1 Dipanjan Guha, IMS Ghaziabad Summer Internship Project Report on A STUDY OF RECEIVABLE MANAGEMENT AND ROLE OF e-PAYMENT IN INDIAN OIL CORPORATION LTD. Submitted towards the Partial Fulfillment of Post-Graduate Diploma in Management (Approved by AICTE, Government of India) ACADEMIC SESSION 2009-2011 Under the kind guidance of Industry Guide College Guide Mr. SANJAY MURARKA Dr. NEERAJ SANGHI Dy. Manager (F), WBSO Faculty Indian Oil Corporation Ltd. IMS, Ghaziabad Submitted by DIPANJAN GUHA BM-09066 Date:22 nd July 2010
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1 DipanjanGuha,IMSGhaziabad
Summer Internship Project Report on
A STUDY OF RECEIVABLE MANAGEMENT AND ROLE OF e-PAYMENT IN INDIAN OIL CORPORATION LTD.
Submitted towards the Partial Fulfillment
of
Post-Graduate Diploma in Management
(Approved by AICTE, Government of India)
ACADEMIC SESSION
2009-2011
Under the kind guidance of
Industry Guide College Guide Mr. SANJAY MURARKA Dr. NEERAJ SANGHI Dy. Manager (F), WBSO Faculty Indian Oil Corporation Ltd. IMS, Ghaziabad
Submitted by
DIPANJAN GUHA BM-09066
Date:22nd July 2010
2 INDIANOILCORPORATIONLIMITED(IOCL)
Student Declaration
I, Dipanjan Guha to the best of my knowledge & belief, hereby declare that the project report
entitled :
“A Study of Receivable Management and Role of e-Payment in Indian Oil Corporation
Ltd.”
is the result of my own work in the fulfillment of academic requirement. The training is done in
Indian Oil Corporation Limited (IOCL) [Eastern Region,Marketing Division, West Bengal State
Office] for a period of two months commencing from 06.05.2010 to 06.07.2010. This project
work is submitted to Institute of Management Studies, Ghaziabad. As well as in Indian Oil
Corporation Limited[Eastern Region, Marketing Division, West Bengal State Office]. It is
not to be used copied or edited by any person. Written order has to be taken from appropriate
authority for that.
Dipanjan Guha
PGDM (Finance)
BM-09066
Institute of Management Studies
Ghaziabad
3 DipanjanGuha,IMSGhaziabad
CERTIFICATE
Hereby it is certified that the project work entitled – “A Study of Receivable Management and Role of e-Payment in Indian Oil Corporation Ltd” is a work carried out by
Dipanjan Guha
Management Trainee
Institute of Management Studies,
Ghaziabad.
It is certified that all the subjective matter carry out by him is verified. The project report has been approved as it satisfies the academic requirements in respect of Project Work.
---------------------------------------
Dr. Neeraj Sanghi
Faculty Guide
IMS, Ghaziabad
4 INDIANOILCORPORATIONLIMITED(IOCL)
ABSTRACT Indian Oil Corporation Limited, with an yearly turnover of about 2 Lac Crores is the biggest
Company in India in terms of sales. It has once again topped the Indian Companies in the
Fortune 500 list of Companies with a rank of 125. In such a large sized corporation the common
problem is the Receivable Management and formulating a sound Credit Policy and Collection
Procedure. In this fluctuating Oil Market it is very difficult to maintain the level of the Sundry
Debtors and hence the Profitability. Moreover the Private Companies are entering the Oil
Industry which has provided a tough competition for IOCL. In this study the Ratios are analyzed
to interpret the Financial Status of the Corporation and then it is compared with the market
Competitors. The Debtors of the Eastern Region has been analysed in details and a few probable
solutions to the existing problems has been formulated.
5 DipanjanGuha,IMSGhaziabad
Acknowledgement
It’s a privilege to be associated with Indian Oil Corporation Limited, a fortune ‘Global 500’
Company, India’s 2nd most top brand also world’s 18th best largest company.
This acknowledgement is not only the means of formality, but to me, it is a way by which I am
getting the opportunity to show the deep sense of gratitude and obligation to all the people who
have provided me with inspiration, guidance and help during the preparation of the project.
At the very outset, I would like to express my gratitude from bottom of my heart to Mr. Debasis
Bhattcharya [ Chief Manager,T & D ] for giving me the opportunity to do my Summer
Internship Project in this esteemed organization.
I articulate my sincere gratitude to my project guide Mr. Sanjay Murarka, Dy. Manager (F),
WBSO Indian Oil Corporation Ltd. who has spend his valuable time and guided me
throughout the training process in spite his busy schedule, in shaping of my project.
I am also thankful to Mr. Vikash Agarwal, A.M.(F), WBSO IOCL and Mr. Aritra Biswas,
AO, WBSO, IOCL for guiding me throughout the project providing me with the required
information about Indian Oil.
I also like to thank Dr R.K. Bharadwaj, Director General,IMS Ghaziabad who helped to
provide me the opportunity to undergo my summer Intership Project in Indian Oil.
I would also like to express my indebtedness to my faculty guide Dr. Neeraj Sanghi, Faculty
IMS who helped me in preceding my project work, which ultimately resulted in successful
completion of the project.
But last not the least I am thankful to my parents, friends and all well wishers for blessing me for
my success.
Dipanjan Guha
PGDM(Finance)
BM-09066
IMS, Ghaziabad
6 INDIANOILCORPORATIONLIMITED(IOCL)
TABLE OF CONTENTS
Sl. No. Particulars Page No. 1. Introduction to Oil Industry in India 1 2. Company Profile of IOCL 2.1 Introduction 4 2.2 Location, Salient Features 7 2.3 Vision, Mission and Values 11 2.4 Objectives and Obligations 13 2.5 Product Profile, Markets, Organizational Structure of IOCL 15 2.6 Business of IOCL 19 3. Literature Review 24 4. Objectives 25 5. Methodology 26 6 Receivable Management 6.1 Introduction 27 6.2 Ways to Manage Debtors 29 6.3 Reasons for Incurring Debts 34 6.4 Confirmation of the Debts 35 6.5 Non Recovery of the debts 36 6.6 Various modes of Debt Collection with special emphasis on e-Collection 39 6.7 Role of SAP in Receivable Management 44 6.8 Impact of debtors in the Working Capital Management of the Company
46 6.9 Different Ratios related to Debtor Management and Profitability 50 6.10 Cash Conversion Cycle 52 6.11 Credit Policies of IOCL and RTGS mode of Payment 54 7 Analysis 7.1 Turnover Ratio 63 7.2 Liquidity Ratio 66 7.3 Working Capital Analysis 68 7.4 Cash Conversion Cycle 73 7.5 Analysis of Debtors in Eastern Region (DGS&D and Non DGS&D) 74 7.6 Comparative analysis of IOCL with BPCL and HPCL 85 7.7 Analysis of Debtors under WBSO 92 8. Case Study 98 9. Conclusion and Recomendations 102 10. Limitations 104 11. Bibliography and Reference 104
7 DipanjanGuha,IMSGhaziabad
LIST OF TABLES
Table. No Particulars Page 1 Retail Market Share (as on Nov-2009) 3 2 Salient Features of Implementation of SAP 45 3 DTR and ACP of IOCL from 2005-06 to 2009-10 63 4 Schedule for Sundry Debtors from 2005-06 to 2008-09 64 5 Liquidity Ratios of IOCL 66 6 Working Capital including Current Assets and Current Liabilities of IOCL 68 7 Change of CA, CL and WC of IOCL from the previous years 69 8 Cash & Bank Balances of IOCL 72 9 Cash Conversion Cycle 73 10 Sales in DGS&D Sector for 2008-09 & 2009-10 77 11 Sales Figure of DGS&D Customers on Month-wise basis in 2009-10(ER) 78 12 Outstanding from DGS&D as on 31.03.2010 (ER) 79 13 Showing Outstanding as a Percentage of Sales in DGS&D Sector as on
31.03.2010(ER)
79 14 IOCL`s Average Collection Period of DGS&D (ER) for 2009-10 81 15 Sales and Outstanding of Non DGS&D Customers till 31 March 2009 (ER) 83 16 Average Collection Period of Non DGS&D Customers in 2009-10 84 17 Comparison DTR and ACP of IOCL with HPCL and BPCL 85 18 Debtors as a percentage of Gross Sales for IOCL, HPCL and BPCL 86 19 Comparison of Liquidity Analysis of IOCL with HPCL and BPCL 87 20 CCC of HPCL 89 21 CCC of BPCL
