a study on credit management in cmm

“A study on Credit Management in Coimbatore Murugan Mills Ltd”

M.Selvi

Reg No: A9410357

Of

INSTITUTE OF CO OPERATIVE MANAGEMENT

A PROJECT REPORT

Submitted to the

Institute of Cooperative Management

In partial fulfilment of the requirements

For the award of the degree

of

MASTER OF BUSINESS ADMINISTRATION

INSTITUTE OF CO OPERATIVE MANAGEMENT

China udaippu, Madurai-625022

January 2011

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DEPARTMENT OF MANAGEMENT STUDIES

BONAFIDE CERTIFICATE

This to certify that the project work entitled “A study on Credit

Management in Coimbatore Murugan Mills Ltd” in Coimbatore is a bonafide work done

by M.Selvi [REGISTER NO: A9410357] in partial fulfilment of the requirement for the

award of Master of Business Administration by Madurai Kamaraj University during the

academic year 2009 – 2011.

Signature of Guide Signature of

Programme Director

Signature of Principal

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DECLARATION

I hereby declare that the project title “A study on Credit Management in

Coimbatore Murugan Mills Ltd” in Coimbatore. Submitted for the award of Master

Business Administration in the Institute Of Cooperative Management affiliated to Madurai

Kamaraj university has been Institute Of Co operative Management and it is my original

work which does not form part of the award of any other degree or diploma.

DATE:

PLACE:

[M.SELVI]

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Executive summary

Every organization needs liquidity cash for smooth running of its

activities. It serves as a link between production and sales. The credit sales are the most

significant part of the long run process in organization. While the organization making the

credit transaction sometimes it will precede the good result but in another side it may

proceed to bad debts. For the purpose of making the credit management is helps to control

the credit policy while in following strict or lenient policy. If the organization follows the

strict credit policy it may felt to loss our customer, whether they follows lenient policy

it’s became create the more bad debt loss. So the company should follow the optimum

credit policy which is given the optimum return. A firm neglecting the management of

credit will be jeopardizing its long run profitability and may fail ultimately. For that event

I wish to analyze the credit optimality position in past event in this organization, my

project shows the credit sales event and its optimal return rate.

The study starts with an introduction to Credit Management,

Company’s profile, Achievements and also the need for study, and objectives are set out

for the study. Research methodology, Data analysis & Interpretation, Findings and

Suggestions of the study follow. And then conclusions, limitations & scope for further

study were discussed.

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ACKNOWLEDGEMENT

I would like to express our immense thankfulness to all those who gave us the

possibility to complete this thesis. We would like to thank the library staff of the Institute of

Cooperative Management for their relentless effort in making access to research data and

literature possible. We are bound to all our lecturers for their motivating effort in transferring

knowledge.

I take this opportunity to express my deep sense of gratitude to

SHRI.G.Suresh MCA; MBA;DCBM Principal and SHRI.A.S.Subramani, Vice-Principal of

our college for their good wishes for this project.

I express my immense gratitude to our Program Director DR.V.Jayamohannair

MSW (PM&IR); MBA; LLB; HDCM; PGDHRD;DIT(C-DAC);FDP(IIMA) for his support and

encouragement for the completion of my project, for his support, encouragement and

enthusiasm through out the project.

The valuable and unflinching requital support in this Endeavor

Mr.P.Rajabalachandran MBA my internal guide whose assistance was immeasurable to the

completion of this project.

I express my thanks to Mr. N.Sreedhar, Chairman, Mr.S.Mani,

Manager-HR, K.Raviendran Assistant General Manager -Finace, and Mrs.

A.Balakrishna Manager – Cost, Coimbatore Murugan Mill limited, Coimbatore for

providing me this chance to complete my final year project in their reputed organization.

I like to thank the staff members of Coimbatore Murugan Mills for their

kind co-operation and support in making the project & informative. Last but never least, I

express my deep gratitude to my adorable parents, encouraging friends, all my well wishers

who have been directly or indirectly responsible for the successful completion of the project.

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Table of Contents

Chapter No. Description Page No.

01 Introduction and Methodology to the Study

Need of the Study

Scope of the Study

Objective of the Study

Research Methodology

01-07

02 Company profile

History of industry

Introduction to CMM

08-24

03 Credit Management in Coimbatore Murugan Mills 25-39

04 Data Analysis and Interpretation 40-62

05 Findings & Suggestions 63-66

06 Appendix 67-68

List of Table

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S.No Name of Table P.No 5.1 Table shows the Correlation Analysis for Credit Sales Vs Receivable in Credit

Sales41

5.2 Table shows the Regression Analysis for Credit Sales Vs Receivable in Credit

Sales43

5.3 Table shows the Aging schedule Analysis for Receivable in Credit Sales 46

5.4 Table shows the Moving Average Analysis for Credit Sales 52

5.5 Table shows the Standard Deviation Analysis for Credit Sales 54

List of Chart

S.No Name of Chart P.No 5.1 Chart shows the Aging schedule Analysis for Receivable in Credit Sales 47

5.2 Chart shows the Moving Average Analysis for Credit Sales 53

Chapter - 01

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Introduction and Methodology to the Study

1.1.1 Introduction of the Study

In recent years cash management has become the most important sector of financial

management in many trading organisations. The company that sells goods or provides

services on credit should always have a carefully considered credit policy, especially under

inflationary conditions. The stages of development that this policy has reached will obviously

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vary from one organisation to another. In the credit policy play the vital role in the

organisational growth and financial feasibility.

The Credit Management of the firm is the essential estimation of the financial

process, because while the credit retain should be in feasible position than only the financial

performance of the firm is well pleasant. The credit management is play a vital role behind in

firm’s business operation and as well as in sales efficiency. The credit optimality is needed

factor to retain the credit from the sundry debtor. From the credit policy, the firm can asses

the credit sales to the customer for retain the bad debts. The optimum credit policy is should

give a profitable return with the reasonable collection period. In the study is evaluating the

credit outstanding with the receivables which is obtaining from the sundry debtor. This

project shows the credit process with the collection amount of the CMM and evaluation of

credit policy which was followed by the firm.

1.1.2 NEED OF PROJECT

Coimbatore Murugan Mills is the composite process unit in Coimbatore, which has an

excellent performance in textile Industry. It is an interesting subject to study the Credit

Management in such a largest Mill. It if felt that the organization is concerned mainly with

the activities going on during the office. The company that sells goods or provides services

on credit should always have a carefully considered credit policy, especially under

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inflationary conditions. Evaluate the Optimum Policy with the credit term is the main Motto

of the study.

1.1.3 Scope of the Study

Coimbatore Murugan Mills is the composite process unit in Coimbatore, which

has an excellent performance in textile Industry. In this project undertaken the credit

performance in such a largest mill, which was evaluate the credit optimistic for the future

prosperities of mills financial position and to improving my career aspects also. This study

would undertake the financial viability in the credit sales return, it would helps to many

manufacturing organisation while maintaining and evaluating the credit policy.

1.1.4 Objectives of Study

The main objective of the study is to understand, in general concept of Credit Mangement and the Credit Management practices particularly in Coimbatore Murugan Mills regardingly the study aim;

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To review the Credit Management policy presently adopted by Coimbatore Murugan Mills

To analyze the pattern of Credit Sales and its Collection

To find the relation between the Credit Sales and Collection

To make few suggestions for effective Credit Management.

1.2 RESEARCH METHODOLOGY

1.2.1 METHODOLOGY:

The project evaluates the Credit Management one of the company with help of

the most appropriate tool of financial analysis like ratio analysis, aging schedule and essential

statistical tools. Hence, it is essentially fact finding study.

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RESEARCH

This Research is based on to analyse the optimality of credit variables in the

aspect of the financial performance. The study undertaken the quantitative research method,

which is analyse the rate of return in the credit sales.

