1. 1
A project report on “ANALYSIS OF
RECEIVABLES MANAGEMENT AT
TRAVANCORE TITANIUM PRODUCT
LIMITED”
Submitted by:
HILAL A.
Reg no: 13428018
RAJADHANI BUSINESS SCHOOL
UNIVERSITY OF KERALA
TRVANDRUM
APRIL 2015
2. 2
DECLARATION
I hereby declare that this project report titled “ANALYSIS OF
RECEIVABLES MANAGEMENT AT TRAVANCORE
TITANIUM PRODUCT LIMITED “ submitted by me to the
department of Human resource is a bonafide work undertaken by me
and is not submitted to any other university or Institute for the award of
any degreediploma certificate or published any time before.
Name:
Date:
(Signature)
3. 3
ACKNOWLEDGEMENT
A Good start leads to a Fine end. The ideal way to begin documenting this project
work would be to extend my earnest gratitude to everyone who has encouraged,
motivated and guided me to make a fine effort for successful completion of this
project.
I would like to thank Mr.SIVAPRASAD, chief finance manager, TTP, by taking me
as an internee in their organization. This proved to be a very good learning
experience for me, where I could get an exposure to the important aspects of real
time finance activities
I am very thankful to, Mr. ANOOP, asst. prof. at RAJADHANI BUSINESS
SCHOOL for guiding me throughout the project. My sincere Gratitude to the College
Management for extending their co-operation for successful completion of my
project.
I acknowledge with pleasure and owe my special thanks to, Mr. NOUSHAD at
training and project dept. for his continuous guidance and support throughout the
project.
A final word of thanks goes to my Parents, Friends and everyone else who made this
project possible. Your contributions have been most appreciated.
4. 4
CONTENTS
CHAPTER PARTICULARS PAGE
NO.
1. INTRODUCTION 3
1.1. STATEMENT OF PROBLEM 17
1.2. NEED AND SCOPE OF THE STUDY 17
1.3. OBJECTIVES 18
1.4. RESEARCH METHODOLOGY 18
1.5. CHAPTERISATION 20
1.6. LIMITATIONS OF THE STUDY 21
2. LITERATURE REVIEW 22
3. PROFILE 30
4. DATA Analysis AND INTERPRETATION 35
5. FINDINGS CONCLUSION AND SUGGESTIONS 53
APPENDIX 66
BIBILOGRAPHY 69
5. 5
LIST OF TABLES AND CHARTS
TABLES PAGE NO.
PROPERTIES OF TITANIUM DIOXIDE 36
CURRENT RATIO 39
QUICK RATIO 41
NET WORKING CAPITAL 43
GROSS PROFIT MARGIN 45
NET PROFIT MARGIN 46
INVENTORY TURNOVER RATIO 48
TOTAL MONTHLY SALES 51
TOTAL ANNUAL SALES 52
DEBTORS 54
6. 6
CHARTS PAGE NO.
PURPOSE OF MAINTAINING RECEIVABLES 8
FACTORS AFFECTING THE SIZE OF
RECEIVABLES
11
CURRENT RATIO 40
QUICK RATIO 42
NET WORKING CAPITAL 44
GROSS PROFIT MARGIN 45
NET PROFIT MARGIN 47
INVENTORY TURNOVER RATIO 49
TOTAL MONTHLY SALES 52
TOTAL ANNUAL SALES 53
DEBTORS 55
8. 8
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. 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.
9. 9
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 be represented by acceptance; bills or notes and the
like due from others at an assignable date in the due course of the business. As sale
of goods is a contract, receivables too get affected in accordance with the law of
contract e.g. Both the parties (buyer and seller) must have the capacity to contract,
proper consideration and mutual assent must be present to pass the title of goods
and above all contract of sale to be enforceable must be in writing. Receivables, as
are forms of investment in any enterprise manufacturing and selling goods on
credit basis, large sums of funds are tied up in trade debtors. Hence, a great deal of
careful analysis and proper management is exercised for effective and efficient
management of Receivables to ensure a positive contribution towards increase in
turnover and profits.
