STATEMENT OF THE PROBLEM Trade credit arises when a firm sells its products or services on credit and does not receivable immediately. It is an essential marketing tool, acting as a bridge for the movement of goods that the production and distribution stages to customers. Credit creates “Receivables or Book Debts” which the firm is expected to collect in the near future. Book debts or receivable arising out of credit receivable constitutes a substantial portion of current assets of the firm. Receivables constitute a substantial portion of current assets of several firms. After the inventories, trade debtors, are the major components of the current assets. They form one-third of the current assets. Granting credit and creating debtors amount to the blocking of funds. The interval between the date of sale and the date of payment has to be financed out of the working capital. Thus, trade debtors represent investment. As substantial amounts are tied up in trade debtors, it needs careful analysis and proper management. An attempt is made in the project work to analyze the efficiency of receivable management of the sample unit. SVCCS, CTR (M.B.A Dept.)
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STATEMENT OF THE PROBLEM
Trade credit arises when a firm sells its products or services on credit and does not
receivable immediately. It is an essential marketing tool, acting as a bridge for the movement
of goods that the production and distribution stages to customers. Credit creates “Receivables
or Book Debts” which the firm is expected to collect in the near future. Book debts or
receivable arising out of credit receivable constitutes a substantial portion of current assets of
the firm.
Receivables constitute a substantial portion of current assets of several firms. After
the inventories, trade debtors, are the major components of the current assets. They form
one-third of the current assets. Granting credit and creating debtors amount to the blocking
of funds. The interval between the date of sale and the date of payment has to be financed
out of the working capital. Thus, trade debtors represent investment. As substantial amounts
are tied up in trade debtors, it needs careful analysis and proper management.
An attempt is made in the project work to analyze the efficiency of receivable
management of the sample unit.
SVCCS, CTR (M.B.A Dept.)
INTRODUCTION
Finance is aptly described as the lifeblood and nerve centre of any business. It is just
as the circulation of blood, an essential system in the human body to keep and alive.
Finance is vital input for the smooth functioning of the business. Every business enterprise
irrespective of its size and nature needs finance to carry on its operations and achieve its
target.
FINANCIAL MANAGEMENT:
Definition:
“Business finance can broadly define as activity concerned with planning, organizing,
controlling and administration of funds used in business.”
“Financial management as an application of general managerial principles to the area
of decision-making.”
Working capital refers to a firm’s investment in short-term assets viz, cash, short-term
securities.
Current assets are to be managed in an efficient manner. Receivables represent an
important component in current assets of a firm. Management of receivables is having more
significance in order to avoid blockage of funds in receivables.
RECEIVABLES MANAGEMENT
The term receivable is defined as ‘debt owed to the firm by customers arising from
sale of goods or services in the ordinary course of business’. Receivables management is
also called trade credit management. Thus, accounts receivable represent an extension of
credit to customers, allowing them a reasonable period of time in which to pay for the goods
received.
These receivables come under current assets as they sooner are converted into cash.
Accounts receivables are the second most liquid form of assets of the firm. Skill full
administration of the receivables management is therefore of prime importance to the
business. The very reason of credit sales is to expand sales volume. Trade credit is
considered as an essential marketing tool, acting as a bridge for the movement of the
products through production and distribution stages to the customers.
SVCCS, CTR (M.B.A Dept.)
DEFINITION OF ACCOUNTS RECEIVABLE MANAGEMENT:
ACCOUNTS RECEIVABLES:
“Receivables represent amount owed to the firm as a result of sale of goods or services in the ordinary course of business”
RECEIVABLES MANAGEMENT:
“Receivables management is the process of making decisions relating to investment in trade debtors”
A firm investment in accounts receivable depends upon volume of credit sales and collection period.
The three major areas involved in accounts receivables management includes credit policy, credit terms and collection policies.
CREDIT POLICY
The credit policy of a company is considerably influenced by the practices followed by the industry.
The credit policy of a firm provides the framework to determine,
1. Whether or not to extend a credit to customer and2. How much credit to extend.
The credit policy decision of a firm has a two broad dimensions:
1. Credit standards2. Credit analysis
CREDIT STANDARDS
The term’ credit standards’ represents the basic criteria for the extension of credit of customers. Our aim is to show what happens to the trade-off when standards are relaxed or, alternatively, tightened.
The tradeoff with reference to credit standards are:
The collection costs The average collection period Level of bad debt losses Level of sales
SVCCS, CTR (M.B.A Dept.)