1.2.2 RESEARCH DESIGN

1.2.3 Secondary Data:

Secondary data studies whole company records and company audited balance sheet (2009-

10) in which the project work has been done. And the sundry debtor’s ledger and the aging

matrix record also used to finish the project. In addition, a number of reference books,

journals and reports were also used to formulate the theoretical model for the study. And

some information is also drawn from the websites.

1.2.4 Tools used in analysis:

Ratio Analysis

Regression analysis

Correlation analysis

Standard deviation analysis

Moving average analysis

Aging Schedule

Collection Experience Matrix

1.2.5 Period of study:

The study covers the period of 2009-10 in Coimbatore Murugan Mills Limited.,

1.3Review of Literature

Bank Performance and Credit Risk Management

by Takang Felix Achou Ntui Claudine Tenguh

In this review MR. Takang Felix Achou Ntui Claudine Tenguh explains the Banking Performance and Credit risk Management under the

guidance of MR. YingHong Chen (PhD) for the Master Degree Project in Finance in unversity of skovde school of technology and science.

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He used to analysis the Bank Performance and Credit Risk Management with the statistical tools with the Credit Scoring Model, Regression

Analysis and Ad Hoc Approach. He would suggest that the banks could establish a credit risk management team that should be responsible for the following

actions that will help in minimising credit risk.

The review indicates the Working with Business Groups in keeping aggregate credit risk well within the bank’s risk taking capacity (risk

tolerance) , Developing and maintaining Credit Approval Authority structure, approving major credits, Granting approval authority to qualified and experienced

individuals, Reviewing the adequacy of credit training across the bank, Setting systems to identify significant portfolio indicators, problem credits and level of

provisioning required, Presents information about the bank’s exposure to and its management and control of credit risks, in time Establishment of credit policies

and standards that conform to regulatory requirements and the bank’s overall objectives, Counterparty ratings, are obtained through the local authorized and

External Credit Rating Agencies and Assessment and the continuous monitoring of counterparty and portfolio credit exposures is carried out

1.4 Limitations of the study

As the study is based on secondary data, the inherent limitation of the secondary data would have affected the study.

This study need to be interpreted carefully. They can provide clues to the company’s credit management and receivable performance alone. But on

their own, they cannot show whether performance is good or bad. It requires some quantitative information for an informed analysis to be made.

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Chapter -02

Company profile

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2.1 Textile Industry History

English inventors in the 18 th century began to automate textile cottage

industry processes including carding, spinning and weaving. James Hargreaves developed the

spinning jenny, a device which replaced eight hand spinners in one operation. Richard

arkwright assembled these processes and started the first factory on the Derwent River in

Cromford, England in 1771.

Following the American Revolution, several founding fathers felt

manufacturing should remain in England. Alexander Hamilton felt otherwise and wanted to

establish a model mill village in Paterson, New Jersey. His ideas were ahead of their time.

The “National Manufactory” went out of business in1796. Samuel Slater of Rhode Island

visited several mills owned by Arkwright and associates, memorized the essential features

and returned to the US. In 1792, he opened a yarn spinning mill in Pawtucket, Rhode Island,

the first successful automated yarn spinning in the US. In 1814, James cabot Lowell of

Boston built a factory in Waltham, up the Charles River from Boston. Later, the Boston

Associates built an entire mill town on the Merrimack River and later named it “Lowell”

memory of James Cabot Lowell.

1793 – Eli Whitney and Hogden Holmes developed a simplified method of removing

the cotton lint from the seed. Whitney’s and es[ecially Holmes’ saw tooth gin, revolutionized

the cotton industry by dramatically increasing the productivity of cotton ginning.

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In the early 1800’s cotton was raised in the southern United States and exported to

mills in England and the north. Leaders such as William Gregg of South Carolina advocated a

home based textile industry for the south but the time was not right. Northern mills resisted to

growth of mills outside New England. Textile machinery was built in New England and New

Jersey and imported from Europe.After the Civil War, the south slowly replaced slaves with

free workers. The industry remained largely in the north until after the 1880s. Leaders such as

Edwin Michael Holt and family of Alamance Country, North Carolina built mills in large

numbers throughout the south as the 19th century closed. Glencoe Cotton Mill and mill village

are preserved today. www.Textileeheritagemuseum.org Cotton mills in New England began

to decline in importance.

Merchants contracted for goods through agents. The Cone family moved from

Baltimore to Greensboro and brokered sales. The Belk family bought goods from Cone to sell

in the dry goods stores. Merchants such as Marshall Fields of Chicago bought goods from

mills through intermediaries. Later, in order to better control supply, the Cones and the Fields

built mills of their own, e.g., cone mills and Fieldcrest mills. Machinery was imported from

the north and from Europe. World War I and the naval blockage imposed by England on

German shipping, and the use of U-boats by Germany to harass English vessels brought the

realization that the United States must be independent of England and Germany for

machinery and dyestuffs. New companies emerged to satisfy the war effort and remained

strong for several decades following the war. World War II once again emphasized the need

for self-sufficiency. Following the war, however, imported machinery and dyes, especially

form Germany and Switzerland, once again supplemented and eventually replaced domestic

supply. American textile companies thrived with the use of imported machinery and

dyestuffs.

In the 1900s, a new world order began to replace the Made in the USA ideas. Buying

from the lowest cost producer drove many textile manufacturers out of the production side

and into imports. Manufacturing companies changed to marketing companies.

A short History of Textile Industry in India:

1700- Cotton buying and selling from Mumbai to china

1853- Rail link to Thana

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1854- Mumbai gets its first mill referred to as ‘Bombany Spinning Mill’ famous for

producing cotton textile to be exported to Britain.

1870- There were about 13 mills

1875- Total count of mills in Mumbai was about 70

1915-Total count of mills in Mumbai goes up to 138

1982- About 2.5 laks mill employees went on work stoppage opposed to ‘Bombay Mill

Owner Association’ demanding wage increase.

1991- State government announced Development Control Rule 58 which Confirmed, mill

lands could be sold to others with some terms and conditions applied.

2005- National Textile Corporation (NTC) who owned 25 mills in the city started selling few

Mills to private businesses.

2006- NTC made decision to start 3 of the old mills.

It was in the late 17th century when cotton trade between Mumbai and China began. At first

the trade between these two countries was in opium and proceeds form this illicit trade were

used to establish the cotton trade. It was the establishment of the rail links, first linking

Mumbai and Thana in 1853 and then subsequently extension to the Deccan in 1863, which

gave the momentum to the cotton trade. The rail link allowed raw cotton to be transported

from its most important growing locations (Nagpur) to Mumbai. A constructive effect of the

sizeable quantities of cotton coming into Bombay was the setting up of warehouses between

the railway line and the port at the Cotton Green dockyard, Sewri. The establishment of the

railway and the setting up of the warehouses gave Bombay a natural advantage in the world

cotton trade.

Initially Bombay was only a trading post, but in 1854 with the establishment of first

cotton mills – “Bombay Spinning and Weaving Company” at Tardeo in central Bombay had

started the transition from trading to manufacturing. Encouraged by the success of the first

cotton mill, the local businessman quickly moved from trading to manufacturing. By the turn

of the century cotton mills very an important part of the Bombay skyline, with well over a

100 cotton mills. Most of Bombays mills were situated in the Girangaon area- the literally

translation from the local Marathi means “mill village” – now part of central Bombay which

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at its peak had about 130 textile mills, with the majority being cotton mills. The mills

personnel lived in the same locale, their families, however, stayed back in their villages. To

begin with, employers accommodated these workers in specially constructed chawls in close

proximity to the mills. Sometimes, several such chawls would border a common enclosed

space.

Textile mill

A textile mill is a factory producing textiles of one or more kinds. Types include:

1. Cotton mill

2. Silk mill

3. Mill for spinning worsted yarn.

Textile refers to a flexible material comprising of a network of natural or artificial

fibers known as yarn. Textiles are formed after the process of spinning, weaving, knitting,

crocheting, knotting and pressing fibers together. Textile mill refers to manufacturing plants

for making textile fabric and products. Textile mill industry is one of the largest industries in

India textile mill industries went through a process of phenomenal growth for the past four

decades.