When goods and services are sold under an agreement permitting the
customer to pay for them at a later date, the amount due from the customer
is recorded as accounts receivables; so, receivables are assets accounts
representing amounts owed to the firm as a result of the credit sale of goods and
services in the ordinary course of business. The value of these claims is carried on
to the assets side of the balance sheet under titles such as accounts receivable, trade
receivables or customer receivables. This term can be defined as "debt owed to the
firm by customers arising from sale of goods or services in ordinary course
of business."
Instruments indicating receivables
Harry Gross has suggested three general instruments in a concern that
provide proof of receivables relationship. They are briefly discussed below: -
10. 10
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
There are no sources in the current document.
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.
11. 11
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,
12. 12
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.
Costof 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 forms 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.
13. 13
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
14. 14
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 to business, in accordance with the nature and type of the 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
15. 15
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: -
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.
16. 16
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.
Collectionpolicy
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.
Collectioncollected
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.
Qualityof 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.
17. 17
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 CREDITMANAGEMENT:
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
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
18. 18
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
There are two important components of credit terms which are detailed below:-
(A) Credit period and
(B) Cash discount term
19. 19
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
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
20. 20
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
three Cs of I.M. Pandey, namely; capital and collateral.
21. 21
1.1. 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 5 years is to be determined for knowing
the impact of receivable in financial liquidity.
1.2. 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 too much credit, or not managing the credit policy
carefully enough, could result in irrecoverable debts. This
represents a loss of income to the company, affecting both
profitability and cash flow. So credit management has to be done.
22. 22
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
1.3. 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 company’s 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.
1.4. 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.
23. 23
1.4.1. RESEARCH DESIGN
This research study adopts an Empirical research methodology. Such
research is often conducted to answer a specific question or to test a hypothesis. Any
conclusions drawn are based upon hard evidence gathered from information
collected from real life experiences or observations. This helps to understand and
respond to dynamics of situations. This research is widely used in stock market
research, analysis of financial statement, and other socio-science related researches.
1.4.2. DATACOLLECTIONMETHOD
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.
24. 24
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.
1.4.3. 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
Trend Analysis of Debtors (2009- 2014)
Trend of Analysis of sales (from 2009-10 to 2013-14 and exclusive monthly
sales of the year starting Mar 2012 to Apr 2013)
25. 25
1.5. 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.
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.
26. 26
1.6. 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
28. 28
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 asset—the receivables --is sold for cash; no loan has been granted.
Banks and finance companies are the most obvious source of receivables
financing. Their lending decision is generally driven by an analysis of a borrower's
financial statements. Consequently it is common for a company's line of credit to be
limited by how its debt compares to its equity base (the ratio of debt-to-worth) or for
the lender to set minimum levels of solvency for the company (the current ratio or
acid-test ratio).
Under these covenants, a lender limits his willingness to lend funds beyond a
predetermined point at which the company would be deemed either excessively
indebted or too short of cash for the payments it must meet. The receivables function
as part of the total collateral that the company pledges in order to strengthen its
corporate commitment to eventually repay the loan. In support of this, the company
usually must periodically produce a report (the borrowing base report) showing how
much in receivables it carries on its balance sheet.
Strischek, Dev, (2001), Looking for a vital sign in contractor accounts: The
receivables ratio, The RMA Journal, 10,vol. 83, 62-66
A contractor's receivables represent two significant elements of contractor
cash flow and working capital. Receivables constitute the major source of cash
inflow, and payables absorb a big share of cash outflow. A construction company's
ability to extend credit to its customers depends on its own trade creditors'
willingness to wait for their payments from the contractor's collection of its progress
billing receivables. The delicate balance of receivables and payables is key to the
29. 29
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.
By adhering to these 4 risk-management principles, bankers can significantly
mitigate risk in receivables purchasing: 1. Making a prudent initial credit decision, 2.
30. 30
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
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
31. 31
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
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.
32. 32
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
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
33. 33
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
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.
34. 34
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.
P. Janki Ramadu & S.Durga Rao (2007) under their study – “Receivables
Management of the Indian Commercial Vehicles Industry”, revealed that the industry had
managed receivables efficiently whereas a few individual companies had far less satisfactory
scores in this respect.
35. 35
Vadakarai (2007) in his study titled with “A Study on Receivables Management
Variables and Investments in Plant & Machinery” found that the receivables management
variables depend upon the investment made in plant & machinery/equipments.
