OFFICE NETWORK OF TVS LUCAS Lucas-TVS provides quality service to its customers with a comprehensive distribution and service network. The company reaches out to its customers, vehicle manufacturers as well as vehicle users, through a network of 100 branches spread throughout the country. The secret of Lucas-TVS' excellent services lies in its ability to respond to changing customer needs swiftly, effectively and consistently. An in-depth training programmed has been developed to provide effective after-market service to customers. This has led to increased appreciation of the commitment of Lucas- TVS to do service and support the end users. I would like to take this opportunity to thank all the people who helped me in completion of my management training and in the completion of this report. I would sincere thanks to Mr. Pradeep khaneja (Manager- Finance and Accounts Department) for providing me guidance at each and every step ofthe training. I would always be obliged to him because he shared his real-life experiences with me. I am thankful to the other members of the finance department who explained me finance work, solving queries and being there to help me whenever required Project Training is an important part of each management course. These studies cover what is left uncovered in the theoretical gamut. It exposes a student to valuable treasure of experience. My project is about µA study of Accounts Receivables Management in TVS Lucas.¶ The purpose of this project is to analyze the important dimensions of the efficient management of receivables within the framework of a firm¶s objectives of value maximisation. When a firm makes an ordinary sale of goods and services and does not receive payment, the firm grants trade credit and creates accounts receivable which would be collected in future. Thus, accounts receivabl e represent an extension of credit to customers, allowing them a reasonable period of time, in which to pay for the goods/services which they have received. It is an essential marketing tool, acting as a bridge for the movement of goods through production and distribution stages to
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Lucas-TVS provides quality service to its customers with a comprehensive distribution
and service network. The company reaches out to its customers, vehicle manufacturers aswell as vehicle users, through a network of 100 branches spread throughout the country.
The secret of Lucas-TVS' excellent services lies in its ability to respond to changing
customer needs swiftly, effectively and consistently.
An in-depth training programmed has been developed to provide effective after-market
service to customers. This has led to increased appreciation of the commitment of Lucas-
TVS to do service and support the end users.
I would like to take this opportunity to thank all the people who helped me in completion of my
management training and in the completion of this report.
I would sincere thanks to Mr. Pradeep khaneja (Manager- Finance andAccounts Department) for providing me guidance at each and every step of the training. I would always be obliged to him because he shared his real-lifeexperiences with me.
I am thankful to the other members of the finance department who explained me finance work,
solving queries and being there to help me whenever required
Project Training is an important part of each management course. These studies cover what is left
uncovered in the theoretical gamut. It exposes a student to valuable treasure of experience. My
project is about µA study of Accounts Receivables Management in TVS Lucas.¶
The purpose of this project is to analyze the important dimensions of the efficient
management of receivables within the framework of a firm¶s objectives of value maximisation.
When a firm makes an ordinary sale of goods and services and does not receive payment, the
firm grants trade credit and creates accounts receivable which would be collected in future. Thus,
accounts receivable represent an extension of credit to customers, allowing them a reasonable period
of time, in which to pay for the goods/services which they have received. It is an essential marketing
tool, acting as a bridge for the movement of goods through production and distribution stages to
Finally, the firm may not be able to recover the overdues because of the inability of the
customers. Such debts are treated as bad debts and have to be written off as they cannot be realised.
Such costs are known as default costs associated with credit sales and accounts receivable.
ADMINISTRATION COSTS OF ACCOUNTS RECEIVABLES
MANAGEMENT
The costs relating to the administration of receivables is as follows :-
Screening the potential customers for granting credit.
Accounting, recording and processing costs of debtors balances.
Expenditure incurred for credit control checks.
Cost incurred for sending invoices and statements of accounts to individual
customers.
Chasing up slow paying debtors.
Cost incurred for classification of quaries.
Recording receipt of cash and processing on individual customer records.Use of office space, processing equipment and remuneration of sales force
involved in debtors collection etc
BENEFITS OF ACCOUNTS RECEIVABLES
MANAGEMENTApart from the costs, another factor that has a bearing on accountsreceivable management is the benefit emanating from credit sales.The
benefits are the increased sales and anticipated profits because of a moreliberal policy. When firms extend trade credit, that is, invest in receivables,
they intend to increase the sales. The impact of a liberal trade credit policy is likely to take two
forms. First, it is oriented to sales expansion. In other words, a firm may grant trade credit either to
increase sales to existing customers or attract new customers. This motive for investment in
receivables is growth-oriented. Secondly, the firm may extend credit to protect its current sales
against emerging competition. Here, the motive is sales-retention. As a result of increased sales, the
profits of the firm will increase.