A factory in which woven fabrics are manufactured, many early mills were

located near a source of power for operating the machinery; most were of timber construction

and in constant danger of being consumed by fire. In 1832, a significant advance in fire safety

occurred with the construction of a mill in Rhode Island that was especially designed to resist

fire (and to burn slowly if ignited) by using thick floor planking by minimizing the number of

timber beams and by maximizing the cross sectional area of each beam. These design criteria,

are widely applied and greatly improved in the fire safety of the mills.

Few leading Indian textile mills

1. Adarsh textile mill- manufacturer and exporter of good quality woolen and synthetic blankets.

2. Amritsar swadeshi woolen mill- pioneer in manufacturing the heavy woolen yarn and largest manufacture of fabric.

3. Aroon mill- manufacturer of textile auxiliaries

4. Mohan thread mill- manufacturer of high quality embroidery yarn and threads.

Products of textile mill

Textile mill usually produces both yarn and fabric products

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Yarn products Fabric products

Cotton yarn Woven fabrics

Blended yarn Knitted fabrics

Synthetic yarn Grey and dyed fabrics

Specialty yarn

Structure of the Indian textile industry

The textile sector in India is one of the worlds largest. The textile industry today is divided

into three segments:

1. Cotton textiles

2. Synthetic textiles

3. Other textiles like wool, silk and jute etc.

All segments have their own place but today cotton textile continue to

dominate with 73% share. The structure of cotton textile industry is very complex with co-

existence of oldest technologies of hand spinning and hand weaving with the most

sophisticated automatic spindles and looms. The structure of the textile industry is extremely

complex with the modern, sophisticated and highly mechanized mill sector on one hand

spinning and hand weaving(handloom sector) on the other which in between falls the

decentralized small scale power loom sector.

Unlike other major textile producing countries, India’s textile industry is comprised mostly of

small scale non integrated spinning, weaving, finishing and apparel making enterprises. This

unique industry structure is primarily a legacy of government policies that have promoted

labor- intensive, small scale operations and discriminated against larger scale firms.

Spinning

Spinning is the process of converting cotton or manmade fiber into yarn to be used

for weaving and knitting. These mill are located in North India. Spinning sector is technology

intensive and productivity which is affected by the quality of cotton and the cleaning process

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used during ginning. Largely due to deregulation beginning in the mid 1980’s spinning is the

most consolidated and technically efficient sector in India’s textile industry. Average plant

size remains small, however and technology outdated, relative to other major producers. In

2002-03, India’s spinning sector consisted about the 1,146 small scale independent firms and

1,599 large scale independent units.

Fabric finishing

Fabric finishing (also referred to as processing) which includes, dyeing, printing,

and other cloth preparation prior to the manufacture of clothing, is also dominated by a large

number of independent small scale enterprises. Overall above 2,300 processor are operating

in India including about 2,100 independent units and 200 units that are integrated with

spinning weaving or knitting units.

Clothing

Apparel is produce by about 77,000 small scale units classified as domestic

manufacturers, exporters and fabricators (subcontractors).

Conditions in the Indian textile mills:

For the past few years the sickness and consequent closure of textile mills has been a matter

of great concern in our country. The primary reasons behind this are:

1. The sickness is due to inadequate structural transformation leading to composite units losing ground to specialized units.

2. Power looms in decentralized sector have greater cost effectiveness than the composite units.

3. Low productivity due to lack of adequate modernization.

4. Stagnation in demand for traditional products. Inability to produce newer products as per market requirements

5. Increase in cost of inputs

6. Inadequate working capital.

The government of India took initiative to tackle this problem. The board for

industrial and financial reconstruction (BIFR) was set up to detect sickness and identify the

sick companies. A textile workers rehabilitation fund scheme (TWRFS) was also set up.

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2.2 COMPANY PROFILE

Coimbatore Murugan Mills Ltd.,

(A unit of National Textile Corporation Ltd, New Delhi.)

History of Coimbatore Murugan Mills:

CMM was established in the year 1936 by Angappa chettiyar with a

spindle age of 11480. Sakomoto Automatic Looms were added during the 1952. The mill was

making good progress until it was caught in the vicious cycle of higher Raw Material Cost,

Lower Yarn Prices and higher cost of Production resulting in huge loss. Continuous losses

are the main reasons of closure of the mills in the year 1968. The mill remained closed for 3

year from May 1968 and it was taken over by the government of Tamil Nadu with effect

from 1971 under Industrial development and regulation Act, 1951. Subsequently, the mill

was nationalized under the sick textile undertaking (Nationalization) Act 1974 and became

one of the units of National Textile Corporation Limited, New Delhi.

This is the only composite mill in Tamil Nadu which is

having Spinning and Weaving. The progress of the unit since nationalization in different

spheres is enumerated. The mill is running with 3 shift based. The mill provide the economic

and facilitating benefits to the employee like Canteen, ESI, PF, Medical benefits, Insurance.

The mills have obtained ISO 9001-2000 certification from TUV RHEINLAND (INDIA) Pvt

Limited, during the year 2004. The well trained employee alone permitted to operate the

machinery. The installed capacity of spindles at the time of Nationalization was 28680 and all

these spindles were renovated under the approved modernization scheme. Were during the

beginning stage of mill totally 1500employees worked, after Modernization it reduced to 500.

The installed capacity of looms machines are import from Japan, Germany, Belgium.

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The mills have adequate self- generating capacity to the tune of 2720 KVA to

meet out power requirement to the extent of 100% and hence achievement of maximum

utilization is possible even during 100% power-cut.

The mill which was once considered a sick mill has now recovered from the initial

sickness and poised for growth. Coimbatore murugan mill is a composite textile mill situated

in mettupalayam Road Coimbatore. The labor strength of this mill is 674 workers.

Objectives of the company:

To provide employment to thousands of workers who were rendered of unemployed

due to the closure of the textile mills.

Reorganize and rehabilitees such undertaking with a view to protect the interest of the

general public.

Augmentation of production of different varieties of yarn and cloth

Distributors of the yarn and cloth at fair prices to consumers power loom

manufactures defence personnel and uniform materials to employees of other public

sector units.

National textile corporation ltd. (NTC)

National textile corporation (NTC) is the single largest textile central public sector

and enterprise under ministry of textiles managing 52 textile mill through its subsidiary

companies spread all over India. The headquarters of the holding company is at New Delhi.

The strength of the group is around 22,000 employees. The annual turnover of the company

in the year 2004-05 was approximately Rs. 638 crores. NTC is modernizing 22mill with the

latest state of art technology on its own. As on 30-09-2007 there are 16,818 employed in 52

textile mill(after closure of 67mills), with 9.55lakh spindles, 577 looms producing 400lakh

kgs of yarn and 185lakh meters of cloth annually. So far 55,642 employees have opted for

voluntary retirement under the Modified Voluntary Retirement Scheme (MVRS) and

Rs.1951.13crores have been paid as VRS compensation to all the employees of closed

unviable mill and surplus employees of viable mill.

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As per the approved Modified Voluntary Retirement Scheme, the total cost of

modernization of 22 mills was estimated at Rs. 530crores. Out of these 22 mill modernization

scheme is being implemented in 15 mills.

RESTRUCTURING

NTC is in the process of a major restructuring. A new corporate plan/ strategy is

under formulation for growth/ repositioning of the organization by merging all its 9

subsidiary companies with holding company.