A study by Amarjit Gill 1, Nahum Biger 2, Neil Mathur 3 (2010), under the title
"The Relationship Between Working Capital Management And Profitability: Evidence from
the United States", the aim of this paper is to find the relationship between working capital
management and profitability. A sample of 88 American firms listed on New York Stock
Exchange for a period of 3 years from 2005 to 2007 was selected. We found statistically
significant relationship between the cash conversion cycle and profitability, measured
through gross operating profit. It follows that managers can create profits for their companies
by handling correctly the cash conversion cycle and by keeping accounts receivables at an
optimal level. The study contributes to the literature on the relationship between the working
capital management and the firm’s profitability
Bhayani and Ajmera (2009) in their study – “Receivables Management in Refinery
Industry in India: An Empirical Study” found that the level of investments in receivables as a
percentage of sales across the industry was reasonably less.
M. Kannadhasan (2008) found under his study of – “Receivable Management in a
Public Ltd. Company” that the efficiency of receivables management in a public ltd.
company was satisfactory.
Robichek (Robichek, 1965) discus risk involved to accounts receivable decisions,
which must be accepted by financial institutions pledging o accounts receivable of the firm.
Smith (Smith, 1973) predicts that portfolio theory may be used to decrease accounts
receivable risk. Friedland (Friedland, 1966) agree with that current assets could be viewed in
portfolio context. Pringle and Cohn (Pringle, 1974) even try to adapt the CAPM theory to
working capital elements. Bierman and Hausman (Bierman, 1970) discuss the granting
policy of a firm and shows that trade credit policy requires balancing the future sales gains
against possible losses. Lewellen, Johnson and Edmister (Lewellen, 1972; Lewellen, 1973)
explain how and why traditional devices used for monitoring accounts receivable should be
36. 36
changed by new and better ones. Freitas (Freitas, 1973) shows relation between liquidity and
risk during accounts receivable management
The question discussed in this article concerns the possibility of using portfolio
theory in making decisions about selecting which customers should be given trade credit. In
this article, we will show that it is possible that the firm sells on trade credit terms to some
customers, who were previously rejected because of too great an operational risk, with a
positive outcome on the creation of increased firm value. This extension of trade credit is
possible only if the firm has purchasers from various branches, and if these branches have
different levels of operating risk. The key to success for a firm is to perform portfolio
analysis with the result of a varied portfolio of customers with a spectrum of managed levels
of operating risk.
38. 38
COMPANY PROFILE
The Travancore Titanium Products Limited is the pioneering enterprise in
India for producing the pigment grade Titanium Dioxide. This product is
produced from the minerals like Ilmienite, Rutile etc. occurring in the beach sands of
Chavara in Kollam district, Kerala Manavalakurichi of Kanyakumari district, Tamil
Nadu and Chatrapur in Orissa. The Travancore Titanium Products Limited was
incorporated on the 18th December 1946. It is located at Kochuveli about 10km to
the North West of Thiruvananthapuram City. The main product of Travancore
Titanium Products Limited is Titanium Dioxide.
HISTORICAL BACKGROUND
Till 1925, the presence of Titanium Dioxide in the black sands of Kollam beaches
was not known. The coir products from Kollam to be exported frequently were dried
on these beaches. When such coir products were exported, some radioactive
properties was noticed. The Germans send a delegation to Kerala to conduct
experiments with the black sand. They found that the sand has some radioactive
properties owing to the presence of Thorium. They also found that the sand was rich
in Titanium. This beach sand containing valuable Titanium Dioxide was exported to
Europe till 1946, when M/s Travancore Titanium Products Limited, was incorporated
with the sole objective of producing pigment grade Titanium Dioxide (TiOP2).When
the British were ruling our country, they exported Ilmenite, which is the raw material
for producing Titanium Dioxide for British Titan Products, and imported their
products to India. Till 1946, the product was imported through the Imperial Chemical
Industries, Calcutta. T.T.P. Ltd was incorporated in 1946 and the unit was promoted
by the princely administration of Travancore, in technical collaboration with the
British Titan Products Ltd, U.K. The credit for launching this maiden venture goes to
His Highness Shri.ChithiraThirunal Balaramavarma Maharaja of Travancore and
his Dewan Sir. C. P. Rameswamy Iyer.Even though the Maharaja held 51% share
capital the administrative control of the company was with a managing agency called
India Titan Products.