CREDIT ANALYSIS
Besides establishing credit standards a firm should develop procedures for evaluating
credit applicants. The second aspect of credit policies is credit analysis and investigation. The
two basic steps that are involved in the credit investigation process are:
Obtaining credit information
Analysis of credit information
Credit information can be obtained by both internal and external sources. Internal
sources includes various forms and documents that are filled by the customers, records of
the firm. External sources to assess the credit worthiness of the customers are published
financial statements of the customers, bank references, trade references, credit bureau
reports.
Information gathered can be analyzed by both qualitatively and quantitatively.
CREDIT TERMS
The second decision in accounts receivables management is the credit terms. After
the credit standards have established and the credit worthiness of the customers has been
assessed, the management of a firm must determine the terms and conditions of which
trade credit will be made available. The stipulations under which goods are sold on credit
are referred to as credit terms.
CREDIT TERMS HAVE THREE COMPONENTS
1. CREDIT PERIOD
In terms of the duration of time for which trade credit is extended during this period
the overdue amount must be paid by the customer. A firm’s credit period may be governed
by the industry norms. But depending on its objective, the firm can lengthen the credit
period.
2. CREDIT DISCOUNT
If any, which the customer can take advantage of, that is, the overdue amount will be
reduced by this amount. The firm uses cash discount as a increase in sales and accelerate
collections from customers.
3. CREDIT DISCOUNT PERIOD
SVCCS, CTR (M.B.A Dept.)
Which refers to the duration during which the discount can be available of these terms are
usually.
COLLECTION POLICIES
The third area involved in the accounts receivables management is collection policies. They refers to the procedures followed to collect account receivables when, after the expiry of the credit period, they become due. These policies cover two aspects.
1. DEGREE OF COLLECTION EFFORT
To illustrate the effect of the collection effort, the credit policies of a firm may be categorized into
Stringent/Light Lenient
The collection policy would be tight if very rigorous procedures are followed a tight collection policy has implications which involve benefits as well as costs
.
2. TYPES OF COLLECTION EFFORTS
The second aspect of collection policies related to the steps that should be taken to collect over dues from the customers. The steps usually taken are
Letters, including reminders, to expedite payment. Telephone calls for personal contact. Personal visits. Help of collection agencies and fully. Legal action.
1. The aim should be to collect as early as possible; genuine difficulties of the customers should be given due consideration.
2. The management of receivables involves crucial decision in 3 areas credit policies, credit terms, collection policies.
3. The objective of receivables management therefore is to have a trade-off between the benefits and costs associated with the extension of credit.
4. The extension of credit involves risk and cost. The benefits are increased sales and anticipated increased profits/incremental contribution.
SVCCS, CTR (M.B.A Dept.)
INDUSTRY PROFILE
Industry Overview:
The total Indian storage battery market is approximately estimated at US$ 500 Million
with the automotive battery segment contributing 60 to 65 percent of the overall market
value. In terms of volumes, the overall consumption of automotive batteries could be around
6.3 million units with the OE segment comprising around 1.2 to 1.3 million units per annum,
according to an interview with the Executive Vice President of ARBL that was published on
the website chennaibest.com. The late 1990s also saw a surge in the sales of the passenger
car segment for around 2 years due to certain factors like the software boom, lowering of
interest rates, etc. - which increased the overall sales of batteries. The automotive sector did
not see any significant growth during the early part of the new millennium and is slowly
showing signs of growth during this financial year. This factor also adds to the demand in the
aftermarket as more number of cars was sold around 2 to 3 years back which is generally the
life of a lead acid battery. The replacement automotive battery market is expected to grow at
a healthy rate in the coming years.
The SLI market in the Indian subcontinent is a highly fragmented industry with a few
manufacturers in the organized segment and a lot many belonging to the tier 2 / tier 3
categories which have a regional presence and thrive especially among the semi urban and
rural areas.
Role of Technology
With the advent of newer more advanced technologies, the consumer is getting the
best of both worlds; a superior product at an affordable price. ARBL sells its automotive
battery under the brand name Amaron which is the country's first Zero Maintenance Free
Automotive battery while the competitors had only maintenance free batteries that needed
topping up of distilled water. Today, all the leading manufacturers are also offering a similar
product with focus shifting towards offering a technologically superior product. Amaron was
also the first to talk about what goes into making a great product. It spoke of having silver
SVCCS, CTR (M.B.A Dept.)
inside which is used as an alloy mix that actually increases the battery life and this was the
first attempt by any battery manufacturer to educate the consumers.
Fuddy Duddy Category to Creative Advertisement of the Year
The interest level shown by any car owner to a battery revolves around only when the
car fails to start. Amaron therefore realized the need to make the consumer think about
automotive batteries, because thinking before a purchase will definitely lead to a comparison
among the brands available in the market.