STATUS OF IMPLEMENTATION OF REHABILITAION SCHEME:

1. The total cost of the revised scheme is Rs. 5267.56crores which is duly approved by BIFR in the year 2006.

2. BIFR has approved a merger of its 9 subsidiary companies with NTC holding company with effect from 1.4.2006

3. An amount of Rs. 322.35crores has been paid to clear PF AND ESI and creditors outstanding.

4. Paid attractive VRS compensation amounting to Rs. 2132.48crores to 59,252 to employees.

5. Old and obsolete plant/machinery of closed mill and surplus machinery of viable mill have been sold for a total amount of Rs. 304.84crores.

6. The materials of the old building have been sold for Rs. 77.10crores.

7. Land sold for a total amount of Rs.3652.14crores through open tender system.

8. The funds amounting to Rs.8018.21crores will be arranged through various sources and utilization of Rs. 7134.12crores is on valuable heads

of expenditure i.e., modernization redemption of bonds and payment of MVRS compensation, payment for working capital and payment of PF

and ESI and Creditors due as on 1.12.2008.

As per the 2 nd modified scheme approved by the BIFR on

05.09.2008 the spindle capacity will be increased from 6 Lakhs to 9 Lakhs spindles.

Accordingly, the total cost of modernization would be Rs. 1155.00 crores instead of Rs 530

crores in the 1st revised scheme and the total cost of the Revised Rehabilitation Scheme

would be Rs 9103.00 crores after adjusting the Cost of Bonds Redemption.

PRODUCT PROFILE

100% Cotton Yarn

Cotton is a soft, staple fiber that grows in a form known as a boll around the seeds of

the cotton plant, a shrub native to the tropical and subtropical regions of Europe and America.

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The fiber is not spun into thread and used to make a soft, absorbent and breathable textile

used for making clothing, sheets and towel. Each fibre is made up of twenty to thirty layers

of cellulose coiled in a neat series of natural springs.

This interlocked form is ideal for spinning it into a fine year. Cotton is used to

make a number of textile products. These include terrycloth, used to make highly absorbent

bath towels and robes; denim, used to make blue jeans; chambray, popularly used in the

manufacture of blue work shirts (from which we get the term “blue – collar”); and corduroy,

seersucker, and cotton twill. Socks, underwear, and most T-shirts are made from cotton. Bed

sheets often as made from cotton. Cotton also is used to make yarn used in crochet and

knitting. Count Range: Ne 2/1 to Ne 140/1, in single, double and multiple ply.

Grey Fabric

Fabric or cloth is a flexible artificial material that is made by a network of

natural or artificial fibers. The example is tread or yarn which is formed by weaving or

knitting as in textiles. Cloth is mostly used in the manufacturing of clothing and household

furnishing etc. Cloth is made in many varying strengths and degrees of durability, from the

finest gossamer fabrics to study canvas sail cloths. Fabric has several definitions. Some of

them are discussed below.

Due to its cost effectiveness, exquisiteness and longevity, grey fabric has been

widely used for cloth manufacturing. Uniquely woven grey fabric has become increasingly

popular in appreciation of increased market demand. Clothes made out of grey fabric can

simply be termed as stunning in each and every aspect. Showcasing immense aesthetics and

revealing a tendency of glamour, clothes made using grey fabric are ruling the international

market.

100% Polyester

It is a type of fabric which is a synthetic, man-made fiber produced. Some of its

features crease resistance, ability to dry quickly, shape retention in garments, high strength,

abrasion resistance, and minimum care requirement. It is very important fiber in upholstery

fabrics, which is often used in warps due to its strength and inexpensiveness.

Polyester is a durable, easy-care synthetic fabric made from petroleum by products. It

can be manufactured in variety of weights and textures. Polyester is used for a wide range of

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applications, including clothing, home furnishings and industrial fabrics. Application:

Knitting, weaving and sewing yarns. Count Range: Ne 6/1 to Ne 80/1 in single double and

multiple ply.

Polyester Cotton Blend

For satisfactory was and wear purposes, fabrics for rainwear, tailored clothing, dress

shirts, and sport shirts usually have a blended of at least 65 percent polyester with the cotton.

Polyester will provide wrinkle resistance and shape retention. Cotton will provide absorbency

and consequent comfort.

However, unless properly constructed and properly cared for, a fabric of a

polyester and cotton blend may pucker and lose its shape if the cotton should shrink or if

cotton thread is used in sewing. Polyester and cotton blends are well suited for fabrics to be

given a permanent press resin finish.

Where greater absorbency and softer hand are desired, a 50/50 blend is preferable, but

there will be a corresponding strength loss of as much as 20 percent as well as a slight loss in

resilience. A 50/50 blend of polyester and cotton is also satisfactory for effective permanent

press finishes. On the other hand, blends of as much as 80/20 of polyester and cotton,

respectively, will have a somewhat stiffer, slicker hand. Strength, wrinkle resistance, and

shape retention will be increased but absorbency will be reduced.

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Manufacturing Process

Spinning Process

Mixing

First step in the process of manufacture of yarn. Cottons of different varieties in

different proportion are hand opened and laid into different layers according to the quality of

cotton and depending on the end use (yarn quality requirement). In best varieties of there will

be a lot of differences, in the quality within cotton bale as well as from bale to bale in lot of

cotton. If the yarn is produced into a single variety, there will be wide fluctuations in yarn

quality. Hence it is the practice to mix several bales, before feeding it to the blow room.

Mixing helps the mill to maintain the following uniform aspects over a long period.

a. Quality of raw material

b. The cost of raw material

c. Particular process like roller setting and twist setting

d. yarn quality and cost

Objective of blow room:

a. Reduce the lumps of cotton into small tufts. This is called as “opening action”

b. cleaning the cotton and removal of dirt and heavy impurities like seeds and leaf-known as “cleaning action”

c. Loose cotton is made into a well regulated sheet called as lap.

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Mixing Blow room Carding

DrawingLap former Comber

Simplex Spinning Cone winding

Blow room:

The cotton is well opened and cleaned to remove the foreign matter such as seed, its, leaf bits

etc., and a thin uniform sheet of 40 ° width and rolled in length of about 40 meters known as

Lap. It is a machine which is used to clean and improve the cotton and it gives the output in

the lap form.

Carding:

The laps received from Blow Room is further opened and cleaned and a clean rope like

material, known as card Silver is produced and stored in cans. Before the raw stock can be

made into yarn, the remaining impurities must be disentangled and they must be straightened.

The straightening process puts the fiber into a parallel lengthwise alignment. This is

necessary for all staple fibers; otherwise it would be impossible to produce fine yarns from

what is originally a tangled mass. The initial process of arranging the fibers in a parallel

fashion is known as carding.

Functions of Carding Machine:

a. Complete the process of opening to the stage of individual fibers- carding action.

b. Remaining impurities in lap are removed in this process.

Combing;

Lap machines –in combing combs cannot act on single silver. Several silvers are

combined together to produce a narrow lab to be fed to the comber. When the fiber is

intended for fine yarns, the silver is put through an additional straightening called combing. It

is a machine which converts lap form into a silver form. It is an optional special process to

remove short fibers, neps etc, from the card silver to improve the quality of yarn in order to

produce combed yarn. The machine which converts lap form into silver form is known as

combing. It is an optional special process to remove short fibers, neps, etc, from the card

silver to improve the quality of yarn in order to produce combed yarn. In this operation, fine

toothed combs continue straightening the fibers until they are arranged with such a high

degree of parallelism that short fibers called noils are combed out and completely separated

from the long fiber.

27

Drawing:

The card silvers or combed silvers (8 to 8 nos) are passed through this machine to

make the fibers in the silver parallel and more even, in order to improve the quality of yarn.

The combining of several slivers for drawing or drafting, process eliminates irregularities that

would cause too much variation if the silvers were put through singly.

Simplex:

The drawing silver is thinned and made to a strand of required size known as

ROVE and wound into bobbins of 1 to 1.5 kg weight. The thinning process is known as

drafting. These bobbins are placed on the placed on the roving frame, where further drawing

out and twisting take places until the cotton stock is about the diameter of a pencil lead.

Roving is the final product of several drawing out operations.