39. 39
The production of Titanium dioxide commenced in the year 1951 and the initial
capacity of the plant was 5 tons per day. In 1960, the Government of Kerala took
over the management of the concern and the production capacity was raised to 10
tons per day. Along with this expansion, the company commissioned its first
sulphuric Acid Plant producing 50 tons of acid per day for captive consumption in
1963, the capacity of the TiO2 plant was further increased to 18 tons per day and
then second sulphuric Acid plant of 50 tons per day capacity started production.
Another major expansion programme was completed in 1973, which augmented the
capacity to 45 tons per day. In 1976-78 under the chairmanship of Dr.Vaseer, a
committee was formed to study the production capacity of the plant. The committee
estimated the production capacity as 15000tons per months. A third acid plant with
pollution control measures of 300 tons per day production was also started in 1996 to
meet the increased requirement of sulphuric acid. At the beginning, Imperial
Chemical Industrial was the sole selling agents for T.T.P. Ltd. After sometimes, they
stopped to function as the selling agents and T.T.P resorted to direct marketing till
1979. In 1979, the government of Kerala appointed a sole selling agency called the
Kerala State Industrial Products Trading Corporation Limited (KSIPTC) to take over
the trading and marketing activity of the company. The Travancore Titanium
Production Ltd now has no major competitors within the country. There are two
private companies-one at Tuticorin (Kilburn Chemicals) and another at Calcutta
(Colmack Industries) which pose minute competition.
PRODUCTS PRODUCED
Travancore Titanium Products Ltd is one of the largest industries in India that
produces Titanium Dioxide (TiO2). In addition to Titanium Dioxide, the company is
manufacturing
Pottassium Titanate,
Sodium Titanate,
Low Phosphorus and Special grade Titanium Dioxidein comparatively in
small quantities.
Titanium Dioxide (TiO2) is a white pigment and there are two grades of Titanium
Dioxide.
40. 40
Rutile Grade
Anatase Grade
These two grades of Titanium Dioxide are chemically the same but their physical
properties differ from each other. The company deals with the production of
Titanium Dioxide, which belongs to Anatase grade. The major raw material used for
production is Ilmenite. The most important commercial use of Ilmenite is the
manufactures of Titanium Dioxide pigment .Ilmenite is a compound of the oxides of
iron, Titanium and traces of other elements. These paration of Titanium Dioxide can
be done through the sulphate route or chloride route. The Travancore Titanium
Product plant is based on the Sulphate Route
Properties of Titanium Dioxide
Titanium Dioxide is of non-toxic nature having chemical stability. It
possesses higher refractive index and hence it is used to make paints. It is extremely
heat resistant and this enhances the capacity of the substance incorporated with
Titanium Dioxide to with stand the effect of the chemical environment and climatic
conditions. It has got high pacifying power ie, the power to change transparency. So
it is used in plastics to make it opaque. Its uniformity of composition enables it to
mix with any material without losing its natural properties. Hardness of
the material provides good resistance to mechanical shock. It possesses tinting
strength ie, the particles are so minute that it occupies a larger surface area.
43. 43
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 company’s 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. This ratio is the indicator of the short-term liquidity position of a firm.
Liquidity means the ability of a firm to meet its maturing obligations. 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.
44. 44
4. 1. TABLE SHOWING THE CURRENT RATIO FROM THE YEAR 2009-10
TO 2013-14
YEAR
CURRENT
ASSETS
CURRENT
LIABILITIES
CURRENT
RATIO
2013-14 987,358,061 1,017,331,244 0.97
2012-13 909,997,176 900,210,718 1.01
2011-12 857,882,355 1,436,368,685 0.59
2010-11 756,562,764 886,750,004 0.85
2009-10 676,261,905 779,908,531 0.86
Current Ratio = Current Assets/ Current liabilities
45. 45
4. 1. CHART SHOWING THE CURRENT RATIO FROM THE YEAR 2009-
10 TO 2013-14
Current assets are not enough to settle current liabilities. Low value of current
ratio may indicate existence of not idle or over utilized resources in the company.