Amaron thus went ahead with its "Chicken Leg" media campaign that created a storm
in the advertising industry and made people look to this relatively new player in the battery
industry. Over the years, the creative bent of all its campaigns starting from the media blitz,
to below-the-line campaigns have been towards educating the consumer about a battery.
The lead shown by ARBL was quickly followed by the others, with Exide Industries
sponsoring a cricket series in India for the first time with the campaign "India moves on
Exide" becoming a major success.
All this action in the automotive battery industry did not go unnoticed. An automotive
battery manufacturer (Amaron) for the first time was in the same league as mega ad spenders
like Coca Cola, Times of India, and others and won the Creative Advertiser of the Year,
which was a shot in the arm for the entire automotive battery industry.
Distribution
For the success of any aftermarket product, availability of the same is as important as
the product quality and competitive pricing which go a long way in increasing the visibility
and creating a network across markets. Here again, the leading automotive battery
manufacturers became aggressive in extending their reach to the nooks and corners of the
country and also moved away from the traditional distribution network and instead appointed
dealers and distributors who were the first timers to the battery business like service outlets of
some of the automobile majors like Maruti, Hyundai, Telco, Ashok Leyland, Hindustan
Motors etc, roadside mechanics and lube shops etc., which went a long way in increasing the
reach and visibility. There has been certain uniqueness that has been brought into the
business by establishing exclusive outlets with some flashy names like "Pitstops" and
"Terminals" which was never seen earlier in this industry. All this, resulted in taking the
smaller / regional manufacturers head on and helped in building better brand recall and
awareness among the end users.
Global scenario:
SVCCS, CTR (M.B.A Dept.)
Global Opportunities for Advanced Battery Technologies in Automotive
Applications, 1998 to 2008 is a multi client report designed specifically to provide subscribes
with an accurate and independent assessment of emerging opportunities in the automotive
battery industry. In addition to providing invaluable information and insights into
developments in starting, lighting, and ignition (SLI) technology, the report focuses
specifically on opportunities emerging from electric vehicles and hybrid electric vehicles.
The report provides material suppliers, advanced battery companies, automotive original
equipment manufacturers, investors, and others with an excellent resource to build soil,
strategic plans and respond to competitive forces, emerging technologies, and evolving
market needs. Specifically, the report assists subscribers in growing their business by
providing the following:
Features:
Identification of the issues and timing for large scale commercial implementation of
advanced battery technology in the global automotive industry.
Unbiased global scenario forecasts of commercial systems to 2003 and 2008.
Forecast of material requirements for advanced batteries.
Profiles of companies those are active in this field.
Benefits:
Identification of emerging business opportunities for advanced batteries
New SLI technologies
HEVs
EVs
Competitive intelligence for use in bench marking
A resource for screening potential merger and acquisition candidates
The business:
Revenues for the global battery market reached an estimated $30 billion in 1998.SLI and
related secondary battery applications represent approximately one-half of the overall
revenues and are mostly utilized in automotive applications. High-performance secondary
batteries used in such applications as portable electronics represent approximately 15% of the
overall battery market. These high-performance secondary batteries have the fastest growth
rates, at over 10% a year. Primary batteries represent the remaining one-third of battery
industry revenues.
SVCCS, CTR (M.B.A Dept.)
A battery is an electro chemical device in which the free energy of chemical reaction
is converted in to the electrical energy. The chemical energy contained in the active materials
is converted electrical by means of electrochemical oxidation reduction reactions.
HOW BATTERY WORKS:
When you place the key in your car’s ignition and turn the ignition switch “ON” a
signal sent to the battery. Upon receiving the signal, the battery takes energy that it has been
strong in chemicals form and releases it as electricity power is used to crank the engine. The
battery also release energy to power the car’s light and others accessories. It is the only
device, which can store electrical energy in the form of chemical energy, and science it is
called as a storage battery.
SEALED MAINTENANCE FREE (SMF) BATTERY:
Sealed maintenance free (SMF) batteries technologies are leading the battery industry
in the recent years in automobile and industry battery sector around the globe.
SMF batteries come under the rechargeable battery category so it can be used a
number of times the life of a battery. SMF batteries are more economical than cadmium
batteries. These batteries are more compact then the wet type batteries. It can be at any
position, these batteries are very popular for portable power requirements and space
constraint applications. The replacement market, on the other hand, is much longer. The
replacement market is characterized by the presence of large unorganized sector, which
constitutes around 55-60% of the total replacement market.