Spinning;

The roving bobbins received from the simplex is fed in Ring Spinning frames

where the material is further thinned down, twisted and yarn is formed which is wound on

small cops of 50 to 60 gms. The roving on bobbins is placed in the spinning frame, where it

passes through several sets of rollers running at successively higher rates of speed and is

finally drawn out to yarn of the size desired. Spinning machines are of two kinds: ring frame

and mule frame. The ring frame is faster process but produces a relatively coarse yarn. For

very fine yarns, such as worsted yarn, the mule frame is required because of its slow

intermittent operation. The ring spinning frame completes the manufacture of yarn

(1). By drawing out the roving

(2). By inserting twist and

(3). By winding the yarn on bobbins all in one operation

Cone winding :

The yarn in small cops is wound into bigger packages known as cones of required

weight (1.25kg) after cleaning the impurities from Ring Spinning Yarn.

28

Weaving Process

Warping:

Warping is the initial process of weaving; it helps to improve the cotton quality.

Warping contain covert the more than 500 cones into one babin with the help of warping

machine. The warping Machines are having the various forms like 450 cones, 500 cones, and

750 cones converter.

Sizing:

Sizing is the process of improve the cotton threat quality with the help of starch and

straighten. The starching is helps to improve the threat straightness and it dry. Finally the

threats are fold into babin again.

Weaving:

Weaving is the process of weave the threat into cloth from the looms. The loom

machines are available at two types there are: automatic looms and hand loom machines. The

automatic looms are not having the human need while the looms are broken but in hand loom

machines are need the human while broken the looms to rectify the looms broken.

29

Weaving

Sizing

Warping

Chapter-03

Credit Management in Coimbatore Murugan Mills.,

30

3.1 Credit Management an overview

Introduction:

The Receivable Management is back bone of the firm running process, while

its help to inverse the credit into cash position. A firm grants trade credit to protect its credit

to protect its sales from the competitors and to attract the potential customers to buy its

products at favorable terms. It helps to find the potential customer and Sundry Debtors, who

had a willing to make a faster of paying the credit amount. It involves the procedure of

following the credit sales and grading process.

3.1.1 Credit policy:

Trade credit arises when a firm sells its products or services on

credit and does not receive cash immediately. It is an essential marketing tool, acting as a

bridge for the movement of goods through production and distribution stages to customers. A

firm grants trade credit to protect its sales from the competitors and to attract the potential

customers to buy its products and favourable terms. Trade credit creates Accounts

Receivable or Trade Debtors that the firm is expected to collect in the near future. The

customers from whom receivable or book debts have to be collected in the future are called

trade debtors. It involves an element of risk that should be carefully analysed. Cash sales are

less, but not the credit sales as the cash payment are yet to be received. Secondly, it is based

on economic value. To the buyer, the economic value in goods or services passes

immediately value to be received later on. Third, it implies futurity. The buyer will make the

cash payment for goods or services received by him in a future period.

31

3.1.2 Purpose of credit granting process in company:

a. Competition:

Generally the higher the degree of competition, is the reasons of the more credit

granted by a firm. However, there are exceptions such as firms in the electronics industry in

India.

b. Company’s bargaining power:

If a company has a higher bargaining power vis-à-vis its buyers, it may grant no or

less credit. The company will have a strong bargaining power if it has a strong product,

monopoly power, brand image, large size or strong financial position.

c. Buyer’s requirements:

In a number of business sectors buyers/dealers are not able to operate without extended

credit. This is particularly so in the case of industrial products.

d. Buyer’s status:

Large buyers demand easy credit terms because of bulk purchases and higher

bargaining power. Some companies follow a policy of not giving much credit to small

retailers since it is quite difficult to collect dues from them.

e. Relationship with dealers:

Companies sometimes extend credit to dealers to build long- terms relationships

with them or to reward them for their loyally.

f. Marketing tool:

Credit is used as a marketing tool, particularly when a new product is launched

or when a company wants to push its weak product.

g. Industry practice:

Small companies have been found guided by industry practice or norm more

than the large companies. Sometimes continue giving credit because of past practice rather

than industry practice.

32

h. Transit delays:

This is a forced reason for extended credit in the case of a number of companies

in India. Most companies have evolved systems to minimize the impact of such delays. Some

of them take the help of banks to control cash flow in such situation.

3.1.3 Goal of credit policy:

A firm may follow a lenient or a stringent credit policy. The firm following a lenient

credit policy trends to sell on credit are granted for longer periods even to those customers

whose creditworthiness is not fully known or whose financial position is doubtful. In

contrast, a firm following a stringent credit policy sells on credit on highly selective bases

only to those customers who have proven creditworthiness and who are financially strong. In

practice, firm follow credit polices ranging between stringent to lenient.

a. Market tool

Firm use credit policy as a marketing tool for expanding sales. In a

decline market, it may be used to maintain the market share. Credit policy helps to retain old

customers and create new customers by weaning them away from competitors. In a growing

market, it is used to increase the firm’s market share. Under a higher competitive situation or

recessionary economic conditions, a firm may loosen its credit policy to maintain sales or to

minimize erosion of sales. Companies may grant credit for several other reasons such as the

company position, buyer’s status and requirement, dealer relationship, transit delays,

industrial practice etc.,

b. Maximization sales vs. incremental profit:

Is sales maximization the goal of the firm’s credit policy if it was so, the firm would follow a

very lenient credit policy, and would sell on credit to everyone. Firm in practice do not follow

very loose credit policy just to maximize sales. Sales do not expand without costs. The firm

will have to evaluate its credit policy in terms of both return and costs of additional sales.

Additional sales should add to the firm’s operating profit. There are three types of cost

involved:

1. Production and selling costs

2. Administration cost

3. Bad-debt losses

33

1. Production and selling cost:

These costs increase with expansion in sales. If sales expand within the

existing production capacity, then only the variable production and selling costs will increase.

If capacity is added for sales expansion resulting from loosening of credit policy, then the

incremental production and selling costs will include both variable and fixed costs.

The difference between incremental sales revenue and the incremental production

and selling costs is the contribution of the change in the credit

2. Administration Cost:

Two types of administration costs are involves when the firm loosens its credit

policy:

a) Credit investigation and supervision costs

b) Collection costs.

The firm requires analyzing and supervising large number of accounts when it loosens its credit policy. Similarly, the firm will have to intensify

its collection efforts to collect outstanding bills firm financially less sound customer. Incremental costs of credit without any additional costs can implement the

new credit policy. This will be the case when the credit department has idle capacity.

3. Bad-debt losses:

Bad – debt losses arise when the firm is unable to collect its accounts receivable. The size of bad-debt losses depends on the quality of accounts

accepted by the firm. This firm trends to sell to customers, with relatively less credit standing when it loosens its credit policy. Some of these customers delay

payments, and some of them do not pay at all. As a result, bad-debt losses increase. The firm can certainly avoid or minimize these losses by adopting a very tight

credit policy. Is minimization of bad-debt losses a goal of credit policy? If it was so, no firm will ever sell on credit to anyone. If this happens, then the firm is not

availing the opportunity of using credit policy as a marketing tool for expanding sales, and will incur opportunity cost in terms of lost contribution.

3.1.4 CREDIT POLICY VARIABLES:

In establishing an optimum credit policy, the Firm should consider the

important decision variables which influence the level of receivables which influence the

level of receivables. As stated in the preceding section, the major controllable decision

variables include the following:

Credit standards and analysis

34

Credit term

Collection policy and procedures

Credit standards and analysis:

Credit standards are the criteria which a firm follows in selecting customers for the

purpose of credit extension. The firm may have tight credit standards: that is, it may sell

mostly on cash basis, and may extend credit only to the most reliable and financially strong

customers. Such standards will result in no bad-debt losses, and less cost of credit

administration. But the firm may not be more than the costs saved by the firm. On the

contrary, if credit standards are loose, the firm may have larger sales. But the firm will have

to carry larger receivable. The costs of administering credit and bad- debt losses will also

increase. Thus, the choice of optimum credit standards involves a trade- off between

incremental return and incremental costs.