Standard ratio is 2:1.in general it can be stated that the higher the ratio, the larger is
the amount of rupees available per rupee of current liability and, accordingly, the
greater is the safety of funds of short-term creditors. However current ratio of none
the year satisfies.
4.2. Quick ratio:
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).
This ratio helps us to determine whether a business would be able to pay off
0.97
1.01
0.59
0.85 0.86
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13 2013-14
CURRENTRATIO
CURRENT RATIO
46. 46
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 4.0 , 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. 2. TABLE SHOWING THE QUICK RATIO FROM THE YEAR 2009-10 TO
2013-14
YEAR
LIQUID
ASSETS
CURRENT
LIABILITIES QUICK RATIO
2013-14 568,684,545 1,017,331,244 0.558
2012-13 502,440,351 900,210,718 0.558
2011-12 543,870,548 1,436,368,685 0.378
2010-11 522,165,205 886,750,004 0.588
2009-10 493,160,710 779,908,531 0.632
Quick ratio = Liquid assets/ Current liabilities
47. 47
4. 2. CHART SHOWING THE QUICK RATIO FROM THE YEAR 2009-10
TO 2013-14
The conventional ratio is 1:1 , ie, every rupee of short term liabilities must be
backed by equivalent liquid assets. If, however the ratio is less than 1, then some
portion of the short-term liabilities must be met from the fund to be collected from
outside. This is not desirable. Since, none of the years was unable to satisfy the
standard ratio, quick ratio is not satisfactory.
4.3. Net working capital to sales ratio:
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.
0.558 0.558
0.378
0.588
0.632
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2013-14 2012-13 2011-12 2010-11 2009-10
QUICK RATIO
QUICK RATIO
Net working capital to sales ratio = net working capital/ sales
48. 48
4.3. TABLE SHOWING NET WORKING CAPITAL TO SALES RATIO
FROM THE YEAR 2009-10 TO 2013-14
YEAR CURRENT
ASSET
CURRENT
LIABILITY
WORKING
CAPITAL
2013-14 987,358,061 1,017,331,244 -2993183
2012-13 909,997,176 900,210,718 9,786,458
2011-12 857,882,355 1,436,368,685 -578486330
2010-11 756,562,764 886,750,004 -130187240
2009-10 676,261,905 779,908,531
-103,646,626
YEAR
NET
WORKING
CAPITAL SALES
NET WORKING CAPITAL
TO SALES RATIO
2013-14 -2,993,183 1,590,826,883 -0.018
2012-13 9,786,458 1,690,500,175 0.005
2011-12 -578,486,330 1,846,065,731 -0.313
2010-11 -130,187,240 1,618,261,858 -0.08
2009-10 -103,646,626 1,429,330,124 0.072
49. 49
4.3. CHART SHOWING NET WORKING CAPITAL TO SALES RATIO
FROM THE YEAR 2009-10 TO 2013-14
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.
-0.018
0.005
-0.313
-0.08
0.072
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
2013-14 2012-13 2011-12 2010-11 2009-10
NET WORKING CAPITAL
NET WORKING CAPITAL
50. 50
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).
4. 4. TABLE SHOWING GROSS PROFIT MARGIN FROM THE YEAR 2009-
10 TO 2013-14
YEAR
GROSS
PROFIT SALES
GROSS PROFIT
MARGIN
2013-14 511,402,257 1,590,826,883 32.14%
2012-13 450,764,603 1,690,500,175 26.66%
2011-12 1,091,430,777 1,846,065,731 59.12%
2010-11 873,437,839 1,618,261,858 53.97%
2009-10 679,905,213 1,429,330,124 47.56%
Gross profit margin = Gross profit / Sales * 100
51. 51
4. 4. CHART SHOWING GROSS PROFIT MARGIN FROM THE YEAR
2009-10 TO 2013-14
Gross margin ratio measures profitability. Higher values indicate that more
cents are earned per rupee 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.
This ratio shows the amount of gross profit made out of the total net sales.
The relation between gross profit and sales is expressed in percentage. The higher the
gross profit ratio, the greater is the profitability of the firm, other factors remaining
constant.
32.15%
26.66%
59.12%
53.97%
47.56%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2013-14 2012-13 2011-12 2010-11 2009-10
GROSS PROFIT MARGIN
GROSS PROFIT MARGIN
52. 52
4. 5. Net profit margin:
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.
