Mind A

INDEX ACKNOWLEDGEMENT PREFACE CHOICE OF THE ORGANIZATION COMPANY PROFILE • • • • •

Minda History Group Companies Vision & Mission Major Clients International Business

INTRODUCTION OF TOPIC – (RECEIVABLE MANAGEMENT) OBJECTIVES OF REPORT MAKING THEORIES & REVIEW • • • • • •

Account Receivable Policy Formulation Analysis of Information’s Strategies of Account Receivable Management Debtor Management Advantages Handling Receivables Factoring – the new concept

RESEARCH METHODOLOGY ANALYSIS • • • • •

Debtors Value Account Chart Debtors more than 90 Days Chart Dispute Account Chart Overdue Debtors Account Chart Debtors No of Days Chart

•

Debtors Ageing Analysis

INTERPRETATION CONCLUSION BIBLIOGRAPHY

ACKNOWLEDGEMENT It is impossible to acknowledge the contribution of all those who came across and therefore, I take this opportunity to acknowledge the major contributors of this project. I am deeply indebted to Mr. Sachin Sharma (Asst. Mgr), my industry guide, for their valuable information’s and inputs which added dimensions and meaning to my project. Without his guidance, the report couldn’t have been possible. It has a great learning experience working under him. I would also like to thanks to Mrs. Ashu Khanna and other distinguished faculty of Department of Management Studies for their moral support, guidance and willing cooperation during the making of my project.

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Last but not the least, I would like to thank my parents, friends and all other people who helped me directly or indirectly in the completion of this project report.

BHAWNA MAMGAIN

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PREFACE Receivables are direct results of the credit sales. Credit sales are resorted to by a firm to push up its sales, which ultimately results in pushing up the profit earned by the firm. At the same time, selling goods on credit results in blocking of funds in account receivable. Addition funds are required for the operation needs of the business, which involves extra cost in term of the interest. Moreover increases in receivable also increases chance of bad debts. Thus the creation of the account receivable is beneficial as well as dangerous. The finance manager has to follow a policy, which uses cash funds as economics as possible in extending receivable without adversely affecting the chance of increasing sales and making profit. Management of Account Receivable may be therefore be define as the process of making decision relating to the investment of funds in this assets which will result in maximization of the overall return on the investment of the firm. Thus “the objective of the Receivable Management is to promote sales and profit until that point is reached where the return investment in further funding of receivable is less than cost of funds raised to finance that additional credit (i.e. cost of capital)”.

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CHOICE OF THE ORGANIZATION Minda Industries Ltd. has been selected as the target group to know the receivable management process. The organization mainly supplies the product to the industrial customer or the major clients (customer) of the Minda Industries are the big automobile industries. The industry supplies the material to the customer on the credit or the mostly sales is credit. Due to this reason Minda Industries Ltd. is found to be the best organization to the present study.

COMPANY PROFILE (MINDA – THE GROUP ON THE MOVE) NK Minda Group is India’s foremost manufacturer of a range of automotive components. The Group has an annual turnover of Rs. 5.45 billion (USD $ 121 million) and is a leading supplier to global Original Equipment Manufacturers.

HISTORY 5

Chairman, Mr. S.L. Minda, founded the Minda Group in 1958. He began with a small team of five people and the vision of becoming a leading player in the automotive components industry. His pioneering efforts have culminated into the Minda Group becoming a diversified, customer oriented, multi-product, and multi-location organization. Under the dynamic leadership of Mr. Nirmal K. Minda, who took over as the Managing Director in the year 1995, the Minda group has grown manifold. Today, it has an annual turnover of Rs. 5.45 billion (USD 121 million) and employs around 4000 people in 18 manufacturing facilities spread across India and 1 in Indonesia. Over the years, Minda Group has acquired a customer base that includes the who’s who of the automotive sector in India and around the world.

Philosophy about Manpower : People work best when there is a sense of ownership and the feeling that it is a collaborative effort. Our philosophy is to empower each individual to take his own decisions in his defined field, so that he can add to the growth. Minda Group has a number of companies, each of which takes pride in being professionally driven. The organization is divided into different companies or Strategic Business Units (SBUs), and each SBU head has the overall responsibility for his operations. A special committee called the Minda Management Committee has been setup which works in a consultative capacity and includes all SBU heads, besides corporate and human resource representation. With a clearly defined value proposition, which is all about respect to people and customer orientation, the Minda Group is a unique example of succeeding by empowering people.

The Minda group product profile comprises of : ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒

Switches-2 wheelers Switches-4 wheelers Lighting Batteries Horns-2/3 wheelers Horns-4 wheelers Alternate fuel kits – LPG /CNG fuel kits

Group foreign joint-venture : ⇒ Tokai Rika Co. Ltd., Japan ⇒ TYC Brother Ind. Company ltd., Taiwan

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⇒ Fiamm S.P.A, Italy ⇒ Impco Technologies Inc., USA

Corporate outline : Established : 1958 Chairman : S L Minda Managing Director : Nirmal K Minda Director : Ashok Minda Director : B R Agarwal Director : Raja Ram Gupta

GROUP COMPANIES Minda Group is a specialized automotive components manufacturer that provides products and solutions to automobile companies across the globe. The Group comprises of the following companies :

1.Minda Industries Limited – Minda Industries Limited is the flagship company of the Minda Group. It designs, develops and manufactures switches for 2/3 wheelers and off-road vehicles. In addition, Minda Industries Limited manufactures batteries for 2/3/4 wheelers and off-road vehicles. Minda Industries already enjoys more than 70% market share in the 2/3 wheeler segment in India and is amongst the top few globally. Today, Minda Industries is over Rs. 3.04 billion (USD 67.5 million) company and is on a rapid expansion spree. It is geared to take on global competition and has already made inroads into the ASEAN market. Minda Industries is on its way to becoming the favored vendor for 2/3 wheeler switches globally. Minda Industries Limited has established 8 state of the art facilities spread across the length & breadth of India and one in the ASEAN region and employs more than 2800 people. The various product offerings include :  Lever and Holder Assembly  Grips Handle Bar Switch  Brake Handle Bar System Assembly  Switch The company also designs different types of switches like Rotary Switch, Handle Bar Switch, Plunger Type Switch, Rocker Switch, Grip, Lever Holder Assembly, Panel Switch and 7