INDUSTRIAL BATTERIES:
Industrial batteries can be basically classified into two main categories:
AUTOMOTIVE BATTERIES
STATIONARY BATTERIES
The automotive batteries are used in electric vehicles and forklifts. The stationary
batteries used in Telecom, Railway and power industries have Registered a growth in excess
of 20% and this trend in likely to be continuing in the next 5 years.
SVCCS, CTR (M.B.A Dept.)
The industrial segment is highly technology is an important factor land is vital for
brand reference. The total demand for the industrial battery segment is met by indigenous
production with a small saves of about 10% of by imports. The demand for industrial has
grown slowly and steadily.
RECYCLING OF BATTERIES:
Battery acid is recycled neutralizing it into water of converting it to sodium soleplate for
laundry manufacturing. Cleaning the battery cases, melting the plastics and reforming it into
pellets recycle plastic. Lead, which makes up 50% of every battery, is melted, poured into
slabs and purified.
PROSPECTUS OF SMF\ VRLA BATTERIESD IN INDIA:
The following factors are influencing demand of VRLA technology batteries.
Entry of multinationals in telecom industry.
DOT’S policy decision to upgrade the overall technology base.
Constraints in the use of conventional battery in radio
TELECOM:
The government policy to increase the capacity from 10 million lines by 2000
increased the demand for storage batteries considerably. The value added services like radio
paging and cellular will increase the demand for storage batteries in future considerably.
RAILWAY:
In railways, the demand estimate is based on the annual post production which
comes to 2500 numbers by railways itself and 1000 numbers more by various other segments,
plus replacements demand and annual requirements for railway electrification.
POWER SECTOR:
In power sector the estimated 90 private power projects which are expected to produce
40000 MV with approximate capital outlay of Rs. 1, 40,000 crores would keep the industry
SVCCS, CTR (M.B.A Dept.)
figured brighter in the coming years. The demand for VRLA batteries is increased due to its
performance over the conventional batteries. So it is more acceptable to the consumers.
VALUE REGULATED LEAD ACID BATTERIES:
In the recent years in automobiles and industry battery sector around the globe VRLA
batteries have become the preferred choice in various applications such as uninterrupted
power supply, emergency lights, security systems and weighting scales. VRLA batteries are
leak- proof, explosion resistant and having life duration of 15-20 years. These batteries
withstand the environment conditions due to high technology, in built in the batteries. Each
cell is housed in a power coated steel tray making them convenient to transport and
installation. So transit damages are minimized in case of these batteries.
AMARA RAJA GROUP OF COMPANIES:
AMARA RAJA BATTERIES LIMITED (ARBL), karakambadi, Tirupathi.
AMARA RAJA POWER SYSTEMS PVT.LTD (ARPSPL), Karakambadi, Tirupathi.
CREDIT STANDARDS ARE CRITERIA TO DECIDE THE TYPES:
Customers to whom goods could be sold on credit. If a firm has slow paying
customer its investment in accounts receivables will increase, the firm will also be exposed to
higher risk of default.
CREDIT TERMS:
Specify duration of credit and terms of payment by customers, investment in
accounts receivables will be high if customer are allowed extended time period for making
payment.
COLLECTION EFFORTS:
Collection effort determine the actual collection period. The lower the collection
the lower the investment in accounts receivables and vice-versa.
GOALS OF THE CREDIT POLICY
SVCCS, CTR (M.B.A Dept.)
Stringent credit policy Leninent credit
policy
Less credit to customer as a More credit to customer as
Results decrease in sales it leads to increase in sales.
CREDIT POLICY AND PRACTICES AT AMARA RAJA BATTERIES LTD.
The sales of the company Amara Raja batteries ltd go on cash as well as credit terms.
The trading division of the ARBL sells its products, which it receives from the factories on a
credit period of 45 days,through the branches of the company located all over the country.
If there is any changes in credit policy there will be change in the
1. Volume of credit sales.
2. Default risk (or) Bad debts.
3. Costs.
4. Average collection period.
Looks for the period of presence of the customer in the business.
1. RAILWAYS
2. TELECOM
3. SERVICE OR SPARES
Looks for the character of the customer i.e., his willingness to pay the moral factor is of
considerable importance in credit position.
Looks for his ability to pay is evaluated by his financial position and the bank guarantee
given by him.
Based on the above factors the company analyses the customers and determine the credit
limit to them. Every six months the company goes for the review of the customers.
SVCCS, CTR (M.B.A Dept.)
When a customer is found to be regular in paying the dues within 30 days the
company may go for increase in the credit limit for the customer. In a small way, the new
customers are taken into consideration and given the credit.
