage Industries in Nigeria
By M.S.K. Ifurueze
Global Journal of Management and Business Research
Volume 13 Issue 2 Version 1.0 Year 2013
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Type: Double Blind Peer Reviewed International Research Journal


Publisher: Global Journals Inc. (USA)
Online ISSN: 2249-4588 & Print ISSN: 0975-5853
Objective:
1)

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


profitability and liquidity of Food and Beverage industries in Nigeria.

2)

To establish the correlation between the level of credit granted to customers and
operating profit of the companies.

Hypothesis 1:
Ho: There is no significant relationship between the level of credit granted to
customers and operating profit of the companies
H1: There is significant relationship between the level of credit granted to customers
and operating profit of the companies
Hypothesis 2:
Ho: There is no positive and significant correlation between liquidity position and
debtors turnover of the companies
H1: There is positive and significant correlation between liquidity position and
debtors turnover of the companies

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


GPM = Gross Profit Margin (Average Gross Profit Margin for 5 Years).
NPM = Net Profit Margin (Average Net Profit Margin for 5 years).
ROCE = Return on Capital Employed (Average ROCE for 5 years

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Inferences:
Effective management of credit sales has a positive relationship with the operating
profit of the companies in the Food and Beverage Sector.
There is significant relationship between liquidity position and debtors turnover of
the companies in the Food and Beverage Sector in Nigeria. This implies that a
favourable debtors turnover would result to favourable liquidity position.
The positive correlation between liquidity and debtors turnover signifies that as the
debtors turnover rises, the liquidity position also rises.
The study also revealed that the objective of any firm's credit policy is to maximize
profit of the firm and at the same time minimize costs associated with credit sales.

Recommendations:
Organizations should consider their mission, the native of their businesses, and their
business environment before setting up a credit policy.
Companies should intensify efforts to engage the services of factoring agents. This
will reduce the incidence of bad debts losses and other associated costs of credit.
Companies should increases the rate of credit sales to trustworthy customers

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