Modular Switch. On an average, Minda Industries develops 140 distinct products across categories each year and puts in place 25 new assembly lines to manufacture them. CORPORATE OFFICE : Minda Industries Limited, Vill. Nawada Fatehpur, P.O. Sikanderpur Badda, Manesar, Distt. Gurgaon, Haryana - 122004 VISION : To be a world-class organization by :  Business expansion  Manufacturing excellence  Creating world-class products  Cost management  People excellent MISSION : To be the global leader (No. 1) in 2/3 wheeler and off-road vehicles’ switches by volume and revenue. Minda Industries believes in collaborative designing with the vehicle manufacturers. Minda Industries has the capability to improvise existing products as well as offer cost-effective solutions for products already available in the market.

2.Mindarika Pvt. ltd. Mindarika Pvt. Ltd. is a Joint Venture between Minda Industries Limited, Tokai Rika Company Limited, Japan and Sumitomo Corporation, Japan to produce automotive switches for four-wheeler vehicles. With Rs. 1.1 billion (USD 24.7 million) in revenue, it is India’s largest four wheeler automotive switch manufacturer. The company has a manufacturing facility at Gurgaon and employs 400 people. Mindarika is consistently winning accolades across categories of products in the automotive switches segment. The core strengths at

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Mindarika are skilled manpower, adherence to the highest quality standards and providing cost effective solutions. 3.

Minda TYC Automotive Limited –

Minda TYC Automotive Limited is a Joint Venture between Minda Industries Limited and TYC Brother Industrial Company Limited, Taiwan to produce automotive lighting. The company has manufacturing facilities in Sonepat, Gurgaon and Pune and employs around 400 people. Minda TYC produces a variety of world-class lighting products for the 2/3 wheelers and off-road vehicles, as for four-wheeler vehicles. 4.

Minda Fiamm Acoustic Limited –

Minda Fiamm Acoustic Limited is a Joint Venture between Minda Industries Limited and Fiamm S.p.A, Italy to produce 2/3 wheeler automotive horns. The Rs. 350 million (USD 8 million) company has manufacturing facilities in Delhi, Gurgaon and Pantnagar and employs over 300 people. Today, Minda Fiamm is the leader player in the Indian automotive horn industry. It offers customized products and solutions for a range of automotive acoustic problems. Minda Fiamm utilizes the experience of its joint venture partner, FIAMM S.p.A. of Italy, to offer R&D expertise and capabilities to the Indian customer. 5. Minda Auto Gas Limited – Minda Autogas Limited began as Minda Impco Limited - a Joint Venture between NK Minda Group and Impco Technologies Inc, USA. In April 2006, Impco, as part of their global strategy, decided to exit all Joint ventures including the one in India. Today, Minda Autogas Limited and is a fully owned company of the NK Minda Group. Minda Autogas provides CNG / LPG kits and other alternative fuel solutions to various OEMs and the replacement market. Company Vision:  To be a Rs. 1 billion company by 2008-2009.  To be the preferred supplier of alternate fuel kits to the Indian market.

6. PT Minda ASEAN Automotive – Recognizing the importance of the ASEAN market, the Minda Group has set up a Greenfield manufacturing facility in Indonesia through a company named PT Minda ASEAN Automotive. The project that was

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conceptualized in October 2004 began its production in Indonesia in December 2005. In a short span, the ASEAN venture started to acquire renowned ASEAN OEM customers and is today exporting to Malaysia, Vietnam, Philippines & Thailand. The product range comprises of switches and locks for two wheelers and is going to start manufacturing other Group product lines.

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MAJOR CLIENTS • • • • • • • • • • • • • •

TVS MOTORS CORPORATION TAFE TRACTOR HERO HONDA LML MOTORCYCLES & SCOOTERS BAJAJ ROYAL ENFIELD HONDA KINETIC SUZUKI MAHINDRA & MAHINDRA CUMMINS INDIA NEW HOLAND PIAGIO GREAVES EICHER

MAJOR OVERSEAS COUNTRIES FOR EXPORTS : • • • • • • •

GERMANY ITALY THAILAND SRI LANKA MALAYSIA FRENCH INDONESIA

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INTRODUCTION OF TOPIC (Receivable management): For most companies, Account Receivables are very important investment, often dominating fixed asset investment. With the concern for return on assets expressed by many companies in recent years, there has come ever-increasing focus on the funds committed to receivable. Whether this current asset is managed efficiently influences very strongly the amount of funds invested. The optimum is determined by comparing benefits to be derived from a particular level investment with the cost of maintaining the level. Effective Management of Account Receivable presents important opportunities for companies to achieve strategic advantage through improvements in customer service, cash management and reductions in costs. The primary objective of Accounts Receivable in the commonwealth public sector is to collect monies due and to assist in meeting cash flow requirements. An effective accounts receivable function can assist in achieving the desired cash flow outcome through the timely collection of outstanding debts. Receivable are very important cash inflow for the organization and managing cash flow is a critical aspect of managing any business. Many companies go out of business because they have not paid enough attention to managing their debtors effectively.

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OBJECTIVES OF REPORT MAKING 1.) To gain maximum knowledge about the practical work. 2.) To know about the debtor (receivable) management of the Minda Industries Ltd. (switch division). 3.) To seek the financial process of the company. 4.) To identify the areas of improvement.