COST BENEFIT TRADE-OFF
We all know that investments in receivables involve both benefits and costs.
The extension of trade credit has a major impact on sales, costs and
profitability. Other things being equal, a relatively liberal policy and,
therefore, higher investments in receivables, will produce larger sales.
However, costs will be higher with liberal policies than with more stringent
measures. Therefore, accounts receivable management should aim at a trade-
off between profit (benefit) and risk (cost). That is to say, the decision to
commit funds to receivables (or the decision to grant credit) will be based
on a comparison of the benefits and costs involved, while determining the
optimum level of receivables. The costs and benefits to be compared aremarginal costs and benefits. The firm should only consider the incremental
(additional) benefits and costs that result from a change in the receivables or trade credit policy.
While it is true that general economic conditions and industry
practices have a strong impact on the level of receivables, a firm¶s
investments in this type of current assets is also greatly affected by its
internal policy. A firm has little or no control over environmental factors,
such as economic conditions and industry practices. But it can improve its profitability through a properly conceived trade credit policy or receivables
Check the credit before the despatch of consignment.
Close monitoring of the credit terms and customer compliance.
Review the customer credit, if required.
Develop the reports for internal appraisal of the customer.
CREDIT POLICY
A firm¶s investment in accounts receivable depends on :
the volume of credit sales, andthe collection period.
For example, if a firm¶s credit sales are Rs 30 lakh per day and customers, on an average, take 45
days to make payment, then the firm¶s average investment in accounts receivable is :
Daily credit sales× Average collection periodRs 30 lakh× 45 = Rs 1,350 lakhThe investment in receivable may be expressed in terms of costs
instead of sales value.
The volume of credit sales is a function of the firm¶s total sales and the percentage of creditsales to total sales. Total sales depend on market size, firm¶s market share, product quality, intensity
of competition, economic conditions, etc. The financial manager hardly has any control over these
variables. The percentage of credit sales to total sales is mostly influenced by the nature of business
There is one way in which the financial manager can affect the volume of credit sales and
collection period and consequently, investment in accounts receivables. That is through the changes
in credit policy. The term credit policy is used to refer to the combination of three decision variables :
credit standards
credit terms, andcollection efforts,
on which the financial manager has influence.
Credit Standards are criteria to decide the types of customers to whom
goods could be sold on credit. If a firm has more slow-paying customers, its investment in accounts
receivable will increase. The firm will also be exposed to higher risk of default.
Credit Terms specify duration of credit and terms of payment bycustomers. Investment in accounts receivables will be high if customers areallowed extended time period for making payments.Collection Efforts determine the actual collection period. The lower the
collection period, the lower the investment in accounts receivable and viceversa.
CREDIT POLICY VARIABLES
In establishing an optimum credit policy, the financial manager must consider the important
decision variables which influence the level of variables. The major controllable decision variables
include the following : Credit standards and analysis
Credit termsCollection policy and procedures
The credit policy of a firm may be administered by the financial manager or the credit manager. It
should, however, be appreciated that credit policy has important implications for the firm¶s
production, marketing and finance functions. Therefore it is advisable that the firm¶s credit policy be
formulated by a committee which consists of executives of production, marketing and finance
departments. Within the framework of the credit policy, as laid down by this committee, the financial
or credit manager should ensure that the firm¶s value of share is maximised. He does so by answering
the following questions :
What will be the change in sales when a decision variable is altered?What will be the cost of altering the decision variable?
How would the level of receivable be affected by changing the decisionvariable?
How are expected rate of return and cost of funds related?
The most difficult part of the analysis of impact of change in the credit policy variables is the
estimation of sales and cost. Even if sales and costs can be estimated, it would be difficult to
establish an optimum credit policy as the best combination of the variables of credit policy is quite
difficult to obtain. For these reasons, the establishment of credit policy is a slow process in practice.
A firm will change one or two variables at a time and observe the effect. Based on the actual
experience, variables may be changed further, or change may be reversed. It should also be noted that
the firm¶s credit policy is greatly influenced by economic conditions. As economic conditions
change, the credit policy of the firm may also change. Thus, the credit policy decision is not one time
static decision.
CREDIT STANDARDS
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 able toexpand sales. The profit sacrificed on lost sales may 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. Thereare two aspects of the quality of customers :(a)the time taken by customers to repay credit obligation, and(b)
the default rate
The average collection period (ACP) 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 indicates
default risk. Default risk is the likelihood that a customer will fail to repay the credit obligation. Onthe basis of past practice and experience, the financial or credit manager should be able to form a
reasonable judgement regarding the chances of default. To estimate the probability of default, the
financial or credit manager should consider three C¶s :
condition.Character refers to the customer¶s willingness to pay. The financial or
credit manager should judge whether the customers will make honest efforts to honour their creditobligations. The moral factor is of considerable importance in credit evaluation in practice.