COLLECTION PROCEDURES:
The company follows a system of centralized control and decentralized collections. the
company does not employ any collection agency for its collection activities. The trading
division receives a statement of sales and outstanding daily from all the branches in the
country, to initiate appropriate actions. the sales offices are engaged in collection activity and
the collection is done through CMP account and through Bank cheques.
MONITORING BOOK DEBTS
The company classifies its book debts based on the number of outstanding days in the
given following way:
OUTSTANDING DAYS DEBTS CATEGORY
MORE THAN 300 DAYS DISPUTES
BETWEEN 180 DAYS BAD DEBTS
BETWEEN 90-180 DAYS DOWBTFUL DEBTS
BETWEEN 0-90 DAYS GOOD DEBTS.
CLASSIFICATION OF CUSTOMER ACCOUNTS:
An analysis of collection from aspects of accounts provides a useful measure of the potential loss in the various customer classifications. Customer accounts may be classified in various categories.
1. Prime or excellent large. Well-established firms.
2. Good firms that are not large and have not yet established excellent credit reputations.
3. Restricted: firms that are limited to a definite credit line and
4. Marginal high risk accounts which must be watched.
SVCCS, CTR (M.B.A Dept.)
DATA ANALYSIS & INTERPRETATION
Analysis of Aging Schedule:
The company prepares monthly ageing schedule to monitor its book debts. The
outstanding are broken down into branch wise entries. The ageing schedules for the past two
years have been thoroughly analyzed to come out with average outstanding days of the book
debts of the company. On an average the outstanding days of the book debts in the company
is as follows:
Aging schedule for the year 2005
Outstanding period Outstanding Receivables (values in Rs)
% of total outstanding receivables
Not due 32,23,38,603 48.68%0-30 11,48,55,005 17.34%31-60 7,70,01,950 11.63%61-90 2,55,44,568 3.88%91-180 2,60,41,030 3.93%>181 9,63,22,626 14.54%Total 66,21,03,780 100%
SVCCS, CTR (M.B.A Dept.)
Not due 0-30 31-60 61-90 91-180 >1810.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
% of total outstanding re-ceivables
ANALYSIS:
During the year 2005, the total outstanding receivables were Rs.
66,21,03,780.out of which 48.68% were not due, 17.34% receivables were
collected within 30 days, 11.63% were collected in between 31 days to 60
days, 3.88% were collected in between 61 days to 90 days, 3.93% were
collected in between 91 days to 180 days. The remaining 14.54% receivables
are taking more than 180 days.
Aging schedule for the year 2006
Outstanding period Outstanding Receivables (values in Rs)
% of total outstanding receivables
Not due 46,98,01,208 52.53%0-30 18,31,25,405 20.47%31-60 5,19,19,923 5.80%61-90 3,94,65,006 4.41%91-180 4,22,79,809 4.75%>181 10,77,48,085 12.04%Total 89,43,39,436 100%
SVCCS, CTR (M.B.A Dept.)
Not due 0-30 31-60 61-90 91-180 >1810.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
% of total outstanding re-ceivables
ANALYSIS:
During the year 2005, the total outstanding receivables were Rs.
89,43,39,436.out of which 52.53%were not due, 20.47% receivables were
collected within 30 days, 5.80% were collected in between 31 days to 60 days,
4.41% were collected in between 61 days to 90 days, 4.75% were collected in
between 91 days to 180 days. The remaining 12.04% receivables are taking
more than 180 days.
Aging schedule for the year 2007
Outstanding period Outstanding Receivables (values in Rs)
% of total outstanding receivables
Not due 96,44,89,566 64.29%0-30 30,56,53,366 20.37%31-60 10,00,07,796 6.67%61-90 2,80,30,688 1.86%91-180 3,86,07,054 2.57%>181 6,32,06,125 4.24%Total 1,499,994,595 100%
SVCCS, CTR (M.B.A Dept.)
Not due 0-30 31-60 61-90 91-180 >1810.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
% of total outstanding re-ceivables
ANALYSIS:
During the year 2005, the total outstanding receivables were Rs.
1,499,994,595.out of which 64.29% were not due, 20.37% receivables were
collected within 30 days, 6.67% were collected in between 31 days to 60 days,
1.86% were collected in between 61 days to 90 days, and 2.57% were
collected in between 91 days to 180 days. The remaining 4.24% receivables
are taking more than 180 days.
Aging schedule for the year 2008
Outstanding period Outstanding Receivables (values in Rs)
% of total outstanding receivables
Not due 1,575,899,203 68.67%0-30 34,44,41,876 15.00%31-60 22,02,53,459 9.59%61-90 6,07,89,668 2.65%