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THEORIES & REVIEW ACCOUNT RECEIVABLE POLICIES An account receivable is generated when an enterprise, having granted credit, aspects, in lieu of cash, a written or implied promise to pay in the future for delivery of its goods or services. In today’s business environment, competitive pressures, customer preferences, and promotional selling opportunities lead the management of most enterprises to offer credit. Account receivable often constitutes a significant portion of assets and are, therefore, a major business investment. Successful control of the account receivable process demands development of appropriate credit, collection, and financing policies compatible with the enterprises profit, liquidity and market share. Account receivable policy development is subject to internal and external business constraints and requires careful evaluation of the policies potential impact on : • Sales volume, • Cash management objectives and procedures, • Direct and indirect costs of receivable management, and • Customer relations. Once an account receivable policy is implemented, it should be reassessed at least annually, since policy changes could be required to adjust for changing internal and external conditions, such as changing business objectives, varying competitive industry standards, fluctuating interest and foreign exchange rates, inflation, rapidly increasing credit volume, technological advances, and global trade pattern trends. This guideline highlights the generally accepted industry principles and processes used to achieve effective management of an enterprises accounts receivable. It also addresses important issues arising from receivable transactions. Emphasis is placed on the development of appropriate credit, collection, and financing policies, and the evaluation and control techniques needed to ensure effective management of the accounts receivable process. The guideline provides prescriptive recommendations to assist managers to make rational decisions and choose effective implementation techniques.

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ACCOUNT RECEIVABLE POLICY FORMULATION The account receivable cycle begins with the enterprises decision to extend credit and ends when settlement is received in payment for the goods or services provided. It is critical that accounts receivable credit, collection, and financing policies complement marketing, sales, and production policies and, therefore, be compatible with enterprises overall objectives. To achieve this goal, the chief executive officer should : • Involve senior managers from all appropriate departments in developing account receivable policy, since the various departments within an enterprise could have vested interests and, possibly, conflicting objectives, • Assign one senior manager to be responsible for the groups policy determination, and • Review and approve the policies that the group has formulated.

CREDIT POLICY – An enterprise’s Credit policy is a major, controllable element that has a significant influence on sales, demand and profits. The factors that comprise credit policy should be analyzed before the decision is made whether or not to offer credit or to make changes to current policy. Factors that could constrain or influence credit policy include : •

•

•

•

Ability to finance the credit policy. Costs of financing receivables by means of internal or external credit facilities should be estimated to determine which approach is feasible for the enterprise. Industry credit terms. Terms tend to be alike throughout an industry. However if an enterprise has a superior product or service, it could consider applying more restrictive credit terms than those offered by the industry in general. Competitive issues. The initial credit policy and any subsequent changes made to it are often limited by competitors and customer reactions to competitive credit benefits, to payment convenience, and to pricing discount and financing efficiency. The size of the customer base and relative risk profile of major customers. Credit policy should take into account major

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• • • •

high-risk customers and the weighting that should be given to them in relation to total customer base. Sales volume. If a new or changing credit policy is expected to increase sales volume, the ability to meet customer demand should be considered. Late payments and defaults. As a firm credit policy is eased, late payment and default risk usually increases. Promotional activities. The implementation of a promotional program may require a target market base, which is provided by record of credit customers. Sovereign risk and credit policy on export sales. Export sales credit policy should consider political, economic, and local practices as well as specific banking requirements.

The development of the enterprise credit policy requires that specific decisions be made regarding several variables that establish the terms of sales and the acceptable level of credit risk. The key variables are : A. Credit quality standards B. Credit period C. Credit terms D. Cash discounts and surcharges E. Credit limits F. Credit instruments When implementing or varying the credit policy by changing anyone, or all, of the above variables, management must assess the impact on net income, calculate the probability of achieving the planned results, and determine the additional levels of risk assumed. In particular, any relaxation of credit policy should be considered only after very careful evaluation of the impact of the change by top management, because it is extremely difficult to revert to more stringent policies without experiencing adverse effects on customer relations and sales. A. Credit quality standards : Credit quality standards should be established to control the receivables risk by determining the likelihood that a given customer will pay slowly or not at all. The standard should define the minimum financial strength required for a customer to be an acceptable credit client. Some factors included in determining customer credit acceptability can be quantified to derive a probability of default. Management should establish quality standards with care in order to minimize the number of instances when a customer with an

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acceptable credit rating is rejected or a customer with an unacceptable rating is accepted. To evaluate overall credit quality, the five C’s of credit should be considered. Each is weighted relative to its importance to the enterprise and the availability of information for constructing probability estimates. i.) Character refers to the buyer’s integrity, as perceived by the seller, and is essentially a subjective assessment. Many credit officers consider character to be a very important predictor of payment patterns. ii.) Capacity measures the customer’s ability to pay the obligation when it is due, and is assessed on the basis of the buyer historical payment records and business reputation. Ability to pay may be quantified by calculating the current, quick, and working capital turnover ratios. If the buyer is an individual or a newly formed business, capacity measures may have to be based on credit rating information available from external sources. iii.) Capital represents the long-term financial resources available if additional liquidity is required. It is measured by the customer’s general long-term financial strength as indicated by the financial ratio analysis, particularly the debt/asset ratio, the times-interest-earned ratio, and the lambda liquidity ratio. iv.) Collateral represents the assets available to satisfy the purchaser’s obligation if cash flow is insufficient to pay for the purchase. Customers may offer, or the supplier may demand, an asset or assets as security to obtain credit. v.) Conditions refer to general economic trends and forecast and specific industry, political and technological factors that may affect the customers ability to pay and the seller’s willingness to grant credit. Information concerning a customers credit worthiness can be obtained from many sources : previous credit sales experience with the customer, external credit information available from public reports such as newspaper business reports or databases, credit association reports, credit reporting agencies such as Credited, Credit Bureau, or Dun & Bradstreet other major vendors, and financial institutions such as the customers bank or trust company. Whilst the materiality of the amount will dictate the degree of analysis involved, the major sources of information available to companies in assessing customer’s credit worthiness are : •

Bank references. These may be provided by the customer’s bank to indicate their financial standing. However, the law 17