Capacity refers to the customer¶s ability to pay. Ability to pay can be
judged by assessing he customer¶s capital and assets which he may offer as security. Capacity is
evaluated by the financial position of the firm as indicated by analysis of ratios and trends in firm¶s
cash and working capital position. The financial or credit manager should determine the real worth of
assets offered as collateral (security).
Condition refers to the prevailing economic and other conditions which may
affect the customer¶s ability to pay. Adverse economic conditions can affect the ability or willingness
of a customer to pay. An experienced financial or credit manager will be able to judge the extent and
genuineness to which the customer¶s ability to pay is affected by the economic conditions.
Information on these variables may be collected from the customers themselves, their published
financial statements and outside agencies which may be keeping credit information about customers.
A firm should use this information in preparing categories of customers according to their
creditworthiness and default risk. This would be an important input for the financial or credit
manager in formulating its credit standards. The firm may categorise its customers, at least, in the
following three categories :
Good accounts; that is, financially strong customers.Bad accounts; that is, financially very weak, high risk customers.Marginal accounts; that is, customers with nmoderate financial health and
risk (falling between good and bad accounts).
The firm will have no difficulty in quickly deciding about the extension of credit to good accounts
and rejecting the credit request of bad accounts. Most of the firm¶s time will be taken in evaluatingmarginal accounts; that is, customers who are not financially very strong but are also not so bad to be
outrightly rejected. A firm can expend its sales by extending credit to marginal accounts. But the
firm¶s costs and bad-debt losses may also increase. Therefore, credit standards should be relaxed
upon the point where incremental return equals incremental cost.
CREDIT TERMS The stipulations under which the firm sells on credit to customers are
called credit terms. These stipulations include :(a)
the credit period, and(b)the cash discount.
Credit Period
The length of time for which credit is extended to customers is called the credit period. It is
generally stated in terms of a net date. For example, if the firm¶s credit terms are µnet 35¶, it is
expected that customers will repay credit obligation not later than 35 days. 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.
A 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 period 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 and(b)
existing customers will take more time to repay credit obligation (i.e., the average collection
period will increase), thus increasing the level of receivable.
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 period.
In practice, credit terms would include :(a)the rate of cash discount,
For example, credit terms nay be expressed as µ2/10, net 30.¶ This means that a 2 percent discount
will be granted if the customer pays within 10 days; if he does not avail the offer he must make
payment within 30 days.
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 discount taken
by the 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-payers and reducing bad-debt losses. A collection policy should
ensure prompt and regular collection. Prompt collection is needed for fast turnover of workingcapital, keeping collection costs and bad 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-paying customers are needed to be handled very tactfully. Some of them may be permanent
customers. The collection process initiated quickly, without giving nay chance to them, may
antagonise them, and the fir 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 initiating an action against non-paying customers. Similarly, the
sales department must
obtain past information about a customer from the accounting department before granting credit to him.
Though 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 them should be initiated only after they have overcome their financial
The firm should decide on 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 he specified
discount period, yet they may make the payment after deducting the amount of cash discount. Such
cases must be promptly identified and necessary action should initiated against them to recover the
full amount.
In practice, companies may take certain precautions vis-a-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.
So, while selling gods in the domestic market, the firm can have a number of different credit
practices. With respect to domestic market, LPS has a number of options to choose from :-
1)Direct Payment
This option includes direct payment of the amount by the customer to the selling party. In this type of
system, one of the following two options can be chosen :
Payment in Advance In this, the purchasing party has to give the payment in advance. The
amount to be paid is known as revolving amount. The purchasing party has to give the payment prior to taking the goods. For immediate payment, the purchasing party is also offered a cash discount, the
rate of which is based on certain factors.
Payment within 60 days In this, the customer has to make
the payment within 60 days of getting the goods. No cash discount is
offered on this type of payment.
2)OBC (Outward Bill Collection)
Under this option, along with the ordered goods, a lorry receipt (also known as goods receipt) is sent
to the customers. This receipt contains information such as number of packets/cartons, value of
goods sent, etc. This receipt is directly sent to the customer and the customer makes the payment
through the bank. For this purpose, the bank has to provide the customer with rest of the documents.