89 22 Profitability Ratios of IOCL, HPCL and BPCL 90 23 Customerwise Tabulation of Outstanding and Beyond Credit Outstanding
under WBSO
93
24 Productwise Tabulation of Outstanding and Beyond Credit Outstanding
under WBSO
95
25 Pivot Table showing the outstanding status Customerwise and Productwise 97 26 Invoice Details of M/s Rifle Factory, Ishapore 99 27 Breakup of the invoice of M/s Rifle Factory in ED, Sales Tax and Cess 100
8 INDIANOILCORPORATIONLIMITED(IOCL)
LIST OF FIGURES
Fig. No. Particulars Page 1 Structure of Oil Industry in India 2 2 Market Share of Different Companies in India 3 3 Formation of Indian Oil Corporation Ltd. 5 4 Organisational Structure of IOCL 17 5 Pipeline Network of IOCL in India 20 6 Relation between Profitability and Liquidity 30 7 Debt Collection Procedure 34 8 Flow chart showing Debt Recovery Process 39 9 Comparison of Conventional Method and Electronic Payment System 43 10 Working Capital Cycle and Sources of Cash 49 11 Operating Cycle 52 12 Classification of Debts considered Unsecured & Good and Unsecured &
Doubtful
64 13 Classification of Debts from Subsidiary Companies and Other Companies 65 14 Line Graph showing the different Liquidity Ratios of IOCL 66 15 Bar Graph showing Working Capital including Current Assets and Current
Liabilities of IOCL 68
16 Area Graph showing Breakup of Current Assets 70 17 Area Graph showing Breakup of Current Liabilities 71 18 Bar Graph showing the Cash and Bank Balance Trend of IOCL 72 19 Sales in DGS&D Sector for 2008-09 & 2009-10 77 20 Comparison of the Outstanding as a % of Sales in Eastern Region And Overall
for the Company
80 21 Comparison of IOCL`s ACP of DGS&D (ER) with Overall ACP for 2009-10 82 22 Comparison ofAACP of Non DGS&D Customers with Overall in 2009-10 84 23 Comparison DTR and ACP of IOCL with HPCL and BPCL 85 24 Line graph comparing Current Ratio and Quick Ratios of IOCL, HPCL and
BPCL
87 25 Comparison of CCC for IOCL, HPCL, BPCL 89 26 Area graph showing Profitability Ratios of IOCL, HPCL and BPCL 90 27 Line Graph showing Return on Capital Employedand Return on Fixed Assets 91 28 Bar chart showing Outstanding and Beyond Credit Outstanding under WBSO 93 29 Line Graph showing the Beyond Credit Outstanding as a % of Outstanding 94 30 Graph showing Productwise Outstanding under WBSO 95
9 DipanjanGuha,IMSGhaziabad
OIL INDUSTRY OVERVIEW
Background
After the Indian Independence, the Oil Industry in India was a very small one in size and Oil was
produced mainly from Assam and the total amount of Oil production was not more than 250,000
tones per year.
This small amount of production made the oil experts from different countries predict the future
of the oil industry as a dull one and also doubted India's ability to search for new oil reserves.
But the Government of India declared the Oil industry in India as the core sector industry under
the Industrial Policy Resolution bill in the year 1954, which helped the Oil Industry in India
vastly.
Oil exploration and production in India is done by companies like NOC or National Oil
Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil
companies in India that are owned by the government under the Industrial Policy Rule. The
National Oil Corporation during the 1970s used to produce and supply more than 70 percent of
the domestic need for the petroleum but by the end of this amount dropped to near
about 35 percent. This was because the demand on the one hand was
increasing at a good rate and the production was declining in a steady rate.
Oil Industry in India during the year 2004-2005 fulfilled most of demand through importing oil
from multiple oil producing countries. The Oil Industry in India itself produced nearly 35 million
metric tons of Oil from the year 2001 to 2005. The Import that is done by the Oil Industry in
India comes mostly from the Middle East Asia.
The Oil that is produced by the Oil Industry in India provides more than 35 percent of the energy
that is primarily consumed by the people of India. This amount is expected to grow further with
both economic and overall growth in terms of production as well as percentage. The demand for
oil is predicted to go higher and higher with every passing decade and is expected to reach an
amount of nearly 250 million metric ton by the year 2024.
10 INDIANOILCORPORATIONLIMITED(IOCL)
OIL INDUSTRY STRUCTURE
Fig.1: Structure of Oil Industry in India
ONGC
OilIndiaLimited
PrivateE&PCompanies–Cairo,RIL,NIKO
IOCL
(Refining&
Marketing)
HPCL
(Refining&Marketing)
BPCL
(Refining&Marketing)
GAIL(GasTransport&
Petrochemicals)
RIL
(Refining&Marketing)
Petroleum
Planning&AnalysisCell
PetroleumIndiaInternational
PetroleumConversation
ResearchAssociation
PetroFed
CentreforHighTechnology
OilIndustrySafety
Directoriate
EngineersIndiaLtd.(Project
Consultant)
UPSTREAM
Exploration&
Production
DOWNSTREAM
Refining&
Marketing
INDUSTRYBODIES/OTHERS
11 DipanjanGuha,IMSGhaziabad
Oil Industry Dynamics in India
At present, there are four PSUs namely, IOC, HPC, BPC and IBP (subsidiary of IOC) marketing
oil products in the country. In addition, certain private players like Reliance, Essar and Shell
have also in marketing rights for transportation fuels. Their marketing presence today, however,
is not significant and is limited to about 1370 outlets out of total retail outlet strength of about
29,380 . Some additional players like ONGC, who have also been granted marketing rights for
transportation fuels, are in the process of setting up retail outlets to integrate across the entire
hydrocarbon value chain. The company – wise market share in sales is tabled below:
It is evident that the share of the private sector in meeting total consumption of refined petroleum
products presently stands at around 15%. This proportion is however, expected to grow
significantly in the coming years
Company Market Share (%) IOC Group 46.2 BPCL 18.6 HPCL 16.5 Other PSUs 2.2 Total PSUs 83.5 Private 16.5 Total 100
Table 1: Retail Market Share (as on Nov-2009)
Fig. 2: Market Share of Different Companies in India
12 INDIANOILCORPORATIONLIMITED(IOCL)
COMPANY PROFILE
INTRODUCTION
In order to ensure greater efficiency and smoothe working in the petroleum sector , Government
of India decided to merge the refineneries and the distribution activities.
The Indian Refineries and Indian Oil Company were combined to form the giant Indian Oil
Corporation (IOCL) on 1st September 1964, with its registered office at Bombay. In 1967, the
pipeline division of the corporation was merged with the refineries division. Research &
Development of Indian Oil Came into Existence in 1972. In October 1981 Assam Oil Company
was nationalized and has been amalgamated with IOCL as Assam Oil Division(AOD).
13 DipanjanGuha,IMSGhaziabad
Fig.3: Formation of Indian Oil Corporation Ltd.
Beginning in 1959 as Indian Oil
Company Ltd., Indian Oil Corporation
Ltd. was formed in 1964 with the
merger of Indian Refineries Ltd.
(established 1958). Indian Oil and its
subsidiaries account for 49% petroleum
products market share, 40.4% refining
capacity and 69% downstream sector
pipelines capacity in India
14 INDIANOILCORPORATIONLIMITED(IOCL)
As the flagship national oil company in
the downstream sector, Indian Oil
reaches precious petroleum products to
millions of people everyday through a
countrywide network of about 34,000
sales points. They are backed for
supplies by 166 bulk storage terminals
and depots, 101 aviation fuel stations
and 89 Indane (LPGas) bottling plants.
About 7,100 bulk consumer pumps are
also in operation for the convenience of
large consumers, ensuring products and inventory at their doorstep.