•

•

•

•

•

•

and practice of banking secrecy determines the way in which banks respond to credit enquiries which can render such references uninformative, particularly when the customer is encountering financial difficulties. Trade references. Companies already trading with the customer may be willing to provide a reference for the customer. This can be extremely useful, providing approached are a representative sample of all the client’s suppliers. Such references can be misleading, as they are usually based on direct credit experience and contain no knowledge of the underlying financial strength of the customer. Financial accounts. The most recent accounts of the customer can be obtained either direct from the business, or for limited companies, from companies house. While subject to credit limitations past accounts can be useful in vetting customers. Where the credit risk appears high or where substantial levels of credit are required, the supplier may ask to see evidence of the ability to pay on time. This demands access to internal future budget data. Personal contact. Through visiting the premises and interviewing senior management, staff should gain an impression of the efficiency and financial resources of customers and integrity of its management. Credit agencies. Obtaining information from a range of sources such as financial accounts, bank and newspaper reports, court judgments payment records with other suppliers, in return for a fee, credit agencies can approve a mine of information. They will provide a credit rating for different companies. The use of such agencies has grown dramatically in recent years. Past experience. For existing customers, the supplier will have access to their past payment record. However, credit managers should be aware that many failing companies preserve solid payment records with key suppliers in order to maintain supplier, but they only do so at the expense of other creditors. Indeed, many companies go into liquidation with flawless payment records with key suppliers. General sources of information. Credit managers should scout trade journals, business magazines and the columns of the business press to keep abreast of the key factors influencing customer’s businesses and their sector generally. Sales staffs that have their ears to the ground can also prove an invaluable source of information.

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Analysis of the information : Collection of the information in respect of any customer is not going to serve any purpose in itself. Once all the available credit information about a potential customer has been gathered, it must be analyzed to reach at some conclusion regarding the credit worthiness of customer. The 5 well-known C’s of the credit provide a framework for the evaluation of a customer has been presented in the following figure :

Payment History Based on Financial Statement Good

No Information

Bad

Accept

Detailed Analysis of Risk

Reject

Low

Medium

High

Accept

Credit Agency Investigation

Reject

Based on Detailed Application

Based on External Credit Analysis Accept

Satisfaction

Doubtful

Reject

The enterprise that is assessing credit quality should : 

Determine the information required to investigate credit approval requests and review customer credit worthiness status,

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 

Analyze the type, quality and cost of the information available, and Establish standard information sources and develop appropriate financial ratios required to produce customer credit reports.

Based on the information gathered, the customer’s credit quality can be assessed. The appropriate manager should then make a decision about gathering credit and defining the credit terms, limits, due dates, and acceptable credit forms. Although the final credit assessment involves subjective management judgment, giving numerical values to critical measures can statically assess the probability that the customer will pay on time that the selling enterprise has determined to be significant. Critical measures could include the customer’s statements, interest rate levels, and pertinent economic and industry figures or trends. A statistical method is especially advantageous for enterprises evaluating many customers on a consistent basis. As a further refinement the process can be computerized. Customer’s credit quality ratings should be reassessed on a regular basis, particularly major customers whose default could have serious financial consequences for the seller. B. Credit period : The credit period is the length of time credit is granted (for example, from invoice date to due date), and is normally established according to an industry standard. The credit period has a direct impact on the cost of financing receivables and on collection risk. An enterprise may elect to deviate from the industry standard for one or more reasons :  To obtain a competitive advantage.  To reflect the enterprises classification of customer quality  Or to adjust to longer-term economic or business changes. The date when payment is deemed to be received should be defined. It may be based on the envelope postmark date, the remittance processing date, or the date funds are received. Customer should be clearly advised of the payment receipt date. C. Credit Terms : Credit terms are normally specified on the contractual documents, or on the customer invoice or statement. Frequently used payment terms include the following :  Cash before delivery (CBD) or Cash on delivery (COD) may be required when the buyer has been classified as a poor credit risk. 20

 



In case of an unknown or one-time customer, a certified cheque may be required when the order is placed, or before the goods or services are delivered. Cash term permit the buyer a payment period of about five to 10 days and may be used for high-turnover or perishable goods. Invoice terms often stipulate a net due date and a discount date that may be calculated from various starting dates such as the invoice, delivery, or client acceptance dates. The terms may be quoted, for example as 2/10 net meaning a payment discount of 2% is given if the invoice is paid within 10 days. Full payment is required after 10 days but within 30 days. Periodic statements are normally issued monthly. The statement terms may be similar to invoice terms and include discounts and interest charges for late payment. All invoice transactions are listed up to a cut-off date and payment is due by a specified date in the following period.

D. Cash Discounts and Surcharges : Cash discount policies may be established for a number of reasons :  To conform to the industry norm to stimulate sales  Or to expedite receipt of cash. To be an effective collection tool, the discount rate must be established at a rate of interest higher than that at which the customer is able to borrow. Consideration should be given to the implications of customers taking a discount to which they are not entitled. A surcharge, or late payment charge, can be used to encourage prompt payment and to equalize treatment for customers who pay on time versus those who delay payment. E. Credit limits : Credit limit categories should be established to codify the total credit that may be granted to customers in each credit quality classification. To ensure that credit limits remain appropriate, given business or other major changes, they should be regularly reviewed. Periodic credit worthiness reassessments can be simplified by automatically reassigning customers to a higher credit limit level after a specified period of satisfactory payment experience. Credit factors, assigned by the credit grantor and weighted by relative importance, can be used to calculate a single numerical value that could be used to assign distinctive credit limits and payment periods to different customers. The credit score must always be tempered by informed management judgment because the acceptreject decision implicitly includes economic trade-offs : to minimize 21

rejection of an acceptable credit customer (with loss of future business) versus to accept a poor credit risk. F. Credit Instruments : Credit Instruments are written payment contracts agreed to by the enterprise and its customers. Instruments range from simple invoices to formal credit arrangements that are selected to reduce credit risk. When selecting an instrument to be used, the enterprise should consider industry standards, market norms, and buyer risk. The enterprise may choose different instruments at different times depending on the product or service sold, the customers geographical location, or customer quality classification. The quality to use different instruments provides flexibility when dealing with significant or sensitive customers and orders. Compliance with relevant consumer protection legislation may require detailed disclosure to the buyer of credit instrument terms.

COLLECTION POLICY – One senior individual in the enterprise should be made responsible for the implementation and control of the collection policy. The collection policy should specify :  The employees directly responsible for maintaining the policy;  Cash management techniques to be used to optimize cash inflow (including prompt invoicing);  A statement routine and payment processing method;  Responsibilities of sales staff and other employees who could have a negative or positive impact on collections;  The consistency with which standard procedures are to be enforced;  Alternative methods to reduce risk of no collection and the circumstances in which those methods should be applied; and  A detailed procedure for handling past-due accounts.