(4.5)
4. 5. TABLE SHOWING THE NET PROFIT MARGIN FROM THE YEAR
2009-10 TO 2013-14
YEAR NET PROFIT SALES
NET PROFIT
MARGIN
2013-14 -3,442,064 1,590,826,883 -0.216
2012-13 12,350,201 1,690,500,175 0.730
2011-12 284,510,165 1,846,065,731 15.411
2010-11 83,158,844 1,618,261,858 5.138
2009-10 18,654,717 1,429,330,124 1.305
Net Profit Margin = Net Profit after Tax / Net Sales * 100
53. 53
4. 5. CHART SHOWING THE NET PROFIT MARGIN FROM THE YEAR
2009-10 TO 2013-14
This ratio indicates the portion of the sales that is left to the firm after all
costs, charges and expenses have been deducted. It is, thus, extremely useful to the
firm as it is an indication of the cost control and sales promotion. This ratio is a guide
to the efficiency or otherwise of operating the firm. 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
-0.216
0.73
15.411
5.138
1.305
-2
0
2
4
6
8
10
12
14
16
18
2013-14 2012-13 2011-12 2010-11 2009-10
NET PROFIT MARGIN
NET PROFIT MARGIN
54. 54
the number of times per period; a business sells and replaces its entire batch of
inventory again.
4.6. TABLE SHOWING THE INVENTORY TURNOVER RATIO FROM
THE YEAR 2009-10 TO 2013-14
YEAR SALES
AVERAGE
INVENTORY
INVENTORY
TURNOVER RATIO
(times)
2013-14 1,590,826,883 413,115,170.5 0.2596
2012-13 1,690,500,175 360,784,316 0.2134
2011-12 1,846,065,731 274,204,683 0.1485
2010-11 1,618,261,858 208,749,377 0.1289
2009-10 1,429,330,124 205,385,963 0.1436
Inventory Turnover Ratio = Inventory / Net Sales
55. 55
4. 6. CHART SHOWING THE INVENTORY FROM THE YEAR 2009-10 TO
2013-14
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. Since all the years showing a lower inventory
turnover ratio points that the inefficiency and poor inventory management system.
0.2596
0.2134
0.1485
0.1289
0.1436
0
0.05
0.1
0.15
0.2
0.25
0.3
2013-14 2012-13 2011-12 2010-11 2009-10
Inventory Turnover Ratio
Inventory Turnover Ratio
57. 57
4.7. TABLE SHOWING THE TOTAL MONTHLY SALES DURING THE
FINANCIAL YEAR 2013-2014
SUMMARY OF MONTHS SALES IN MONTHS (IN RUPEES)
APRIL 2013 154535522.82
MAY 2013 168042921.19
JUNE 2013 208806743.69
JULY 2013 93084614.12
AUGUST 2013 169980565.88
SEPTEMBER 2013 113515779.89
OCTOBER 2013 132220861.14
NOVEMBER 2013 108759659.65
DECEMBER 2013 125889488.96
JANUARY 2014 176127012.61
FEBRUARY 2014 147023677.77
MARCH 2014 164598854.14
58. 58
4.7. CHART SHOWING TREND OF SALES FOR THE FINANCIAL YEAR
2013-2014
From the above chart it indicates that in the month of june-2013the sales is very
high and in the beginning of the year it seems to be lowest and later in the month of
july-2013 again there is a fall in sales value.