Indian Oil operates the largest and the widest network of petrol & diesel stations in the country,
numbering over 17,600. It reaches Indane cooking gas to the doorsteps of over 50 million
households in nearly 2,700 markets through a network of about 5,000 Indane distributors.
Indian Oil’s ISO-9002 certified Aviation Service commands over 62% market share in aviation
fuel business, meeting the fuel needs of domestic and international flag carriers, private airlines
and the Indian Defense Services. The Corporation also enjoys a do4
minant share of the bulk consumer business, including that of railways, state transport
undertakings, and industrial, agricultural and marine sectors.
15 DipanjanGuha,IMSGhaziabad
LOCATION
Registered Office : Indian Oil Bhavan,
G-9, Ali Yavar Jung Marg,
Bandra(East), Mumbai-400 051
Corporate Office : 3079/3, Sadiqnagar,
J B Tito Marg, New Delhi- 110 049
Refineries Division Head Office : SCOPE Complex, Core-2
7, Institutional Area, Lodhi Road
New Delhi -110003
Barauni Refinery: P.O. Barauni Oil Refinery,
Dist. Begusarai -861 114 (Bihar)
Gujarat Refinery: P.O. Jawahar Nagar,
Dist. Vadodara -391 320(Gujarat)
Guwahati Refinery : P.O. Noonmati,
Guwahati-781020 (Assam)
Haldia Refinery: P.O. Haldia Refinery
Dist. Midnapur-721 606 (West Bengal)
16 INDIANOILCORPORATIONLIMITED(IOCL)
Mathura Refinery: P.O. Mathura Refinery,
Mathura -281 005(Uttar Pradesh)
Panipat Refinery: P.O. Panipat Refinery,
Panipat-132140(Haryana)
Bongaigaon Refinery: P.O. Dhaligaon
Dist. Chirang, Assam - 783 385
Marketing Division Head Office: G-9, Ali Yavar Jung Marg,
Bandra (East), Mumbai -400 051
Northern Region: IndianOil Bhavan,
1, Aurobindo Marg, Yusuf Sarai
New Delhi -110016
Eastern Region: IndianOil Bhavan,
2, Gariahat Road, South (Dhakuria)
Kolkata -700 068
Western Region: 254-C, Dr. Annie Besant Road,
Worli Colony, Mumbai -400 025
Southern Region: IndianOil Bhavan
139, Nungambakkam High Road
R&D Centre R&D Centre: Sector 13 Faridabad -121 007(Haryana)
W.B.S.O has three area offices: 1. Durgapur area offices. 2. Kolkata area offices. 3. Siliguri area offices.
L.P.G UNDER W.B.S.O:-
The L.P.G plants under W.B.S.O are situated as the following places: 1. Budge Budge 2. Durgapur 3. Kalyani 4. Malda 5. Rangpo 6. Raninagar 7. Port Blair
DEPOTS UNDER W.B.S.O:-
1. Hasimara 2. Kantapukur 3. Malda
4. Rangpo
27 DipanjanGuha,IMSGhaziabad
BUSINESS OF IOCL
REFINING:
Born from the vision of achieving self-reliance in oil refining and marketing for the nation,
IndianOil has gathered a luminous legacy of more than 100 years of accumulated experiences in
all areas of petroleum refining by taking into its fold, the Digboi Refinery commissioned in
1901.
IndianOil controls 10 of India’s 20 refineries. The group refining capacity is 60.2 million metric
tonnes per annum (MMTPA) or 1.2 million barrels per day -the largest share among refining
companies in India. It accounts for 33.8% share of national refining capacity.
The strength of IndianOil springs from its experience of operating the largest number of
refineries in India and adapting to a variety of refining processes along the way. The basket of
technologies, which are in operation in IndianOil refineries include: Atmospheric/Vacuum
amongst others. The countrywide marketing operations are coordinated by 16 State
Offices and over 100 decentralised administrative offices.
Several l and mark surveys continue to rate IndianOil as the dominant energy brand in the
country and an enduring symbol for high quality petroleum products and services. The heritage
and iconic association that the brand invokes has been built over four decades of commitment to
uninterrupted supply line of petroleum products to every part of the country, and unique products
that cater not only to the functional requirements but also the aspirational needs of millions of
customers.
IndianOil has been adjudged India's No. 1 brand by UK-based Brand Finance, an independent
consultancy that deals with valuation of brands. It was also listed as India's 'Most Trusted Brand'
in the 'Gasoline' category in a Readers' Digest - AC Nielsen survey. In addition, IndianOil topped
The Hindu Businessline's "India's Most Valuable Brands" list. However, the value of the
IndianOil brand is not just limited to its commercial role as an energy provider but straddles the
entire value chain of gamut of exploration & production, refining, transportation & marketing,
petrochemicals & natural gas and downstream marketing operations abroad. IndianOil is a
national brand owned by over a billion Indians and that is a priceless value.
32 INDIANOILCORPORATIONLIMITED(IOCL)
LITERATURE REVIEW:
A Prescription for Debt Recovery Management, Towards Reducing
Costs and Increasing Recovery of Receivables Author: David Coyle, President,
Published by: SeeWind Design 2008
Debt recovery and collections managers are always looking for less costly and more efficient
ways of collecting on bad debt. This is especially true in todays business climate of diminished
budgets and pressures from restructuring. This paper reviews six debt recovery management
best practices that ensure swift and accurate recuperation of receivables for less operational cost
than is usual within a typical collections process. As well the workflow that enables the
application of these best practices is described. Finally this paper outlines the features and
benefits of FORCE, a business analysis and collections management software solution that
incorporates the fully automated workflow and best practices discussed. The prescription
suggested here focuses on the ability to uncover and see the business reality along with the
capability to detect, diagnose and action opportunities that center on TIME and MONEY:
33 DipanjanGuha,IMSGhaziabad
OBJECTIVES: To find the Trend of the Sales and Debtors of the Company and to find a relation
between the two.
To find out the Average Collection Preriod of Various Customers, DGS&D and Non
DGS&D.
To analyze the Cash Conversion Cycle and the Liquidity of the Company.
To analyse the Working Capital of the Comapany and how it can be regulated.
To find out the different Ratios related to Liquidity and Profitability of the Company
and compare them with the competitors like HPCL and BPCL
To know the Credit Policies of IOCL for different Customers.
Analyse the efficiency of different Collection Procedures with special emphasis on
the e-Collection Mode like RTGS and Core-to-Core banking.
34 INDIANOILCORPORATIONLIMITED(IOCL)
METHODOLOGY
The methodology followed in this project involved the following Phases:
Collection of Data
Type of the project
Analysis of Data
Conclusion & Recommendation
Collection of Data:
Data required for the project e.g. Balance Sheet, statement of Profit & Loss Account etc. were
collected from the annual reports of IOCL, for the period of 2005-06 to 2009-10. Besides for
Explanation of several issues, different articles, Internet data’s, books etc were consulted. The
data collected are Secondary & Published Data. Few data have been collected from the SAP
module used in IOCL
Type of the project:
The project is descriptive and analytical in nature.
Analysis:
For the comparative analysis ratio’s were used along with graphs, charts, and necessary
diagrams. The current year i.e., 2009-10 has not been taken into calculation in many ratios
because, at that time of preparation of this report the Annual Report 2009-10 was not published.
Interpretation & Recommendation:
After completion of the entire analysis, interpretation & recommendation were made on the basis
of figures and diagrams. Statistical tools like Tables, Charts, Bar graphs Correlations are
used for representation of data.
35 DipanjanGuha,IMSGhaziabad
RECEIVABLE MANAGEMENT INTRODUCTION: A sound managerial control requires proper liquid management of
liquid assets and inventory. These assets are a part of working capital of the business. An
efficient use of financial resources is necessary to avoid financial distress. Receivables
result from credit sales. A concern is required to allow credit sales in order to expand its
sales volume; it is not always possible to sell goods on cash basis. Sometime other
concern in that line might established a practice of selling goods on credit basis. Under
these circumstances it is not possible to avoid credit sales without adversely affecting
sales. The increase in sales is also essential to increase profitability. After a certain level
of sales this increase in sales will not proportionately increase production costs. The
increase in sales will bring in more profits.