CREDIT INSURANCE – Collection risk can be reduced by purchasing credit insurance, thus shifting some of the risk of bad debt losses to a third party. The risk level has to be high enough to warrant the insurance premium. For example, if a few customers make up a significant percentage of the accounts receivable and default by one of them would threaten the viability of the enterprise, credit insurance should be seriously considered. Credit insurance terms are negotiable but will normally 22

incorporate a deductible amount and a coinsurance provision so the insurer and the seller share a percentage of the loss above the deductible amount.

OVERDUE ACCOUNTS – The process for collecting overdue accounts may vary depending on the monetary value of the account, the type of sale (goods or service), and past experience with the customer. Some situations will require special treatment. For example, a customer with an overdue account may request further credit and a decision must be made concerning the steps to be followed until that customer has been reestablished as a normal credit risk. The following policy actions could be applied in such situations :  Request prompt payment of the account,  Withhold approval or refuse to ship further goods (or provide service) until all past due payments are made,  Withhold approval until a partial payment is made, or  Refuse further credit. When partial payments are required, the policy should specify whether the payments would be applied to the oldest amounts outstanding to the smallest outstanding invoices (a process called shorting), or to the largest overdue amount. Payments should be made against specific invoices where possible. If ongoing service is provided (for example, utilities such as hydro, gas, or telephone), the enterprise may also initiate action to cut off or disconnect service to the extent permitted under relevant consumer legislation.

STRATEGIES OF ACCOUNT RECEIVABLE MANAGEMENT Debtors (Accounts Receivable) are customers who have not yet made payment for goods or services, which the department has provided. The objective of debtor management is to minimize the timelapse between completion of sales and receipt of payment. The costs of having debtors are :  Opportunity Costs (cash is not available for other purposes);  Bad Debts.

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Debtor management includes both pre-sale and debt collection strategies.

Pre-sale strategies include: o Offering cash discounts for early payment and /or imposing penalties for late payment o Agreeing payment terms in advance o Requiring cash before delivery o Setting credit limits o Setting criteria for obtaining credit

Post-sale strategies include: o Placing the responsibilities for collecting the debt upon the center that made the sale o Identifying long overdue balances and doubtful debts by regular analytical reviews o Having an established procedures for late collections, such as  A reminder  A letter

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HANDLING RECEIVABLES (DEBTORS) Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know…who owes them money… how much is owed…how long it is owing…for what it is owed. Late payments erode profits and can lead to bad debts. Slow payment has a crippling effect on business, in particular on small businesses that can least afford it. If you don’t manage debtors, they will begin to manage your business, as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debts. The following measures will help manage your debtors : 1) Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2) Establish clear credit practices as a matter of company policy. 3) Make sure that these practices are clearly understood by staff, suppliers and customers. 4) Be professional when accepting new accounts, and especially larger ones. 5) Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources, etc. 6) Establish credit limits for each customer…and stick to them. 7) Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8) Keep very close to your larger customers. 9) Invoice promptly and clearly. 10)Consider charging penalties on overdue accounts. Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtor is getting longer, or is already very long, you may need to look for the following possible defects :  weak credit judgment  poor collection procedures  lax enforcement of credit terms  slow issue of invoices or statements  errors in invoices or statements  Customer dissatisfaction. 25

Debtor due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example,  Longer credit terms taken with approval, particularly for smaller orders  Use of post-dated checks by debtors who normally settle within agreed terms  Evidence of customers switching to additional suppliers for the same goods  New customers who are reluctant to give credit references Profits only come from paid sales. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help in collecting money from debtors :  Develop appropriate procedures for handling late payments.  Track and pursue late payers.  Get external help if your own efforts fail.  Don’t feel guilty asking for money…its’ yours and you are entitled to it.  Make that call now. And keep asking until you get some satisfaction.  In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem.  When asking for your money, be hard on the issue-but soft on the person. Don’t give the debtor any excuses for not paying.  Make it your objective is to get the money – not to score points or get even. Accounts receivable is an important part of any company’s financial management. Reducing accounts receivable risk is always a top priority. There are a variety of tools and services available to help assist companies in managing their accounts receivable. Examples include : accounts receivable software tools, collection services, and even factoring services to allow companies to sell their accounts receivable, and minimize their risk.

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DEBTOR MANAGEMENT ADVANTAGES  Payment arrears and open accounts can place the financial health of your company at risk.  Reduce your Outstanding Payments.  You reduce personnel costs and debit interest, and convert fixed costs into variable ones.  You increase your cash flow by improving liquidity, success ratios and credit interest.  You can make optimum use of the credit limits issued.  You increase capacity for your own business activity. Significant advances in accounts receivable performance and process efficiency through the following five complementary key management initiatives :  Re-engineering accounts receivable  Risk assessment  Use of advanced technology  Debt collection processes  Performance measurement These matters are addressed following :–

•

RE-ENGINEERING ACCOUNTS RECEIVABLE – Some large private sector organizations have achieved real cost reductions and performance improvements by reengineering the accounts receivable process. Re-engineering is a fundamental rethink and re-design of business processes, which incorporates modern business approaches. The nature of accounts receivable is such that decisions made elsewhere in the organization are likely to affect the level of resources that are expended on the management of accounts receivable. An illustration of this point is the extra effort that must be put into debt collection where credit policy is poorly administered or too freely given. The strong linkages between different processes means that true improvements cannot be achieved without focusing on all aspects of the management of accounts receivable. 27

The following better practices present opportunities to improve the accounts receivable function : 1) Centralized Processing A better practice for the delivery of finance services is the adoption of centralized processing for finance functions such as accounts payable and accounts receivable. Centralized Processing groups are typically high volume transactions processing centers servicing multiple operating groups. Their establishment achieves a number of benefits for the organization. These include the achievement of a high degree of specialist expertise in the function supported, the establishment of centers of excellence that develop and enforce common practices and standards and the achievement of cost efficiencies through the co-locating of systems and staff. The establishment of these centers also frees up other staff for more value adding work. One private sector firm reduced its total finance staff numbers by 12% through centralized processing.