Credit analysis credit standards influence the quality of the firm’s

customers. There are two aspects of the quality of customer:

I. The time taken by customers to repay credit obligation

II. The default rate

The average collection period determines the speed of payment by customers. It

measures the number of days for which credit sales remain outstanding. The longer the

average collection period, the higher the firm’s investment in accounts receivable. Default

rate can be measured in terms of bad-debt losses ratio- the proportion of uncollected

receivable. Bad-debt losses ratio the proportion of uncollected receivable. Bad- debt losses

ratio indicated default risk. Default risk is the likelihood that a customer will fail to repay the

credit obligation. On the basis of past practice and experience, the firm should be able to form

a reasonable judgment regarding the chances of default.

To estimate the probability of default, the firm should consider three C's

a. Character

b. Capacity

c. condition

Credit term:

The stipulation under which the firm sells on credit to customers are called credit

terms. These stipulations include:

35

a. The credit period

b. The cash discount

a. The credit period:

The length of time for which credit is extended to customers is called the credit period. A firm’s credit period may be governed by the industry

norms. But depending on its objective, the firm can lengthen the credit period. On the other hand, the firm may tighten its credit period if customers are

defaulting too frequently and bad-debt losses are building up.

The firm lengthens credit period to increase its operating profit through expanded sales. However, there will be net increase in operating profit only

when the cost of extended credit policy is less than the incremental operating profit. With increased sales and extended credit period, investment in

receivable would increase. Two factors cause this increase:

a. Incremental sales result in incremental receivable

b. Existing customer will take more time to repay credit obligation, thus increasing the level of receivable.

b. The cash discount:

A cash discount is a reduction in payment offered to customers to induce them to

repay credit obligations within a specified period of time, which will be less than the normal

credit period. It is usually expressed as a percentage of sales. Cash discount terms indicate the

rate of discount and the period for which it is available. If the customer does not avail the

offer he must make payment within the normal credit policy.

Credit terms would include:

a. The rate of cash discount

b. The cash discount period

c. The net credit policy

A firm uses cash discount as a tool to increase sales and accelerate collections from

customers. Thus, the level of receivable and associated costs may be reduced. The cost

involved is the discounts taken by customers.

Collection policy and procedures:

A collection policy is needed because all customers do not pay the firm’s

bills in time. Some customers are slow-payers while some are non-payers. The collection

efforts should, therefore, aim at accelerating collections from slow- players and reducing bad-

debt losses. A collection policy should ensure prompt and regular collection. Prompt

collection is needed for fast turnover of working capital, keeping collection costs and bad-

36

debts within limits and maintaining collection efficiency. Regularity in collections keeps

debtors alert, and they tend to pay their dues promptly.

The collection policy should lay down clear-cut collection procedures. The

collection procedures for past dues or delinquent accounts should also be established in

unambiguous terms. The slow-playing customers should be handled very tactfully. Some of

them may be permanent customers. The collection process initiated quickly, without giving

any chance to them, may antagonise them, and the firm may lose them to competitors.

The responsibility for collection and follow-up should be explicitly fixed. It may be

entrusted to the accounts or sales department, or to a separate credit department. The co-

ordination between accounts and sales departments is necessary and must be ensured

formally. The accounting department maintains the credit records and information. If it is

responsible for collection, it should consult the sales department before initiation an action

against non- paying customers. Similarly, the sales department maintain must obtain past

information about a customer from the accounting department before granting credit to him.

Through collection procedures should be firmly established, individual cases

should be dealt with on their merits. Some customers may be temporarily in tight financial

position and in spite of their best intentions may not be able to pay on due date. This may be

due to recessionary conditions, or other factors beyond the control of the customers.

Such cases need special considerations. The collection procedure against the m

should be initiated only after they have overcome their financial difficulties and do not intend

to pay promptly. The firm should decide about offering cash discount for prompt payment.

Cash discount is a cost to the firm for ensuring faster recovery of cash. Some customers fail

to pay within the specified discount period, yet they may make payment after deduction the

amount of cash discount. Such cases must be promptly identified and necessary action should

be initiated against them to recover the full amount.

In practice, companies may take certain precautions vis-à-vis collections.

Some companies require their customers to give pre-signed cheques. Bills discounting is

another practice in India. Unfortunately, it is not very popular with a number of companies.

Some companies provide for penal rate of interest for debtors who fail to pay in time.

37

3.1.5 CREDIT EVALUATION OF INDIVIDUAL ACCOUNTS:

For effective management of credit, the firm should lay down clear cut guidelines

and procedures for granting credit to individual customers and collecting individual accounts.

The firm need not follow the policy of treating all customers equal for the purpose of

extending credit. The credit evaluation of individual accounts should involve the following

steps:

1. Credit information

2. Credit investigation

3. Credit limits

4. Collection procedure

1. Credit information

The firm would ensure that receivables will be collected in full and on due date. Credit should be granted to those customers who have the ability to

make the payment on time. To ensure this, the firm should have credit information concerning each customer to whom the credit will be granted.

The decision to grant cannot be delayed for long because the time involved in collecting the credit information. Depending on these two factors of time

and cost, any, or a combination of the following sources may be employed to collect the information.

a. Financial statement

b. Bank references

c. Trade references

d. Other sources

These are the sources are avail to investigate the customer position

which is has been the repayment process.

2. Credit investigation and analysis:

38

After having obtained the credit information, the firm will get an idea

regarding the matters which should be further investigated. The factors that affect the extent

and nature of credit investigation of an individual customer are:

The type of customer, whether new or existing.

The customer’s business line, background and the related trade risks.

The nature of the product- perishable or seasonal.

Size of customer’s order and expected further volumes of business with him.

Company’s credit policies and practices.

In the analysis of credit investigation contains the following steps to evaluate the customer repayable capacity;

1. Analysis of credit file

2. Analysis of financial ratios

3. Analysis of business and its management

3. Credit limit:

A credit limit is a maximum amount of credit which the firm will extend at a

point of time. It indicates the extent of risk taken by the firm by supplying goods on credit to

a customer. Once the firm has taken a decision to extend credit to the applicant, the amount

and duration of the credit will depend upon the amount of contemplated sale and the

customer’s financial strength. In case of customers who are frequent buyers of the firm’s

goods, a credit limit can be established. This would avoid the need to investigate each order

from the customers. Depending on the regularity of payment, the line of credit for a customer

can be fixed on the basis of his normal buying pattern. The credit limit must be reviewed

periodically. If tendencies of slow paying are found, the credit can be revised downward.

4. Collection procedure

A collection procedure is would like to followed by the firm as per the credit terms

and condition which is agreed at the time of making contract.

3.1.6 MONITORTING RECEIVABLE:

A firm needs to continuously monitor and control its receivable to ensure the success of

collection efforts. Two traditional methods of evaluating the management of receivables are:

39

1. Average collection period

2. Aging schedule

These methods have certain limitations to be useful in monitoring receivable. A

better approach is the Collection Experience Matrix.

3.1.6.1 Average Collection period:

The average collection period measures the quality of debtors in an

aggregative way. The average collection period so calculated is compared with the firm’s

stated credit period to judge the collection efficiency.

Debtors

Average Collection period =

× no. of . days

Credit Sales

1. Aging schedule Analysis

Aging schedule removes one of the limitations of the average collection period.

It breaks down receivables according to the length of time for which they have been

outstanding. Thus the aging schedule provides more information about the collection

experience. It helps to spot out the slow-paying debtors. However, it also suffers from the

problem of aggregation, and does not relate receivables to sales of the same period.