Receivables constitute a significant portion of current assets of a firm. But for investment
in receivable a firm has to incur certain costs. Further there is a risk of bad debts also. It
is therefore very necessary to proper control and management of receivables.
Cash is the most important component of current assets; therefore the firm basic
strategies are to reduce the operating cash requirement. The company’s aim is to
accelerate the collection of receivables so as to reduce the average collection period. The
receivables represent an important component of current assets of a firm. The purpose of
this analysis is the important dimension of efficient management of receivables within the
framework of a firm objective of value maximization.
OBJECTIVES: The term receivables are defined as “debt owed to the firm by customer
arising from sale of goods or services in the ordinary courses of business”. Receivable
management is also called trade credit management. Thus account receivables represent
an extension of credit to customers allowing them a reasonable period of time in which to
pay for the good received.
The objective of receivable management is to promote sales and profit until that point is
reached where return on investment in further funding receivables is less than cost of
funds raised to finance that an additional credit, i.e. cost of capital. The specific costs and
benefits which relevant to the determination of receivables management are examined
below.
36 INDIANOILCORPORATIONLIMITED(IOCL)
The major categories of cost associated with the extension of credit and account
receivables are:
COLLECTION COST:
These are administrative cost incurred in collecting the receivables from the customer to
whom credit sales have been made.
CAPITAL COST:
The increased level of accounts receivables is an investment in assets. There is time lag
between the sale of goods to, and payment by the customer. Meanwhile the firm has to
pay employees and suppliers of raw materials. Thereby implying that firm should arrange
for additional funds to meets its own obligation while waiting for payments from its
customers. The cost on the use of additional capital to support credit sales, which
alternatively could be profitability employed elsewhere, is , therefore a part of extending
credit or receivables or capital cost.
DELIQUENCY COST:
This cost arise out of the failure of the customers to meet their obligation when payment
of credit sales become due after the expiry of credit period, the cost are (i) blocking of
funds for extending period, (ii) cost associated with steps that have to be initiated to
collect the overdue, such as reminders and other collection efforts, legal charges etc.
DEFAULT COST:
The firm may not be able to recover the over dues because of the inability of the
customers. Such debts are treated as bad debts these cost associated with credit sales and
accounts receivables.
BENEFITS:
The benefits are increased sales and anticipated profits because of a more liberal policy.
When firm extended trade credit, i.e. invest in receivables they intend to increase sales.
The impact of liberal trade credit policy is likely to two forms. First, it is oriented to sales
expansion, in other words, a firm may grant trade credit either to increase sales to
existing customers or attract new customer. This motive for investment in receivables is
growth oriented. Secondly, the firm may extend credit to project its current sales against
emerging competition. Here the motive is sales retention. As a result of increased sales,
the profit of firm will increase.
37 DipanjanGuha,IMSGhaziabad
What are Debtors? Debtors are people or other firms who owe money to the firm. This will usually happen
where the firm has sold goods with a period of credit. The firm sells the good or service
but allows the purchaser a period of credit to pay - usually a month. During this month
the purchaser owes the firm the money and is therefore a debtor.If the firm has debts
these are considered an asset, because when the debtors pay the firm will have converted
the debt into cash in the bank. Because most debts are relatively short-term they are
considered current assets. The other current assets are stocks and cash.The amount of
debtors a firm has depends on the line of business they are in. If most of their business is
with trade customers where they have to offer credit then the level of debtors may be
high. For many retail businesses, however, the level of debtors will tend to be relatively
low as most of their sales are cash sales.
Ways to manage debtors - credit policy and collection procedure A sale is not a sale until the money is in your bank account. Having an effective credit
policy and collection procedure in place is one of the most important facets of owning
your own business. When it comes to dealing with customers who seem unwilling to pay
on time it can mean the difference between prosperity and failure.
Credit policy
Credit policy effects debtor management because it guides management about how to
control debtors and how to make balance between liberal and strict credit. If company
does not restrict to sell the products on credit after a given limit of sale. This liberated
credit policy will increase the amount of sale and profitability. But risk will also increase
with increasing of sale. If we sell the good to those debtors whose capability to pay is not
good, then it is possible that some amount will become bad debts. Company can increase
the time limit for paying by such debtors. On the other hand, if company’s credit policy is
strict, then it will increase liquidity and security, but decrease the profitability. So,
finance manager should make credit policy at optimum level where profitability and
liquidity will be equal. We can show it graphically.
38 INDIANOILCORPORATIONLIMITED(IOCL)
Fig. 6: Relation between Profitability and Liquidity
Mode of payment: Any type of payment is acceptable, but the costs involved with such
things as credit card transactions as you may need to add a surcharge to cover them must
be seen.
Dealing late payments: The policy should appear on the credit application form, and
should clearly state the consequences of late payment. This may take the form of
withholding goods, not processing orders, and in some cases, legal action.
Sub part of credit policy
(a) Length of Credit period : Length of credit period is also an element that affects
decisions of finance manager relating to manage debtors. It is the time which allows to
debtor to pay his debt for purchasing goods on credit from vendor. Finance manager can
increase the length of credit period according to reputation of customers.
(b) Cash discount: Cash discount is technique to get money fastly from debtors. It is
cost of investment in credit sale.
• Credit policy analysis
It means decision relating to analysis of credit policy. Evaluation and analysis of credit
policy is based on following factors.
39 DipanjanGuha,IMSGhaziabad
a) Collection of debtor’s information
For analysis the financial position of debtors, we have to collect the information relating
to debtors. This information can be obtained from customer’s financial statements of
previous years, bank reports, and information given by credit rating agencies. These
information will be useful for deciding where debtors will our debt or not. It will also be
useful for knowing capability to pay the debt.
b) Credit Decisions
After collection and analysis the debtor’s information, manager has to decide whether
company should facilitate to sell goods on credit or not. If company sells the goods on
credit to particular debtor, then at what level it will be sold after seeing his position. For
this manager can fix the standard for providing goods on credit. If a particular debtor is
below than given standard, then he should not accept his proposal of buying goods on
credit.
• Formulation Collection Policy : For getting fund fastly from debtor, the
following steps will be taken under formulation of collection policy.
a) Send reminding letter for paying debt
b) Take the help of debt collection agency for getting bad debt.
c) To do legal action against bad debtors.
d) To request personally to debtor to pay his dues on mobile or email.
e) Finance manager should monitor collection position through average collection period
from past sundry debtor and their turnover ratio.
f) To make ageing schedule. Sample of Ageing schedule is given below.
Credit application
To help you to decide which of your customers should be granted credit terms, it is
important to have a credit application form/agreement. This sets out all the conditions of
credit, as well as the rights and obligations of both parties.
Essential components of a credit application:
40 INDIANOILCORPORATIONLIMITED(IOCL)
• comprehensive details of all directors/partners/owners
• at least three trade credit references
• signature of the applicant to ensure that they have read and understood all the conditions
and have agreed to abide by them. A Deed of Indemnity and Guarantee for corporate
clients is optional, however it is an excellent safeguard against solvent clients.
• the final decision should be based on all the data collected, in particular the references,
the length of time that the business has been operating and whether or not the guarantees
have been signed.
Collection procedure
Step 1: A statement asking for payment should be sent. Some 'Reminder' or 'Final Notice'
adhesive labels can be bought.
Step 2: Telephone the customer and remind them of the debt. Ask them if there is a
problem. If no barrier to payment exists, ask them to settle the debt by a specific date.
Step 3: If there is a cash flow problem, try to arrange a payment plan that accommodates
both parties.
Step 4: If the problem is recurrent then it is a good idea to review the customer's credit
terms.
Step 5: If the debt is not settled within the agreed timeframe, you may wish to take legal
action
To deal with situations as they occur so you don't contribute to any potential cash flow
problems resulting from delinquent payments. If you design an effective credit policy,
credit application and collection procedure, you are helping to ensure the financial
security and stability of your business venture.
CREDIT ANALYSIS:
Two basic steps are involved in the credit investigation Process.