After the data have been collected, the task of analysis them are
done. The analysis of data requires a number of closely related operations
such as establishment of categories, the application of these categories to
raw data through coding, tabulation and then drawing statistical inferences.
In present study we have critically examined the accounting data in detail. It
helps us to obtain better understanding of firm¶s position and performance.
Interpretation means drawing inferences and conclusion after conducting
detailed analysis.
Having discussed the principle of credit administration and credit & collection policies of the LPS,
the organisation under study, now we shall evaluate the receivables management.
SIZE OF RECEIVABLES
When the firm sells its products or services and does not receive cash for it immediately, the
firm is said to have granted trade credit to its customers. Trade credit, thus, creates receivables,
which the firm is expected to collect in the near future. In receivables, we include only sundry
debtors because only these are involved in credit sales. The receivables of various years have been
taken from the annual reports of the company.
TABLE I.YEAR SIZE OF RECEIVABLES
(Rs in Lakhs)PERCENTAGE
2006
379.86
100.00
2007885.14
233.00
2008
884.87
232.97
It can be seen from Table No. I that the receivable has the tendency to rise fast from 2000 to 2002.
During this period the receivables are increasing every year. Having considered the book debts of 2000 as base, the receivables have become 106% during 2001 and then after a substantial increase,
they have risen to 127% in 2002. This considerable increase in the size of receivables is not good as
it demands more investment in receivables and increases the costs related to it.
In 2003, the size of receivables has gone down considerably to 118%
and in 2004 there has been a slight increase in it and it has risen upto 121%
Table No. II shows that the receivables as a percentage of sales have risen from 2000 to 2002 after which there has been a fall in the percentage. After the fall in 2003 they have again risen in 2004.
In 2000, the amount of receivables as compared to sales has been around 29.5%. After that it
has risen to about 30.5% in 2001 and to 31.5% in 2002. After the increase there has been a fall in this
percentage in 2003 to 28.5%. But in 2004, it has again risen to about 30%.
TABLE III.YEAR
DEBTS EXCEEDING SIX
MONTHS (In Lakhs)TOTAL DEBTS
(In Lakhs)PERCENTAGE2006
2.41
379.86
0.63%
2007
4.43
885.14
0.50%2008
19.90
884.87
2.25%
From Table No. III it is clear that the debts exceeding 6 months form a very less part of the
total debts. They were about 4% of the total book debts in 2000. In 2001, they rose to 7% of the
receivables. This rising trend continued till 2003. During this period, they formed 7.5% of the total
debts in 2002 and about 10% of the same in 2003. The rising trend in this percentage is not a good
The credit policy of the firm is determined by Board of Directors with
consultation of the marketing division of the firm. The financial division is
informed by the marketing division about the unrealised dues. The marketing
division handles the credit policies as credit sales have got direct bearing on the
total sales. A study has been conducted to find out the effectiveness of its credit
and collection policy. The credit period lies between 30 to 90 days depending on
the credit worthiness of the customer. The firm gives credit on selective basis after
analysing the 5 C¶s about the customer viz; character, capacity, capital, condition,
and collateral. The firm charges an interest equal to commercial bank rate @ 18%
at which bank generally extends cash credit / overdrafts etc. The firm extends
credit through bills of exchange which are paid within 10 to 15 days from he date
of issue.
The size of receivables of the firm from 2000 to 2004 has shown increasing
tendency throughout this period i.e. from 100% to 121%, except in the year 2003when it has decreased. The increase is almost every year which is not appreciable.
The increase is considerable from 2000 to 2002 but the rate of increase has gone
down in 2003 & 2004.
The sales of the firm have increased during the time period under
consideration. But the size of receivables as a part of sales has not risen
proportionately. From 2000 to 2002, this percentage has increased from 29.5% to
31.5%. But in 2003 there has been a decline in this figure in spite of the increase in
the amount of sales. This shows a collection policy which tends to emphasize on
the restriction of credit sales. But the condition has improved a little in 2004 withthe percentage showing an increase to 30%.
The debts of the firm which are outstanding for a period of more than 6 months
form a very less part of the total debts of the firm. But their percentage to total
debts has shown an increasing trend till 2003. This is not a good indicator as it may
lead to more bad-debt losses for the firm because higher the time period for which
the receivables have been due, higher are the chances of those debts going bad.
These debts have decreased in the year 2004 which shows that the firm has taken
certain measures
In contrast to the credit period of 30 to 90 days the average collection period varies
between 104 to 115 days during this period. The ACP has increased from 108 days
in 2000 to 115 days in 2002 which is not good for the firm. In 2004, after declining