CASE STUDY OF SUNLIGHT INDUSTRIES LTD.

Sunlight industries ltd. manages its account receivables by its sales and credit department. The cost of
sales ledger administration stands at Rs 9 crore annually. It supplies chemicals to heavy industries. These
chemicals are used as raw material for further use or are directly sold to industrial units for consumption. There
is a good demand for both the types of uses. For the direct consumers, the company has a credit policy 2/10, net
30. Past experience of the company has been that on avg. 40% of the customer avail of the discount while the
balance of the receivables are collected on an avg. 75 days after the invoice date. Sunlight industries also has
small dealer networks that shall the chemicals bad debt of the company are currently 1.5% of total sales.
Sunlight industries finances its investment in debtors through a mix of bank credit and own long term
funds in the ratio of 60:40 current cost of bank credit and long term funds are 12% and 15% respectively.
There has been a consistent rise in the sales of company due to its proactive measures in cost reduction
and maintaining good relations with dealers and customers. The projected sales for the next year are Rs 800
crores. Gross profits have been maintain at a healthy 22% over the years and are expected to continue in futures.
With escalating cost associated with the in-house management of debtors coupled with the need to
unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight Industry
examine the possibility of outsourcing its factoring service for managing its receivables. He assigns the
responsibility to Anita Guha, the CFO of Sunlight. Two proposals the details of which are given below are
available for Anita’s consideration.
Proposal from Canbank Factors Ltd.: The main element of the proposal are :
i. Guaranteed payment within 30 days
ii. Advance, 88% and 84% for the recourse and non-recourse arrangement respectively
iii. Discount charge in advance 21% for recourse and 22% without recourse
iv. Commission, 4.5% without recourse and 2.5% with recourse

Proposal from Indbank Factors:

i. Guaranteed payment within 30 days
ii. Advance 84% with recourse and 80% without recourse
iii. Discount charge upfront, without recourse 21% and with recourse 20%
iv. Commission upfront, without recourse 3.6% and with recorse 1.8%

The opinion of the chief Marketing manager is that in context of the factoring arrangement his staff would be
able to exclusively focus on sales promotion which would result on additional sales of Rs 75 crore.

Solution:
FINANCIAL ANALYSIS OF RECEIVABLES MANAGEMENT ALTERNATIVES (Rs crore)
(A) In house Management :
Cash discount(Rs 800 croreX0.40X0.20) Rs 6.4
Bad debts (Rs 800 croreX0.015) 12.0
Opportunity Cost (Forgone contribution on lost sales) [Rs 75 croreX0.205 net of
bad debts] 15.4
Avoidable administrative and selling expenses 9.0
Cost of investment in receivables © 14.4
Total Cost 57.2
© Avg. collection period (0.40X10days)+(0.60X75days)=49 days
Investment in debtors: (Rs108.9X0.60X0.12)+ (Rs108.9X0.40X0.15)= Rs 14.4 crore
(B) Canbank factors Proposal:
With recourse Without recourse
Factoring Commission (Rs 875 croreX0.025) 21.9 -
(Rs 875 croreX0.045) - 39.4
Discount charge(Rs 750.7*croreX.21X30/360) 13.1 -
(Rs 701.9**croreX.22X30/360) - 12.9
Cost of long term funds invested in debtors:
[(Rs 875 crore-Rs750.7 crore)X0.15X30/360] 1.6 -
[(Rs 875 crore-Rs701.9 crore)X0.15X30/360] - 2.2
36.6 54.5
*Amount of Advance=0.88X(Rs 875crore – Rs 21.9 crore)= Rs 750.7crore
**Amount of Advance=0.84X(Rs 875crore – Rs 39.4 crore)= Rs 701.9crore

(C) Indbank Factor Proposal

With recourse Without recourse
Factoring Commission (Rs 875 croreX0.018) 15.7 -
(Rs 875 croreX0.036) - 31.5
£
Discount charge(Rs 721.8 croreX.20X30/360) 12.0 -
(Rs 674.8££croreX.21X30/360) - 11.8
Cost of long term funds invested in debtors:
[(Rs 875 crore-Rs721.8 crore)X0.15X30/360] 1.9 -
[(Rs 875 crore-Rs674.8 crore)X0.15X30/360] - 2.5
29.6 45.8
£
Amount of Advance=0.84X(Rs 875crore – Rs 15.7 crore)= Rs 721.8crore
££
Amount of Advance=0.80X(Rs 875crore – Rs 31.5 crore)= Rs 674.8crore

Decision Analysis: Recourse Factoring

Particulars Canbank Indbank
Benefits (Rs 57.2-Rs 12 Bad debts to be born by company) 45.2 45.2
Costs 36.6 29.6
Net Benefits 8.6 15.6
Decision Analysis: Non-Recourse Factoring
Particulars Canbank Indbank
Benefits (Rs 57.2+Rs 1.1Bad debts to be borne by factor) 58.3 58.3
Costs 54.5 45.8
Net Benefits 3.8 12.5

Advice: My advice to the CFO of Sunlight Industries would be to accept the proposal

of Indbank Factors for recourse factoring.