40

Out Standing

Interval

Out Standing

(in crore ) Percentage

0-25 200000 50%

25-35 100000 25%

35-45 50000 12.5%

45-60 30000 7.5%

Over 60 20000 5%

Total 2740.42 100%

3.1.6.3 Collection Experience Matrix:

When the sales over a period of time are shown horizontally and associated

receivables vertically in a tabular form, a matrix is constructed. Therefore, this method of

evaluating receivables is called Collection Experience Matrix.

3.2 Credit Management in CMM

3.2.1. Sales Department:

The Sales Department in CMM performs the crucial role in the operating system

which is behind to make profit and increase the turnover rate. Usually, the NTC segregate the

Norms and terms of the Sales procedure to the Mils which is operating under the National

Government. Like wise the CMM sales procedure also nominated by the NTC. The CMM is

the Government firm, that their most of the customers are also the government organisation,

so they would expect the sales in credit alone. The Credit sales are made by the customer

financial position and the personal trustiness.

In CMM have a distribution channels are as follows ;

Mills sell the cloths through the agencies and they give the percent of

commission to them, because of reducing risk due to bad debts.

Through Public Sectors

Through State Government

Through Local Marketing

41

Through Institution

Through Retail Marketing Shops

Through Exports

a. Through Public Sector Undertaking Company:

Mills approach various Public sector spread all over the country, in that directly through service agents, who are responsible for procuring order

for mill or National Textile Corporation. Here the mills supplies the finished goods to the public sector undertaking for the purpose of workers, students,

officers in uniform as per the contract form agreed up on the payment has been made by Public sector company. Most of the public sector company are

paying after 90 days from the date of receipt of the material to them.

b. Through State Government:

National Textile Corporation or mills approach the State Government through that they supply the cloths and material to the companies, factories, and

others.

c. Through Local Market:

Mill distributes material and cloths through service agencies to the local market.

d. Through Institutions:

NTC has sale the goods to the educational institutions, college, schools, and others through the services agencies which are belong to

government sector.

e. Through Retail Market Shops:

The material should supplies only against the advance payment from the party. To get the order from local agents who are in Local Market.

f. Through Exports:

Mill gets the order against the advance payment and letter of credit. Exports contain two

types of Exports like merchant export and direct export.

After receiving any order, mill plan for loom according to the

preparation. At the Yarn sells through our deppo keeper or service agents. Major haps wear of

weaving through out the Nation Somnoor, Erode, Ilchal Karanchi, Delhi, Surath. The rates are

finalised by the Southern Region the counts are desired by the General Manager during Yarn Comity

Meeting. Here, we would allow the credit facility to the deppo keeper. He pays the amount and left

the material.

42

In CMM follows the following policies for credit sales;

Maximum due period of collection is 90 days

No discount will proceed due to fast payment.

Considering the above, the preventing study has been undertaken to analyse

mainly the credit sales and its turnover, velocity, relationship and variation. The details of

analysis are prevented in the next chapter.

Chapter – 04

Data analysis and Interpretation

43

4. Analysis and Interpretation

4.1Correlation Analysis for Credit Sales with Receivables

Correlation is an analysis attempts to determine the ‘degree if relationship’

between variables. Thus the correlation is a statistical device which helps us in analysing the

co variation of two or more variables.

Table: 4.1

Table shows the Correlation Analysis for Credit Sales Vs Receivable in Credit Sales

Months Credit sales

X

( in Crore)

Collection

amount Y

( in Crore)

X² Y² XY

April 0.4 2 0.16 4 0.8

May 15 9 225 81 135

June 4.7 7.7 22.09 59.29 36.19

July 3.6 2.5 12.96 6.25 9

August 2.37 4.3 5.6169 18.49 10.191

Septembe

r

2.25 5.8 5.0625 33.64 13.05

October 2.7 2.4 7.29 5.76 6.48

November 2.9 2.9 8.41 8.41 8.41

December 2.3 2.6 5.29 6.76 5.98

January 2.2 1.1 4.84 1.21 2.42

February 2.8 1.7 7.84 2.89 4.76

March 3.7 3.8 13.69 14.44 14.06

44

44.92 45.8 318.2494 242.14 246.341

Sources of data : Balance sheet and Sundry Debtor book

∑XY

Co-efficient of Correlation =

∑X² × ∑Y²

246.341

=

318.25 × 242.14

246.341

=

277.598

= 0.88

=0.9 (approx)

Inference:

From the above correlation analysis we find the positive (0.9) result for the

Credit Sales and their Receivables of Credit Sales. We can conclude the relationship between

the variables is Perfect.

45

4.2 Regression analysis for credit sales with Receivables

Regression equations, also known as estimating equations, are algebraic

expressions of the regression of regression lines. Since there are two regression lines, there

are two regression equations- the regression equation of X on Y is used to describe the

variations in the values of X for given changes in Y and the regression equation of Y on X is

used to describe the variation in the values of Y for given changes in X

Table-4.2

Table shows the Regression Analysis for Credit Sales Vs Receivable in Credit Sales

Credit sales

X (in Crore)

Collection amount

Y (in Crore)

X² Y² XY

0.4 2 0.16 4 0.8

15 9 225 81 135

4.7 7.7 22.09 59.29 36.19

3.6 2.5 12.96 6.25 9

2.37 4.3 5.6169 18.49 10.191

2.25 5.8 5.0625 33.64 13.05

2.7 2.4 7.29 5.76 6.48

2.9 2.9 8.41 8.41 8.41

2.3 2.6 5.29 6.76 5.98

2.2 1.1 4.84 1.21 2.42

2.8 1.7 7.84 2.89 4.76

3.7 3.8 13.69 14.44 14.06

44.92 45.8 318.2494 242.14 246.341

46

Sources of data : Balance sheet and Sundry Debtor book

Formula of Regression Analysis is:

X on Y:

X = a+ by

∑X = Na + b ∑Y

∑XY = a ∑Y+ b ∑Y²

44.92 = 12 (a) + 45.8b --------------------- 1 × 45.8

246.341 = 45.8 (a) + 242.14b --------------------- 2 × 12

Equation 1 + 2

2057.34 =549.6a + 2097.64b

2956.08 =549.6a + 2905.68b

--------------------------------------

- 898.74 = - 808. 04b

b = 1.19

Substitute the value of b = 1.19 in the equation 1

12a + 45.8b = 44.92

12a + 50.838 = 44.92

12a = -5.918

47

a = -0.49

For example in if X = 5 Crore

X = -0.49 + 1.11 Y

5 = -0.49 + 1.11Y

4.51 = 1.11Y

Y = 4.063

Inference:

From the regression analysis we can forecast the receivables on credit sales. It will

help to get the optimum return during future in our current credit policy which is following

by the mill.

48

x = -0.49 + 1.11y

4.3 Aging schedule Analysis

Aging schedule for Credit Outstanding with the Receivables

Aging schedule removes one of the limitations of the average collection period.

It breaks down receivables according to the length of time for which they have been

outstanding. Thus the aging schedule provides more information about the collection

experience. It helps to spot out the slow-

paying debtors. However, it also

suffers from the problem of

aggregation, and does not relate

receivables to sales of the same period.

Table – 4.3

Table shows the Aging schedule

Analysis for Receivable in Credit

Sales

49

Month Interval

Out Standing

(in crore ) Percentage

0-1 704.995 26%

1 to 3 827.18 30%

3 to 6 709.36 25%

6 to 12 189.545 7%

1 to 2 years 194.88 8%

2 to 3 years 114.46 4%

Total 2740.42 100%

Source of data: Monthly Aging schedule data from cost department

Chart – 4.1

Chart shows the Aging schedule Analysis for Receivable in Credit Sales

Inference:

From the Aging Schedule Analysis we can find the collection process are under

the significant amount was received with in the reasonable period, remains uncollected much

longer than the firm’s credit period.

50

4.4 Ratio Analysis

Ratio Analysis is a powerful tool of analyzing the credit risk policy. A

Ratio is defined as “the indicated quotient of two mathematical expressions” and as “the

relationship between two or more things”. In Credit Management, a ratio is used as a

benchmark for evaluating the credit retainable position and optimum level of collection.