4.7.1 TABLE SHOWING THE TOTAL ANNUAL SALES DURING THE
FINANCIAL YEAR 2009-10 TO 2013-14
YEAR SALES (RUPEES)
2009-10 1,429,330,124
2010-11 1,618,261,585
2011-12 1,846,065,731
2012-13 1,690,500,175
2013-14 1,590,826,883
0
50000000
100000000
150000000
200000000
250000000
SALES
SALES
59. 59
4.7.1 CHART SHOWING TREND OF SALES DURING THE FINANCIAL
YEAR 2009-10 TO 2013-14
1,429,330,124
1,618,261,585
1,846,065,731 1,690,500,175
1,590,826,883
0
200,000,000
400,000,000
600,000,000
800,000,000
1,000,000,000
1,200,000,000
1,400,000,000
1,600,000,000
1,800,000,000
2,000,000,000
2009-10 2010-11 2011-12 2012-13 2013-14
SALES
SALES
61. 61
4.8. TABLE SHOWING THE TREND OF DEBTORS DURING THE
FINANCIAL YEAR 2009-10 TO 2013-14
YEAR DEBTORS (RUPEES)
2009-10 137,528,069
2010-11 132,053,140
2011-12 239,563,812
2012-13 260,217,374
2013-14 309,429,246
4.8. CHART SHOWING TREND OF SALES DURING THE FINANCIAL
YEAR 2009-10 TO 2013-14
137,528,069 132,053,140
239,563,812
260,217,374
309,429,246
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
2009-10 2010-11 2011-12 2012-13 2013-14
DEBTORS
DEBTORS
62. 62
This chart indicates that amount due seems too low in the year 2010-11 and
high in the year 2013-14. Comparing to the financial year 2009-10, the changes in
debtors showing a significant increase of rupees 171,901,177 in the financial year
2013-14. The main reason for this particular phenomenon is that he liberalized credit
policy of the company.
64. 64
RESULTS AND DISCUSSION
5.1. SUMMARY OF FINDINGS
1. Low value of current ratio may indicate existence of non-idle or over
utilized 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
rupee 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 industry’s
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)
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. Strengthen their management of receivables.
2. State explicit and articulate credit policies.
65. 65
3. An efficient collection program.
4. Better co- ordination between production, sales, and finance
departments.
5. 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.
66. 66
APPENDIX
BALANCE SHEET
Particulars As at
March 31,
2014
As at
March 31,
2013
As at
March 31,
2012
As at
March 31,
2011
As at
March
31,
2010
A. EQUITY
AND
LIABILITIES
1.
Shareholders'
funds
(a) Share
Capital
137,675,191 137,675,191 137,675,191 137,675,191
(b) Reserves
and Surplus
65,966,873 69,408,938 57,568,749 -226,941,417
2. Non-
Current
Liabilities
(a) Long Term
Borrowings
551,043,197 567,437,092 578,374,891 600,347,740
(b) Deferred
Tax Liabilities
(Net)
3. Current
Liabilities
(a) Short Term
Borrowings
67. 67
(b) Trade
Payables
504,340,516 471,739,782 476,816,500 45,234,620
(c) Other
Current
Liabilities
285,824,718 205,088,916 58,720,812 567,512,020
(d) Short Term
Provisions
227166010 223381975 900,831,373 274,003,364
TOTAL 1,772,016,505 1,674,731,939 2,209,987,516 1,397,831,518
B. ASSETS
1. Non-
Current Assets
(a) Fixed Assets 734,615,979 710,814,241 1,305,006,762 595,709,872
(iii) Capital
Work in
Progress
(b) Non Current
Investments
1,229,204 1,229,204
(c) Long Term
Loans &
Advances
(d) Differed
Tax assets(net)
28,660,583 28,660,583 28,660,583 28,660,583
(e) Other non-
current assets
21,381,883 25,259,939 17,208,610 15,669,096
2. Current
Assets
(a) Current
Investments
1,229,204 1,229,204
68. 68
(b) Inventories 418,673,516 407,556,825 314,011,807 234,397,559
(c) Trade
Receivables
309,429,246 260,217,374 239,563,812 132,397,559
(d) Cash and
Cash
Equivalents
29,399,691 58,642,040 133,475,750 208,115,358
(e) Short Term
Loans &
Advances
228,629,404 182,351,733 170,830,986 181,996,707
(f) Other
Current Assets
Miscellaneous
expenditure
TOTAL 1,772,016,505 1,674,731,939 2,209,987,513 1,397,831,518
69. 69
BIBLIOGRAPHY
1. Bhabatosh Banerjee: Fundamentals of Financial Management (PHI LEARNING
PRIVATE LIMITED, New delhi-110001, 2010)
2. D.C. Bose: Financial Management (DIVYA PUBLICATIONS, KERALA-2005)3.
B. Mahadevan: OPERATIONS MANAGEMNT theory and practice, second edition
(IIM, PEAESON, New delhi-2010)
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