2) Standing Payments Research into better practice indicates that providing customers and debtors with alternative payment approaches significantly enhances repayment rates. In addition to there being alternative payment methods there are also alternatives to issuing invoices in the traditional accounts receivable processing approach. These alternative payment strategies result in efficiencies in the management of accounts receivable. 3) Alternative Payment options Private sector organizations and public authorities are finding that payment of account outstanding is likely to be quicker where a number of payment methods are a marketing tool that is to benefit in attracting and retaining customers. The following modern payment methods are available and provide the benefits of added customer service, reducing remittance processing costs and improving cash flow through faster debtor turnover : •

Direct debit - involves authorization for the transfer of funds from the purchaser’s bank account; this approach has the advantage of reduced processing costs, however it can present security exposures.

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•

Integrated Voice Response - a system which combines use of human operators and a computer based system to allow customers to make payments over the phone, generally by credit cards; this system has been proved highly successful in organizations which process a large number of payments regularly.

•

Outsourced Agency Collection – payments are collected by an external agency under a contractual arrangement. The payment method under this approach can be cash, cheque, and credit card. This method increases flexibility and convenience to the customer, which may lead to improvements in the rate of payment. A variant on this approach is BPAY, a system whereby banks act as outsourcing partners by collecting payments from supplier’s customers and directly crediting supplier accounts.

•

Lock Box Processing – an outsourced partner captures cheque and invoice data and transmits the file to the client agency for processing in that agency’s systems. This approach transfers the cost of data collection to service provider.

Other payment methods such as use of data kiosks by customers in public use areas and payment for goods and services via the Internet are likely to become readily available in the near future. Each of the above payment types has advantages and disadvantages, which are likely to be peculiar to the environment that particular agencies operate in. agencies need to balance the benefits in both the payment and receipting processes against the costs that some payment options may present to the agencies themselves. Customers should be aware of their liability at all times. A practical way of achieving this objective is the issue of monthly customer statements.

4) Use of Payment Incentives

Private sector practice has been to, over time, reduce the level of reliance on discounting as an incentive for prompt payment. The agencies, which have problems with debtor turnover Discounting cab be used as an incentive for customers to pay upon receipt of services, thereby, avoiding the use of credit terms.

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Whilst discounting has the advantage of potentially shortening the average collection period it also reduces net revenue. Before deciding to offer discounts agencies should conduct an analysis of the effect that the utilization of discounting will have on net revenue. This estimate should be balanced against the costs of continuing to hold receivables at their existing levels, which is effectively the market interest rate applied to the annual carrying cost of receivables. Another issue for consideration is the alternative uses to which the funds tied up in receivables could be put. In addition to developing a range of incentives for early payment agencies should consider the imposition of penalties on late payment. In designing penalties, agencies should be aware of legislative and policy considerations, which may reduce the potential for major penalties such as removal of service.

5) Case Management Approach Where individual customers have strategic importance to the company a case management approach may be adapted to the management of the company-customer relationship. Under this approach all aspects of the relationship are drawn together including debt management. The increased knowledge of the customer that derives from the adoption of a case management approach can assist in the design of strategies for the prompt repayment of debt. •

RISK ASSESSMENT –

Risk assessment is a major component in the establishment of an effective control structure. Once risks have been properly identified, controls can be introduced to either reduce risks to an acceptable level or to eliminate them entirely. A proper risk assessment also creates opportunities for freeing processes from inefficient practices. In managing accounts receivable the key areas that management should focus on for the purpose of conducting a risk assessment are : 1) Debt Management Processes – The risk analysis involves a re-think of processes and questioning the way that tasks are performed. A risk assessment opens the way for efficiency and effectiveness benefits in the management of accounts receivable. In particular, processes can be re-designed to achieve the following benefits :

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• • • • • •

The establishment of clear and concise policies for issuing credit and for recovery of debt; The removal of non value adding tasks and clarification of roles and responsibilities; By, for example, streamlining delegations; The establishment of controls where exposures are noted; Allowing staff to apply more initiative and ingenuity to every day tasks; and The identification of new and more effective ways of delivering services.

2) Outstanding Debts and Debtors – The application of a credit policy will not be fully effective unless there has been a comprehensive risk analysis of the customer population performed. This can be achieved by having detailed information on the characteristics of customers (and potential customers) and through the establishment of criteria against which to assess the credit worthiness of individual customers.

• USE OF ADVANCED TECHNOLOGY – Advances in technology present an opportunity for improvement in accounts receivables processes. The principal innovations available are the integration of systems used in the management of accounts receivable, the automation of debt collection processes and the use of electronic commerce.

System Integration – Improvements are available from the integration of the revenue and accounts receivable systems. This integration results in remittances being automatically credited against a customer account with a simultaneous update of the general ledger. This process avoids the downloading of data and re keying.

Electronic Commerce – Electronic commerce is a term applied to the use of computer and telecommunications technologies, particularly on an inter-organizational basis, to support trading in goods and services. It uses technologies such as electronic data interchange (EDI), electronic mail, electronic funds transfer (EFT) and electronic catalogue systems to allow the buyer and supplier to transact 31

business by exchanging information between computer applications systems. This achieves cost savings by removing the need for direct negotiation between the parties. “There is, in addition, an unrealized potential for the wider application of other electronic commerce technologies.” The statement indicated that individual departments should : “take account of the opportunities offered by electronic commerce in their business planning processes, and include in their information technology and telecommunications strategic plans relevant provisions covering the use or intended use of electronic data interchange both for core functions and in support applications.”