A)OBTAINING CREDIT INFORMATION-The first step in credit analysis is
obtaining the information which form the basis for the evaluation of customers.The
sources of information may be internal such as the historical payment pattern of a
customers,or may be external such as :
I)FINANCIAL STATEMENTS-The published financial statements such as
balance sheet and profit and loss account.
41 DipanjanGuha,IMSGhaziabad
II)BANK REFERENCES-The firm’s banker collects the necessary
information from the applicant’s Bank.
III)TRADE REFERENCES-Reputed Credit organization are approached about
the credit worthiness of proposed customers.
IV)CREDIT BUREAU REPORTS-Credit Bureau reports from organization
which specializes in supplying credit information can also be utilized.
B)ANALYSIS OF CREDIT INFORMATION-The information collected from
different sources are analyzed to determine the credit worthiness of the applicant.The
analysis should cover two aspects:
I)QUANTITATIVE-The quantitative aspects is based on the factual information
available from the financial statements,the past records of the firm’s and so on.
II)QUALITATIVE-The qualitative judgement would cover aspects relating to the
quality of management.
Customers Evaluation-The 5 C’s-
CHARACTER- Reputation, Track Record
CAPACITY- Ability to repay( earning capacity)
CAPITAL- Financial Position of the company.
COLLATERAL- The type and kind of assets pledged
CONDITIONS- Economic conditions & competitive factors that may affect the
profitability of the customer.
Effective accounts receivable management can help you in a variety ways:
• It can cut and maintain your average collection delay or DSO
• It can lessen your direct and indirect expenses
• It can considerably reduce your bad debt
• It can tell you various ways to take advantage of your cash-flow
• It can help you capitalize on your internal resources
• It can maximize interventions on sales, service and market share
42 INDIANOILCORPORATIONLIMITED(IOCL)
Fig 7: Debt Collection Procedure.
Reasons for incurring Debts? 1.Debtors are the current assets for a company and provide the liquidity for a company.So to
improve the liquidity position of a company it is important to incur debts. However if the
debtors are too high in comparison with the other Current assets then there will be a problem
of high working capital for the company which can hit the profitability badly.
2. Secondly, most of the sales are credit sales in every organization. Cash sales constitutes
insignificant amount of the sales of a company. So to maintain the sales revenue company
has to incur debts.
43 DipanjanGuha,IMSGhaziabad
3. It is important to reach the sales potential of a company in this growing
market. So if the company doesnot allow the credit to the customers then the market will be
untouched.
4. To Optimize the return on investments on the assets.
5. To get a competitive advantage over the competitors and to stay in the competition it is
important to give the customers to credit period so the can utilize the extra advantage.
Confirmation of debt(How to establish correctness of debtors): These are some points to establish the correctness of the Debtors.
• One must be sure to know who he is doing business with. Always obtain a signed Credit
Application from new customers and check them out thoroughly.
• Only three trade references cannot always be relied upon. Some organisations only pay
three customers on time just so that they can use them as references.
• Always a mercantile report must be obtained and checked for previous legal actions and
directors that have been associated with previously failed businesses. If one find either,
credit should not be extended. COD facility may be offered instead.
• A credit limit must be set. Whilst a credit limit should always be seen as a guide, if a
customer is going to exceed that limit by a considerable margin (say 20%), one must
always recheck their credit worthiness and reset the limit accordingly.
• Every Company should have a written policy that clearly sets out when, and under what
circumstances, the organisation offers credit. This should be distributed to all interested
parties (especially the sales force).
• Customers must not be given any excuse not to pay you on time. Make sure all your
paperwork is easy to read and understand.
• Company should give their customers plenty of payment methods to use (i.e. cheque,
EFT, bankcard, Mastercard, Visa, Diners and American Express).
• If claims and disputes are unavoidable, it must be made sure that he have an effective
dispute resolution procedure that always results in effective corrective action.
• Sales personnel should play an active role in ensuring that all invoices are paid on time.
44 INDIANOILCORPORATIONLIMITED(IOCL)
• Terms and Conditions of Sale should include retention of title clause and should be sent
to the customer with a new account welcome letter. This letter is an opportunity to advise
the customer of their credit limit and your payment terms.
• Customers must be asked to sign personal guarantees, if he is unable to justify the level
of credit that they require.
• Personal guarantees must not be used as a reason to open an account for a customer with
a poor payment history. Stick to COD.
• Ring all new accounts before the first payment is due. Make sure that they are happy with
the service / goods and confirm that payment will be made on the due date.
• Once customers are five days overdue with their payment, ring them and ask for YOUR
money. Do not be shy or embarrassed. They aren’t.
• If Company have provided a good product or service and the customer still will not pay,
the account should be closed and handover the debt over to a professional collection
agency and never trade on a credit basis with these people again.
• Analyse the financial status of the company you are lending to by checking their previous
financial accounts history or analysing the previous Legal Cases the customer have
• Seek for the credit rating the company have. The higher arted comapanies are
comparative risk free and credit can be extended in that cases.
Non Recovery of debts A company that extends credit to a customer faces the risk of not collecting the account
receivable. If a loss does occur from extending credit, it is reported as an operating expense,
such as bad debts expense.
There are two ways of reporting losses from credit sales. One is the direct write-off method.
Under this approach, the company does not anticipate any loss. The asset Accounts
Receivable is reported at its full amount and no expense is reported until it is known with
certainty that a customer will not pay the amount owed. This method is not encouraged by
accountants, because it may be overstating assets and net income.
45 DipanjanGuha,IMSGhaziabad
The preferred way to report losses from credit sales is to anticipate that some
receivables will not be collected. This approach is the allowance method. It gets it name
because of the contra account to Accounts Receivable entitled Allowance for Doubtful
Accounts. The credit balance in the allowance account works to value the accounts
receivable at their approximate net realizable amount. Under the allowance method, the bad
debts expense and the credit to the allowance account is reported closer to the time of the
sale—thus providing a better matching with revenues. Under the allowance method the
accounts receivable are reported at a more realistic and conservative amount.
To assist in the managing of accounts receivables, an aging of the accounts receivable is
prepared. An aging sorts the customers' balances by how long the customers have owed the
open invoice amounts.
Ways to collect Bad Debts: Recovering bad debts is not an easy or pleasant task, and it is advisable for businesses to
take measures to avoid or at least minimize bad debt. This can be done by having a credit
management system in place. Credit management strategies may include:
* clearly stating terms and conditions in the credit contract
* ensuring all credit transactions are documented and signed
* maintaining records accurately
* keeping track of due and overdue payments
* checking the credit rating of debtors before extending credit
* checking the credit rating of the debtor on a regular basis after giving credit
* collecting a deposit from the customer before delivering goods or services
* collecting portions of the payment as a project progresses
* reminding customers of payments through phone, letters or visits
In spite of having an efficient credit management strategy, it is still possible to incur bad
debts. All businesses will have some percentage of customers who delay payments or even
avoid them. Businesses have many options to deal with delinquent customers. Some of these
are discussed below.
46 INDIANOILCORPORATIONLIMITED(IOCL)
Consultation
Businesses can try to recover bad debt from customers through consultation. The
consultation can bring about an agreement between the creditor and debtor regarding the
payment. In case of any disputes over the debt, the Community Justice Center can be called
upon to intervene and resolve the issue.
Demand letter
A demand letter can be sent to the company or individual in debt, if the consultation does not
give satisfactory results. A demand letter must clearly state the details of the debt, along with
the total amount of debt involved and the date by which the debt must be settled. The demand
letter can also include a warning of legal action in case the debt is not paid by the specified
date.
Statutory letter
The credit company may choose to send a statutory letter instead of a demand letter. A
statutory letter will also give details of the debt, total amount of debt and expected date of
debt settlement. Statutory letters are sent out like court documents and hold greater clout than
demand letters. The statutory letter warns the debtors of legal action, within 21 days of the
specified date, if they fail to make the payment.
Litigation
A business may have to file a lawsuit against the debtor to recover the debt. All other debt
recovery strategies, within legal boundaries, must be tried before reaching this stage.
Litigation is always the last option. Taking legal action is a time-consuming and costly
business. It is advisable to get some idea of the potential cost involved before proceeding
with the litigation.