Ratio helps to summarize large quantities of financial data and to make

qualitative judgment about the firm’s credit performance.

4.4.1 Debtor Turn over ratio:

A firm sells goods on credit and cash basis. When the firm extends credits to its

customer’s books debts are created in the firm’s account: debtors expected to be converted

into cash over short period and thus included in current assets. It is most essential that a

reasonable quantitative relationship between outstanding Receivables and sales should

always its funds are unnecessarily locked up in Receivables. The liquidity position of the firm

depends on quality or liquidity of debtors

Credit Sales

Formula for Debtor Turnover =

Average Debtor

Opening Debtor + Closing Debtor

Average Debtor =

2

51

84133675.89 + 81813067.62

=

2

Average Debtor = 82973371.75

458472176.5

Debtor Turnover =

82973371.75

Inference:

From the above Debtor Turnover Ratio we can conclude the debtors and credit sales are

in optimum position for retaining the Receivables is with in 66days (360 / 5.5).

52

Debtor Turnover = 5.5 times

4.4.2. Average Collection period:

The average collection period measures the quality of debtors in an

aggregative way. The average collection period so calculated is compared with the firm’s

stated credit period to judge the collection efficiency.

Debtors

Formula for Average Collection period = × no. of . days

Credit Sales

81813067.62

= × 360

458472176.5

Inference:

From the average collection period we can find the collection efficiency which is

behind the .receivable on credit sales is 64.24

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Average Collection period = 64.24 days

4.4.3. Working Capital Turnover Ratio:

The ratio is a measure of the efficiency of the employment of the working capital. It indicates the number of times the working capital is turned

over in the course of the year. This ratio finds out the relation between cost of sales and working capital. It helps in determining the liquidity of the firm in as

much as it gives the rate at which inventories are converted to sales and then to cash.

Cost of Good Sold

Formula for Working Capital Turnover Ratio =

Net Working Capital

567978000

=

80124766.22

Inference:

From the above Working Capital Turnover Ratio we convert the sale into cash with in

the 51 days (365 / 7.08). That analysis gives the optimum return during our sales process it

will help to our liquidity position

4.5. Moving Average Analysis for Credit Sales

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Working Capital Turnover Ratio = 7.08 Times

Moving Average is the analysis of showing the variable which by average of the

past event and represent the variables in percentage of movement.

Table -4.4

Table shows the Moving Average Analysis for Credit Sales

Months

(2009-10)

Credit sales

(in Crore)

12 month

Moving

Total

Average

Moving

Moving

totals

Average

Moving

figure

% of

Moving

Average

April 0.4

May 15

June 4.7 23.7 5.925

July 3.6 25.67 6.4175 12.3425 6.17125 58.33%

August 2.37 12.92 3.23 9.6475 4.82375 49.13%

September 2.25 10.92 2.73 5.96 2.98 75.50%

October 2.7 10.22 2.555 5.285 2.6425 102.20%

November 2.9 10.15 2.5375 5.0925 2.54625 113.90%

December 2.3 10.1 2.525 5.0625 2.53125 90.86%

January 2.2 10.2 2.55 5.075 2.5375 86.70%

February 2.8 11 2.75 5.3 2.65 105.70%

March 3.7

Total 44.92

Sources of data : Balance sheet and Sundry Debtor

Chart – 4.2

55

Chart shows the Moving Average Analysis for Credit Sales

Inference:

From the above chart represent the Moving Average of the Credit Sales in past 12

months. We can conclude the event from the analysis, which the credit sales movement in

future years is, may not be in same.

4.6. Standard Deviation

Standard Deviation measures the absolute dispersion or variability of

distribution; the greater amount of dispersion or variability. A small standard deviation means

a high degree of uniformity of the observation as well as homogeneity of a series; a large

standard deviation means just the opposite. It is extremely useful in identify the deviation

which is behind the variables.

Table – 4.5

Table shows the Standard Deviation Analysis for Credit Sales

Months Credit sales d (x-3.74) d²

56

X

April 0.4 -3.34 11.1556

May 15 11.26 126.7876

June 4.7 0.96 0.9216

July 3.6 -0.14 0.0196

August 2.37 -1.37 1.8769

September 2.25 -1.49 2.2201

October 2.7 -1.04 1.0816

November 2.9 -0.84 0.7056

December 2.3 -1.44 2.0736

January 2.2 -1.54 2.3716

February 2.8 -0.94 0.8836

March 3.7 -0.04 0.0016

Total 44.92 0.04 150.099

Sources of data : Sundry Debtor book

∑X

Mean X =

N

44.92

= = 3.74

12

∑d² ∑d ²

Standard Deviation of Credit Sales = N N

150.099 0.04

= 12 12

57

= 12.51 – 0.003

Standard Deviation of Credit Sales = 3.536

S.D

Co-efficient of variation = -------------- × 100

Mean

3.536

= --------------- × 100

3.74

Co-efficient of Variation = 94.54 %

Inference:

From the standard deviation analysis shows the credit sales performance in past 12

months, it represent the credit sales in past months are doesn’t have a major deviation.

Chapter-05

58

Findings and suggestion

5.1. Findings

In the study we can find the credit policy optimum position from the correlation analysis.

The correlation analysis shows the perfect relationship between the credit sales and its receivable.

From the regression analysis we can forecast the credit sales and Receivables which is being we following the same credit policy in the equation of

Xc = -0.49 + 1.11Y

From the Debtor Turnover Ratio analysis conclude the debtors and credit sales are in optimum position for retaining the Receivables is within

66days (360 / 5.5)

In study analysis of Average Collection Period show the collection efficiency which is behind the .receivable on credit sales is 64.24.

From the above Working Capital Turnover Ratio we convert the sale into cash with in the 51 days (365 / 7.08).

59

In the study Working Capital Turnover Ratio analysis gives the optimum return during our sales process it will help to maintain our liquidity

position.

We can conclude the event from the Moving Average analysis, which the credit sales movement in future years is, may not be in same.

From the standard deviation analysis represent the credit sales in past months are doesn’t have a major deviation.

If they follow the same credit policy which is helps to increase the sales

The aging schedule was preparing by the cost department in every month, but they won’t prepare for the year schedule

5.2. Suggestion

The current credit policy gives the optimum rate of return, but its create the loss on profit while we stricken the credit terms, when we followed the

optimum credit policy it will gives the more profit to us.

If mill followed the computerized accounting method, it make very convenient to forecast the future requirement of data

The mill should consider the financial position, truthiness and the repayable capacity of the debtor while before making the credit transaction. It will help

to reduce the outstanding receivable and bad debts.

The credit sales was consist the more fluctuation in the past year, so it leads to bear the more financial risk.

The mill was preparing the formal accounting books which were needed to the auditing, but they would analyze forecasting review accounts and schedules

while it will help to strengthen the financial position.

If they accumulate the Aging schedule by year wise it will helps to identify the bad debt risk

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5.3. CONCLUSION

. The Credit Management Analysis done on the credit optimality position of the

company has provided a clear view on the activities of retain the receivable. The use of the

Correlation, Regression, aging Schedule Analysis, Ratio Analysis, Moving Average and

Standard Deviation helped in this study to find out the Credit policy optimality of the

company.

This project was very useful for the judgment of the Credit Sales status of the

company from the management point of view. This evaluation proved a great deal to the

management to make a decision on the regulation of the Credit Sales to increase the sales and

bring profit to the company.

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Chapter – 06

Biography

62

6.1. Appendix

Reference Books:

Financial Management – IM PANDEY Ninth Edition

Modern Credit Management - Patrick R.A.Kirkman

Financial Management – Khan Jain

Research Methodology – Kothari CR.

Financial management - M.Y. Khan and P.K. Jain

Reference Website

www.googlebooks.com

www.creditguru.com

www.ntc.com

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