• DEBT COLLECTION PROCESSES – Debt collection processes should be undertaken with the objective of reducing outstanding accounts while keeping sight of the need to maintain customer goodwill, in an environment of cost restraint. Better practice in debt collection includes the following : Assessment of debt against a financial threshold before proceeding with recovery actions; Review of the accuracy of invoices following failure by debtors to respond to a letter of demand; Categorize debtors in accordance with their ability and willingness to pay. Tailor debt collection processes in accordance with results of this analysis; Prioritize debt on the basis of risk indicators. The indicators could include the payment history of the customer, debt level, demographics, etc; Communicate directly with debtors most probably by phone and obtain personal commitment as to repayment schedule;

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Staff have the authority to negotiate payment options within guidelines, without further approval from management; Of vital importance in the design of debt collection procedures is the need to be proactive about the recovery process. Credit industry advice is that the more a debt ages, the greater is the risk of non-recovery. Estimates are that allowing a debt to age more than 90 days increases the risk of non-recovery by at least 20 %.

• PERFORMANCE MEASUREMENT – An integral part of the re-engineering of any finance function is to develop a suite of indicators, which will measure progress over time. Following is an outline of the possible users of some of the measures of effectiveness in Accounts Receivable Management : o Debtor’s turnover – This ratio measures the average period for which sales revenue will be held in accounts receivable. This measures the efficiency and effectiveness of receivables collection. o Accounts Receivable to Revenue Ratio – This ratio can be used to highlight trends in the level of investment in accounts receivable. Where accounts receivable as a proportion of monthly revenue exceeds an established benchmark, thereby indicating the possibility of interest foregone, the matter can be highlighted for management attention.

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FACTORING AN EVALUATION (Factoring the new concept)

It already has seen that maintaining the receivables by a firm require funds to be invested in receivable. The firms have to be raise funds from various sources in order to finance the receivables. While maintaining receivable, a firm may face two type of problem. First, of problem of rising funds to finance to receivable and second, the problem relating to collection, delays and defaults of the receivables. Since the receivable management is a specialized type of activity involving a lot of time and effort, a firm, not having many receivable, may be in a position to give a direct attention to each and every customer on a regular basis. However, in a big firm the receivable management may not be so direct and the firm may be exposed to more and more defaults from customers. In such case, a firm can avail the services of specialist organization engaged in receivable management. These specialists firms are known as factoring firm. Factoring may be defined as the relationship between the seller of goods and a financial firm, the factor, whereby the latter purchase the receivable of the former and also administer the receivable of the former. Factoring involves sale of the receivables of a firm to another firm under and already exiting agreement between the firm and the factor. So the factoring is a tool to release the working capital tied up in credit extended to the customer, for more profitable uses and thereby relieving the management from sales collection chores so that they can concentrate on other important activities. In a way, the factor firm works as the collection department of the selling firm. The procedure of factoring can be explained as follows : 1) Under an agreement between the selling firm and the factor firm, the latter makes an appraisal of the credit worthiness of the potential customer and may also set the credit limits and terms of credit for different customer. 2) The sales documents will contain the instruction to make the payment directly to the factor, which is responsible for the collection.

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3) When the payment received by the factor on the due date, the factor shall deduct its fess charge and credit the balance to the firm amounts. 4) In some cases, if agreed, the factor firm may also provide advance finance to the selling firm. In a way this tantamount to the bill discounting by the factor firm. However the factoring is something more than mere bill discounting as the former includes analysis of the credit worthiness of the customer also. The factor may pay whole or a substantial portion of the sales value to the selling firm immediately on sales being effected the balance if any may be paid on the normal due date.

The mechanism of factoring has been presented in following figure:

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TYPES OF FACTORING : There are two types of factoring service :1. Non-recourse factoring - It is where the factoring company purchases the debts without recourse to the client. This means that if the client’s debtors do not pay what they owe, the factor will not ask for his money back from the client. 2. Recourse factoring – On the other hand, it is where the business takes the bad debt risk. With 80% of the value of debtors paid up front (usually electronically into the client’s bank account, by the next working day), the remaining 20% is paid over when either the debtors pay the factor (in case of recourse factoring), or, when the debt becomes due (non- recourse factoring). Factors usually charge for their services in two ways : administration fees and finance charges. For the finance made available, factors levy a separate charge, similar to that of a bank overdraft.

ADVANTAGES :

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⇒ Provides faster and more predictable cash flows. ⇒ Finance provided is linked to sales, in contrast to overdraft limits, which tend to be determined by historical balance sheets. ⇒ Growth can be financed through sales, rather than having to resort to external funds. ⇒ The business can pay its suppliers promptly (perhaps benefiting from discounts) and because they have sufficient cash to pay for stocks, the firm can maintain optimal stock levels. ⇒ Management can concentrate on managing, rather than chasing debts. ⇒ The cost of running a sales ledger department is saved and the company benefits from the expertise (and economies of scale) of the factor in credit control.

DISADVANTAGES : ⇒ The interest charge usually costs more than other form of short-term debt. ⇒ The administration fee can be quite high depending on the number of debtors, the volume of business and the complexity of the accounts. ⇒ By paying the factor directly, customers will lose some contact with the supplier. Moreover, where disputes over an invoice arise, having the factor in the middle can lead to a confused three-way communication system, which hinders the debt collection process. ⇒ Traditionally the involvement of a factor was perceived in a negative light (indicating that a company was in financial difficulties), though attitudes are rapidly changing.

FACTORING IN INDIA : Factoring in India is recent origin. In order to study the feasibility of the factoring services in India, the Reserve Bank of India constituted a study group for examining the introduction of the factoring services, which submitted its report in 1988. On the basis of the recommendation of this study group, the RBI has 37

come out with specific guidelines permitting bank to start factoring in India through their subsidiaries. For this purpose, the country has been divided into 4 zones. In India the factoring is still not very common and only few commercial banks have established the factoring agencies. The first factor, i.e., the SBI factor and Commercial Services Limited started working in April 1991 in western India. The Canara Bank Factoring Ltd. has also started operation since September 1991 in Southern India. The Punjab National Bank and Allahabad Bank have also established subsidiary companies to take up factoring business in the Northern India and Eastern India, respectively.