Bad debts are an unavoidable side effect of extending credit. Though there are many avenues
to collect debts, they are by no means easy and can cost the business a good amount of time
and money. Therefore, it is better to develop an effective credit management strategy to
minimize bad debts. Also, consider a partnership with a good collection agency that can take
over the task of collection if your in-house resources and expertise is inadequate to resolve
the situation.
47 DipanjanGuha,IMSGhaziabad
Fig.8: Flow chart showing Debt Recovery Process
Varoius modes of Debt Collection(How to collect debts?) Payment options include estimated annual fees paid in periodic instalments (preferably by
debit authority); cheque; direct deposits; Electronic Fund Transfer(EFT) ; BPay; Credit or
Debit Card (via phone or website); direct debit; or Professional Fee Funding.Others include:
Online Credit Card Payment System
Electronic Cheque System
Electronic Cash System and
Smart Card based Electronic Payment System
Real time Gross Settlement (RTGS) System
NationalElectronic Fund Transfer (NEFT) System and
Electronic Clearing Service (ECS).
Electronic funds transfer or EFT refers to the computer-based systems used to perform
financial transactions electronically.
The term is used for a number of different concepts:
• Cardholder-initiated transactions, where a cardholder makes use of a payment card
48 INDIANOILCORPORATIONLIMITED(IOCL)
• Direct deposit payroll payments for a business to its employees, possibly via a payroll
services company
• Direct debit payments, sometimes called electronic checks, for which a business debits
the consumer's bank accounts for payment for goods or services
• Electronic bill payment in online banking, which may be delivered by EFT or paper
check
• Transactions involving stored value of electronic money, possibly in a private currency
• Wire transfer via an international banking network (generally carries a higher fee)
• Electronic Benefit Transfer
RBI Control:
Recognising the importance of ensuring the safety, security of the paymentsystems, the
Reserve Bank of India (RBI) has put in place three modes ofelectronic payments i.e. Real
time Gross Settlement (RTGS) System, NationalElectronic Fund Transfer (NEFT) System
and Electronic Clearing Service (ECS).Payments by these modes have been steadily growing
in the last few years. Aninternal Working Group set up by the Reserve Bank to examine the
variousissues related to migration from paper-based systems to electronic
systemsrecommended a phased approach of encouraging, monitoring and mandating for this
migration. The Reserve Bank has been using the approach of encouragingand monitoring
resulting in almost 40,000 bank branches spanning over 9773 centres being covered by the
RTGS and NEFT systems. A study conducted by the Reserve Bank revealed that during a
three month period about 2,100 cheques each valued at Rs.1 crore and above were processed
in the clearing houses in the four metros. It is proposed that with effect from
April 1, 2008 all payment transactions of Rs. 1 crore and above between RBI regulated
entities i.e. banks, primary dealers and NBFCs as well as in RBI regulated markets i.e.
money market, Government Securities market and foreign exchange market may be
mandated to be undertaken through electronic mode only. This move will not only reduce
risk from moving large paper-based value retail payments to safer electronic modes, but will
also bring greater efficiency and customer convenience to the payment systems.
Recognising the importance of electronic payment systems in ensuring safe, secure and fast
payment and settlements RBI has put in place three modes of payments:
49 DipanjanGuha,IMSGhaziabad
Sl. No. PaymentSystems Features
1 RTGS (Real Time Gross Settlement)
For online real time settlement of systemically
important payments. Minimum transaction value
Rs.1.00 lakh. Transaction window from 9.00 a.m.
to 4.00 p.m. Amount is credited to the beneficiary's
account within a maximum time of 2 hours.
2 NEFT (National Electronic
Funds Transfer)
For settlement in batch process – 6 settlements a
day on week days and 3 settlements on Saturday.
Customers accounts credited on the same day for
first four settlements and by the next day for the
last two settlements
3 ECS (Electronic Clearing
System)
Netted settlement for bulk transactions of repetitive
Debtor Turnover Ratio 27.35 32.78 36.63 48.46 46.74
Average Collection Period(Days) 13.35 11.14 9.96 7.53 7.81 Table 3: DTR and ACP of IOCL from 2005-06 to 2009-10
From the table it is seen that Debtors turnover ratio of IOCL shows an increasing trend
with the exception of the year 2009-10 and it indicates that the debts are being collected
more quickly. The changes of the ratio shows that the efficiency in the company’s credit
policy or better performance in its ability to collect from its debtors. For the Year 2009-
10 the sales has decreased for the company by 5.79%. Though the Debtors has also
decreased but not that the same ratio, so the ratio has jumped up. The reasons cannot be
sited due to non availability of sufficient data.
From the table it is seen that the Debtors Collection Period of IOCL is decreasing year by
year except 2009-10 which is a positive trend and it indicates efficient debtor
management of IOCL. Effective debtor management is minimizing the collection period
and also the bad debts incurred by the company. In 2009-10 the ACP has slightly
increased thsn the previous year
Moreover as we can see from Table 3 the Sales of IOCL is increasing year by year but
the the Sundry Debtors are more or less constant and it has actually decreased in the year
2008-09 by 12.9% when the Sales had increased by 15.2%. This shows the efficiency of
collection procedure and the credit policies of the company.
72 INDIANOILCORPORATIONLIMITED(IOCL)
Schedule for Debtors:
Rs.(in Crores) Sundry Debtors 2005-06 2006-07 2007-08 2008-09 Over Six Months From Subsidiary Companies Unsecured, Considered Good 24.28 197.39 162.19 28.69 From Others Secured, Considered Good 0.00 0.00 0.00 8.18 Unsecured, Considered Good 62.44 28.13 43.70 53.77 Unsecured, Considered Doubtful 255.04 247.24 540.30 537.98 Subtotal 341.76 472.76 746.19 628.62 Other Debts From Subsidiary Companies Unsecured, Considered Good 2,145.40 1,790.77 1,950.22 1,553.15 From Others Secured, Considered Good 0.00 0.00 138.31 139.93 Unsecured, Considered Good 4,465.91 4,719.77 4,526.12 4,154.14 Unsecured, Considered Doubtful 0.70 2.47 3.07 3.44 TOTAL 6,953.77 6,985.77 7,363.91 6,479.28 Less: Provision for Doubtful Debts 255.74 249.71 543.37 541.42 Consolidated Total 6,698.03 6,736.06 6,819.23 5,937.86
Table 4: Schedule for Sundry Debtors from 2005-06 to 2008-09
ANALYSIS:
Fig.12: Classification of Debts considered Unsecured & Good and Unsecured & Doubtful
73 DipanjanGuha,IMSGhaziabad
Fig. 13: Classification of Debts from Subsidiary Companies and Other Companies
Table 4 shows the Breakup of the Total Sundry Debtors under different heads like Over
Six Months and Other Debts.
Among the debts over 6 months 71.23% has been proposed to be doubtful on an average.
And the whole of it from Other Companies. The Debts over 6 months for subsidiary
companies has been considered as good.
Among the Other Debts, the debts considered Good and Unsecured by other companies
contribute a significant part like 69.85% on an average
From the Fig.12 it can be seen that even though the Debts considered good and
Unsecured has decreased in 2008-09 but the debts considered doubtful has been
increasing over the years and this whole part is contributed by the Other Companies.
From the Fig.13 it can bee seen that the Debts from Subsidiary Companies has fluctuated
over the years but in case of Other Companies the debts has increased round the years
expect in the year 2008-09 when there was fall of 6.74%.
So in Conslusion, IOCL should focus more on the Older debts and the debts from other
companies to reduce the Bad Debts which has incresed over the years. Though the debts
from other companies is incresing year-wise it is not an alarming situation because the
Sales as-well-as Customers has also increased over the years.