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RESEARCH METHODOLOGY The objective of Research is the systematic and in-depth study or search for any particular topic, subject or area of investigation, backed by the collection, compilation, presentation and interpretation of relevant details or data. Types of research: •

Exploratory Research

•

Descriptive Research

Entire information and data were gathered from the annual reports and monthly information report of Minda industries. All the figures are taken from their internal documents, which were personally shown by the members of company in our interest. DATA COLLECTION METHOD Collection of data is the first step in statistics the goal of conclusion. The data collection process follows the formulation of research design including the sample plan. Data can be secondary or primary or can be collected using variety of tools.

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RESEARCH DESIGN Research design includes the various type of sampling. It included the 3 years back data and current financial year’s 2 months data.

DATA COLLECTION SOURCES •

SECONDARY SOURCES :    

Annual reports Monthly information reports Manuals The company’s various types of data record like dispute statements, overdue statement of the debtor, debtor’s age analysis statements.

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ANALYSIS

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DEBTORS VALUE ACCOUNT CHART

DEBTORS (VALUE) 6000

Rs in Lakhs

5000

4862.57

4000

3847.76

3000

2842.36

2000

1720.54

1000 0 AVG. 04-05

AVG. 05-06

AVG. 06-07

TARGET 07-08

YEARS

ANALYSIS – Debtors’ value of the company is increasing. In the FY 2004-05, they were worth of Rs. 1720.54 Lakhs which was increase by 65.20% and reached to the Rs. 2842.36 Lakhs in the year 2005-06. In the FY 2006-07, it is increase by 35.37% and reached to the Rs. 3847.76 Lakhs. The company set the target of Rs. 4862.57 Lakhs debtor value for the financial year 2007-08. The increase in the debtor value is also a sign of increase in the sales.

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DEBTORS MORE THAN 90 DAYS CHART

DEBTORS >90 DAYS 300

285.21

Rs in Lakhs

250 200 157.71

150

105.5

100 50 0 AVG. 04-05

AVG. 05-06

AVG. 06-07

0 TARGET 07-08

YEARS

ANALYSIS – The company’s debtor more than 90 days were worth of Rs. 157.71 Lakhs in the year 2004-05which was increased by 81% and reached to the Rs. 285.21 Lakhs in the year 2005-06. During the FY 2006-07 the graph is showing a decrease of 63% and it comes at Rs. 105.5 Lakhs. The company has set the target of zero debtors more than 90 days for the FY 2007-08 because of the company’s policies. The company has the policies of less than 90 days debtor credit period.

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DISPUTE ACCOUNT CHART

DISPUTE ACCOUNT 0

Rs in Lakhs

-5

AVG. 04-05

AVG. 05-06

AVG. 06-07

0 TARGET 07-08

-10 -15 -20 -23.58

-25 -30

-28.47

-30.25

-35 YEARS

ANALYSIS – The dispute account (bad debts) position of the company is showing increasing and decreasing trend. The average bad debts of the company in the financial year 2004-05 were worth of Rs. 30.25 Lakhs, which is decreased by the 22% in the year 2005-06 and reached to Rs. 23.58 Lakhs. But during financial year 2006-07 the dispute account is increased by 20.7% and reached to Rs. 28.47 Lakhs. The company set the target of zero bad debts for the financial year 2007-08.

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OVERDUE DEBTORS ACCOUNT CHART

OVERDUE DEBTORS 250 202.2

Rs in Lakhs

200

151.67

150

130.1

100 50 0 AVG. 04-05

AVG. 05-06

AVG. 06-07

0 TARGET 07-08

YEARS

ANALYSIS Overdue debtor account chart is showing improvement during previous years. They were worth of Rs. 202.20 Lakhs in the year 200405 which is decrease by 35.65% and reaches to Rs. 130.10 Lakhs in the year 2005-06. During the financial year 2006-07 there is an increase of 16.5% and it reaches up to Rs. 151.67 Lakhs. The company set the target of zero overdue of the financial year 2007-08.

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DEBTORS NO. OF DAYS CHART

DEBTORS (NO. OF DAYS) 59

60 58

55

DAYS

56 54 52

50

50

50

48 46 44 AVG. 04-05

AVG. 05-06

AVG. 06-07

TARGET 07-08

YEARS

ANALYSIS The debtor no of days or the collection period of the company in the financial year 2004-05 was of 50 days, which increase in the year 2005-06 and reached to 59 days. But during financial year 2006-07 collection period decreases and comes at of 55 days. The company set the target of 50 days for the financial year 200708.

Debtors Age Analysis as on 28/02/08 (Rs. In Lakhs)

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DEBTORS AGE ANALYSIS

RS. IN LAKHS

GROSS TOTAL 3500 3000 2500 2000 1500 1000 500 0

3327.59 1518.15 782.5

OVER DUE

0-30

31-60

311.22

146.46

73.25

61.06

61-90

91-120

121-180

>181

NO. OF DAYS

From the above interpretation, we can say that the debtor (receivable) position of the company is good. The company’s receivable management is performing a good job in collecting the money from the debtors.

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CONCLUSION Receivable (Debtor) Management is a very important department in the organization. Effective receivable management of the company provided to kind of the costs benefits these are :  Opportunity Cost  Bad debts Cost Debtors (Account Receivable) are customers who have not yet made payment for goods or services, which the department has provided. Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. A customer who does not pay is not a customer. The company’s working capital position depends upon the receivable of the company. If the company is collecting the money on the time, then the company’s working capital will be strong, it is very easy to sell the product or services on the credit but it is very difficult to collect the money. If the company’s debtor collection period is increasing it means, the company losing a high amount by not collecting the money with in the credit limit given to the customers. Slow payment has a crippling effect on business, in particular on small businesses that can least afford it. In case, the company’s customer’s ageing of the debtors are increasing so the company should take the appropriate decision to control the receivable because we all know that the profits comes only from the paid sale.

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BIBLIOGRAPHY • • • • • •

Annual report, Minda Industries Ltd. 2004-05 Annual report, Minda Industries Ltd. 2005-06 Annual report, Minda Industries Ltd. 2006-07 Monthly Information Report, Minda Industries of the month of Jan, Feb. Chandra Prasanna, Financial Management Khan M.Y. and Jain P.K., Financial Management

Websites Visited : o www.mindaweb.com o www.google.co.in o www.yahoo.com

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