Total Current Liabilities(B) 25676.36 29705.87 34580.98 35358.04 44751.73
Net Working Capital 10806.73 9351.31 18350.32 9177.15 14637.07 Table 6 : Working Capital including Current Assets and Current Liabilities of IOCL
Fig. 15 : Bar Graph showing Working Capital including Current Assets and Current Liabilities of IOCL
77 DipanjanGuha,IMSGhaziabad
The Working Capital Requirement of IOCL as in most Public Sector Enterprises,
are met through cash credit and advances arranged mainly with the State Bank of India and other
Nationalized Banks.The excess over the margin money if required is usually covered by a
gurantee from the Central Government. Whenever the total requirements of working capital
cannot be met by Cash-Credit arrangements by SBI, IOCL can approach the Government for
term loans. On Such a request the Government ususally examines the validity of the request vis-
a-vis the internal resources of the undertaking and makes the decision to grant the term loans.
This process of taking term loans is undertaken at the Head Office Level.
Year 05-06 to 06-07 06-07 to 07-08 07-08 to 08-09 08-09 to 09-10
Total Current Assets 7.05% 35.6% -16.93% 33.35%
Total Current Liabilities 15.69% 16.41% 2.24% 26.56%
Working Capital -13.46% 96.23% -49.98% 59.49%
Table 7: Change of CA, CL and WC of IOCL from the previous years
From the above Tables and Figs. the following interpretation can be done:
The Company tries to maintain a stable working capital around Rs.10,000 Crores but has
failed to do so in the years 2007-08 and 2009-10. This is mainly because the company
could not maintain a stable Inventory Level in those years. As the inventory constitute
about 65% of IOCL`s Current Assets a strict regulation over it can largely affect the
Working Capital of the Company.
As Petroleum is an essential commodity it has an even demand in the market. So as there
is no huge fluctuations in the demand it helps in predicting the sales. But the main cause
of concern for the company is the availability of the fuel at international markets and the
rise in the International Fuel Prices over the years. As the major part of the requirement is
imported from South East Asian countries, the Ecomonic and Political scenario of these
countries also imporment from IOCL`s business point of view.
78 INDIANOILCORPORATIONLIMITED(IOCL)
From Table 7 we can see that 2007-08 has been an year of huge turmoil when there was
a 36.6% increase of Current Assets which occured mainly due to increase in the
Inventory Level and Loans and Advances. The Loans and Advances increased as
Govenment issued Oil Bonds for IOCL in that year to Compensate the huge losses which
the company suffered during this year due to rise in the Crude Prices. Due to in increase
in the Fuel Prices there was a problem in the cash flow of the company. So to finance the
short term obligations the company had to go for the Short-Term Loans. Hence the
Current Liabilities had increased. The Net result was a 96.23% surge in the Working
Capital.
In 2008-09, the situation came back to normal when the Current Assets droped by
16.93% and Working Capital Decreased by 49.98%. This was mainly due to a strict
credit policy which brought down the Debtors and lowering of the inventory due to high
demand of fuels.
Breakup Of the Current Assets and Current Liabilities Under different Heads like Cash & Bank, Debtors, Loans & Advances, Inventory & current liabilities , Provisions(in CroresRs.):
Fig.16: Area Graph showing Breakup of Current Assets
79 DipanjanGuha,IMSGhaziabad
Fig. 17: Area Graph showing Breakup of Current Liabilities
From Fig. 16: it can be seen that :
• Cash and Other Current Assets has increased at a constant rate and Sundry
Debtors has decreased at a constant rate when the Sales of the Company has
increased over the Years.
• The controlling factor of Working Capital has been the Inventory which has
fluctuated over the Years along with the Loans & Advances which was geared up
from the year 2007-08 by receiving the Oil Bonds.
From Fig.17 : it can be seen that:
• The provisions has drastically increased by about 294% in the year 2009-10.
• The current liabilities had incresed in the year 2007-08 but after that IOCL has
maintained a stable current liability level which is good because it finances the
daily cash requirement of the Company.
80 INDIANOILCORPORATIONLIMITED(IOCL)
CASH AND BANK BALANCES of IOCL( Rs.In Crores)
Cash & Bank balances Years Particulars 2005-06 2006-07 2007-08 2008-09 1. Cash Balances: a. Cash balances including imprest 2.7 3.75 2.48 85.37 b. Cheques in hand 698.83 726.43 746.96 712.65
Total (1) 701.53 730.18 749.44 798.02 2. Bank Balances: a) Current account 27.85 185.02 64.57 123.98
b) Fixed Deposit account 14.63 9.73 9.38 10.14 c) Blocked account 0.16 0.16 0.16 0.16
Total (2) 42.64 194.91 74.11 134.28 3. Bank balances with Non Scheduled Banks: a) Current Account 0 0.88 0.88 0.88
Myanmar Economic Bank Branch (5), Rangoon [ Maximum balance during the year- 0.88 crore] TOTAL(1+2) 744.17 925.97 824.43 798.02 Table8: Cash & Bank Balances of IOCL
Fig.18 :Bar Graph showing the Cash and Bank Balance Trend of IOCL
ANALYSIS:
From the Table it can be seen that almost 92% of the Cash & Bank Balances comes from the
Cheque Balance. But it would be better if this Balance comes more from the Cash Balances or
the Balance in Current Account.
81 DipanjanGuha,IMSGhaziabad
CASH CONVERSION CYCLE OF IOCL:
(in Days) Particulars 2005-06 2006-07 2007-08 2008-09 Average Days of Sales Outstanding 13.98 11.36 11.09 8.25 11.17 Days of Sales in Inventory 50.67 41.65 50.33 34.95 44.40 Days of Payable Outstanding 37.46 31.07 31.50 27.20 31.81 Cash Conversion Cycle 27.19 21.93 29.92 16.00 23.76 Table9: Cash Conversion Cycle
ANALYSIS:
Cash conversion cycle is likely to be negative as well as positive.
A positive result indicates the number of days a company must borrow or tie up capital
while awaiting payment from a customer. A negative result indicates the number of days a
company has received cash from sales before it must pay its suppliers.
Of course the ultimate goal is having low CCC, if possible negative. Because the shorter
the CCC, the more efficient the company in managing its cash flow.
It can be seen that the Cash Conversion Cycle for Indian Oil is on the higher side with an
average of 23.76 days. It means that IOCL have to borrow for 23.76 days to finance its
working capital requirement.
The main reason for this high CCC is a very high Inventory Holding Period. This is
because IOCL purchases Crude from the International Market and so have to maintain a high
Inventory to meet the unforeseen requirements.
The Days of Sales Outstanding is decreasing yearly which is a positive trend and is
Lowering the Cash Conversion Cycle
But the Days of Payable Outstanding is also decreasing yearly. This is mainly due to the
Circular by the Goverment of India which has restricted the payment period to be 30 days
from the receipt of the delivery of the crude.
The Year 2008-09 shows the lowest CCC of 16 days. The main reason behind this is the
lowest Inventory Holding Period of 34.95 days.
IOCL should try to get more credit period from its Creditors and lower the Inventory
Holding to lower this CCC even negative to better it Cash Flow position.
82 INDIANOILCORPORATIONLIMITED(IOCL)
ANALYSIS OF THE DEBTORS IN THE EASTERN REGION:
Registration with DGS&D
Registration with DGS&D is a process by which firms can get enlisted as an approved
supplier to qualify for participation in DGS&D procurement programme.
DGS&D registers suppliers for specialized items after verification of their technical
capability, financial status and reliability as a supplier.
This registration is widely taken as a benchmark by other procurement agencies in India
both in the State & Central Sectors
20 Registration centres across the country deal with applications for registration for
registration on single window disposal basis.
Different Categories of Registration:
Indigenous Items:
Indian Manufacturers/ Assemblers/ Converters.
Authorized Agents/ Distributors of registered Indian Manufacturers
Stockist of certain specified indegenous stores
Imported Items:
Foreign Manufacturers with or without Indian Agents
Stockist of Imported Stores
Suppliers of Inported Stores
Advantages In Associating with DGS&D:
To Suppliers:
Its registration is held in high esteem by all Govt. Departments.
Award Of Contract lends respectability & Image enhancement.
Company Ratios 2005-06 2006-07 2007-08 2008-09 Average
IOCL Gross Profit Ratio 4.47 5.00 4.51 1.50 3.87
Return on Capital Employeed 16.89 25.78 24.53 9.84 19.26
Return On Fixed Assets 11.26 13.69 12.32 4.78 10.51
HPCL Gross Profit Ratio 0.42 2.35 1.17 0.65 1.15
Return on Capital Employeed 3.26 20.49 10.50 6.64 10.22
Return On Fixed Assets 5.53 17.81 9.51 4.93 9.45
BPCL Gross Profit Ratio 1.82 4.27 3.92 3.14 3.29
Return on Capital Employeed 4.45 25.79 22.24 8.28 15.19
Return On Fixed Assets 2.64 15.27 12.41 5.26 8.89 Table 22: Profitability Ratios of IOCL, HPCL and BPCL
ANALYSIS:
Fig. 26: Area graph showing Profitability Ratios of IOCL, HPCL and BPCL
Fig.27: Line Graph showing Return on Capital Employedand Return on Fixed Assets
99 DipanjanGuha,IMSGhaziabad
• From the above graph we can see that after the year 2006-07 which showed a huge rise in
the Gross Profit for all the companies, there has been a downward trend for the profit of
all the companies. For IOCL it can be said that there had been a huge fall in the
profitability and hence the Gross Profit Ratio. This is mainly due to a huge rise in the
Manufacturing, Administration, Selling and Other Expenses. This expense shot up to
Rs. 160352.58 Crores in 2008-09 from Rs. 115163.07 Crores in 2007-08. The Raw
Material consumption increased in this year which was due to the increase in the
purchase by 24.59% which decreased the Gross Profit of the Company.
• The Return on Capital Employed is on the very higher side for all the 3 Companies. This
is because all these companies being PSU s a very small portion of the Capital is through
Equity Shares.
• The Return on Fixed Assets has been on a comparatively higher position for IOCL than
HPCL & BPCL. The main difference in the Fixed Assets of the other two Companies is
with IOCL is in the Plant & Machinery. The Plant & Machinery for IOCL is almost 3
times that of the other 2 Companies. This is due to the huge Refineries and Bottling
Plants which IOCL pocess.
• So in conclusion it can be said that IOCL has maintained the highest average of Gross
Profit Ratio among the 3 Companies. Though there was a sharp decrease in the
Profitabilty in the Year 2008-09 the situation has completely changed in 2009-10 where
the company has registered a gross profit of 10000 Crores. So in terms of profitability
also IOCL is in a better situation than its PSU Competitors.
100 INDIANOILCORPORATIONLIMITED(IOCL)
ANALYSIS OF DEBTORS UNDER WBSO
Monitering and Control on Beyond Credit Outstanding: Guidelines are issued from time to time underlining the need to moniter the outstanding and
control the incidents of beyond credit outstandings. Guidelines are also issued on the checks and
control to be exercised at supply locations to obviate the possibility of releasing supply beyond
authorised limit. The instructions are iterated below:
• The copy of Credit Approval Note should beavailable with the location before
commening credit supply to any customer.
• The credit approval, apart from other things must specifically contain the following:
Product to be supplied on credit
Monetary limit of credit. Where the product is to be supplied from more than one
location monetary limit for each of the supply location.
Number of days credit and Validity Period
• Based on above, location/finance in-charge of location shall feed the required
details/limit in the Credit Master immidiately. Supply shall not be released beyond the
approved limits.
• Following is ensured in TDM:
Password security to be maintained and password to be changed periodically.
TDM terminal to be installed in the rooms of the Location in-charge/finance in-
charge for authorizing exceptional cases instantly and over –viewing of
functioning of S&D.
Only Finance in-charge/location in-charge to exersise financial authorization as
per TDM option.
Daily review of exceptional listing by Location in-charge/finance in-charge.
Review of one line PAD on Daily/ monthly basis by Location in-charge/finance
in-charge.
• In case of Cash and Carry Customers, product to be supplied only against:
DDs or Pay Orders for the value of product or
Cheque, if cheque fecility have been approved for the party or
Fund Transfer Credit(FTC) covering the value of suply or
Adequete credit balance in the PAD
101 DipanjanGuha,IMSGhaziabad
Customerwise Outstanding and Beyond Credit Outstanding for WBSO:
Table 23:Customerwise Tabulation of Outstanding and Beyond Credit Outstanding under
WBSO
ANALYSIS:
Fig.28: Bar chart showing Outstanding and Beyond Credit Outstanding under WBSO
102 INDIANOILCORPORATIONLIMITED(IOCL)
Fig.29:Line Graph showing the Beyond Credit Outstanding as a % of Outstanding
The Outstanding for the 6 Months from January to June in WBSO is analysed in this
Section. It can be seen that the Outstanding in the month February is highest among the
chosen 6 months which had drastically decreased in the month of March. The beyond credit oustanding for the first 3 months is also showing a downward trend
reaching the least in the month of March. This is because of the closing in the month of
March when the Debtors are pushed to make their due payments. All the lagging
outstandings are tried to be cleared in this month. The Private companies are focussed in
this month March and their Outstanding decreased drastically in this month by 42.63%
along with a more or less decrease from all other both Private and Goverment. But what is alarming in this figures is that the beyond credit outstanding has jumped in
the Month of April to 6.19% from 4.56% in the previous month though the oustanding
has increased minimally by about 19.81%. This may be due to the negligence from the
administration in this month to collect the previous month`s outstanding which was
shown up in this month as beyond credit outstanding. The situation normalized after April in the months of May and June when the outstanding
increased by 13.87% in May but decresed by 5.46% in the month of June, but for both the
months the beyond credit outstanding decreased to 5.32% and 5.12% repectively. So in conclusion it can be said that Indian Oil WBSO has a highly fluctuating trend of
Outstanding from debtors as well as the Beyond Credit Oustanding which can result into
the increase in the bad debts of the company.
103 DipanjanGuha,IMSGhaziabad
Productwise Outstanding and Beyond Credit Outstanding for WBSO:
Table24: Productwise Tabulation of Outstanding and Beyond Credit Outstanding under
WBSO
ANALYSIS:
Fig.30:Graph showing Productwise Outstanding under WBSO
104 INDIANOILCORPORATIONLIMITED(IOCL)
From Fig. 30 it can be seen that among all the products, Naphtha and FO is showing the
highest Credit Outstanding. This due to the credit policy for this two products where the
Company allows 30 days of credit to the Customers. But the Beyond Credit Outstanding
for this two Products is almost nil for the considered 6 Months. This is a highly positive
sign becuase most of the Naphtha and FO customers belongs from Private-Others
Category.
Almost 99% beyond credit outstanding comes from the Lubes and MS/HSD but
relatively the outstanding figures for these two products are almost half that of FO and
one-third that of Naphtha. The Credit Period for the Lubes is 60 Days for Government
and 30 days for the Non- Government.
By analysing the actual data it can be seen that the maximum beyond credit outstanding
for the Lubes and the MS/HSD comes from the RO Agencies, Private as well as
Government Bodies. But the the Beyond Credit Outstanding comes mainly from the
Government Bodies. So the debts are secured in that sense.
But this extra fecility should not be given to the Government Companies because they are
already enjoying an extra 30 days fecility over the Private Companies.
Table 25 :Pivot Table showing the outstanding status Customerwise and Productwise
106 INDIANOILCORPORATIONLIMITED(IOCL)
CASE STUDY
107 DipanjanGuha,IMSGhaziabad
Issuance of Credit Note against an Outstanding of Rs. 653319 on account of Customer M/s Rifle Factory, Ishapore (SAP 138174) due to discounts not being passed.
1. M/s Rifle Factory, Ishapore is IOCL`s major Customer under defence category in WBSO.
IOCL has All India Rate Contract with Ordnance Factory Board for the supply of various
grades of Lubricants for their 39 Factories. M/s Rifle Factory, Ishapore is one such Unit.
2. IOCL had lodged a claim against their outstanding and M/s Rifle Factory have replied
back that they have no outstanding to IOCL for all the factories.
3. After detailed investigation of all the invoices IOCL have identified the following.
4. M/s Rifle Factory have placed various supply orders on IOCL according to the rate in the
Rate Contract and have made supplies accordingly. However there are certain cases in
which higher rates have been charged and hence those cases have resulted in generation
of non-claimable outstanding in their PAD with IOCL.
5. No Credit Note has been Issued till date for the cases mentioned in the Note.