'Project financing & recedivables management

Presented by:

Laxman Patil

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PROJECT FINANCE is the financing of long term industrial projects based upon a complex financial structure divided in two parts like debt funding & equity funding to meet total Project Cost

Management of trade credit is commonly known as Management of Receivables.

When goods and services are sold under an agreement permitting the customer to pay for them at a later date, the amount due from the customer is recorded as accounts Receivables.

To understand the concept of Project financing, it’s various components, methods and nature of project financing.

To analyse the various components of project financing, which is specifically used in borrowing the finance for the small-scale industry and large scale industry. If focuses on the requirement and the procedures applied by the banks for assessing and sanction the loan.

To study the credit policy and procedure of receivable management.

To study impact of receivable in financial liquidity.

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The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flows generated by the project.

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Finalization of Order Loan Application Preparation Stage Appraisal as carried out by Bank/Financial Institutions Communication of sanction of financial assistance/

Sanction Letter Acceptance of Financial Assistance by the Borrower Post Sanction Formalities Creation of stipulated securities like Equitable

Mortgage. Execution of Loan Agreement Loan Disbursement

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Additional cost to get loan viz. application & loan procedure fees of the banks, stamp duty & legal expenses involved

Details on existing facilities availed like Term Loan, Cash Credit, Overdraft, Letter of credit, etc from existing banks and security offered for these facilities.

Amount of loan. Name of preferred banks. Own contribution (margin money) and source of

margin money Additional security available & offered for the

proposed loan Rate of interest offered by various Banks . Supporting documents required by the Banks.

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Statement mentioning purpose of investment Type, capacity of technical inters. Revenue generation with a current and budgeted figures Details of government approvals Technical specifications about the project. Location details of the project Type of land & plant & machinery and other infrastructure. Details of Operation & Maintenance Information on Cost Benefit Analysis Report of techno economic viability study Market scenario of the industry Cost of the project Means of Finance Revenue Mechanism Financial Projections including, IRR, Debt Equity Ratio, etc.

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Rate of interest

Security for the loan

Personal Guarantee

Corporate guarantee

Pledge

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What are receivables?

• Receivables are sales made on credit basis.

Why do we need receivables?

• To increase total sales

• To increase profits

• To meet increasing Competition

Understanding Receivables

• As a part of the operating cycle

• Time lag between sales and receivables creates

need for working capital

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ADMINISTRATIVE COST:Administrative costs In form of salaries to clerks who maintain records of debtors, expenses on investigating the creditworthiness of debtors, etc.

CAPITAL COST:Cost incurred in terms of interest (if financed from outside) or opportunity cost (if internal recourses they could have been put to some other use)

COLLECTION COST

Cost incurred for collection of amounts at the appropriate time from the customers.

DEFAULTING COST: Amounts which have to written off as bad debts.

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Credit policy encompasses the policy of a company in respect of credit standards adopted, the period over which credit is extended to customers, any incentive in the form of cash discount offered, as also the period over which discount can be utilized by the customers and the collection effort made by the company.

Various variables are: Credit standards

Credit period

Cash discount

Collection program

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Monitoring Receivable

↓

Sending Letters

↓

Telegraphic Advice

↓

Threat of Legal action (overdue)

↓

Legal Action

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Allowed Instrument to customer for Payment

CHEQUE

NEFT TRANSFER

DEMAND DRAFT

REAL TIME GROSS SETTLEMENT

Current Ratio = Current assets

Current liabilities

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0

0.5

1

1.5

2

2.5

Current Ratio

Quick ratio = Current Assets- (Inventories+ Prepaid expenses)

Current Liabilities

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00.20.40.60.8

11.21.41.61.8

2

Quick Ratio

Inventory Turnover Ratio = Sales

Average Inventory

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37

38

39

40

41

42

43

44

Inventory Turnover Ratio

INVENTORY TURNOVER PERIOD= No. of Days in year / Inventory turnover ratio

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7.4

7.6

7.8

8

8.2

8.4

8.6

8.8

9

9.2

Invetory Turnover Period

3.63.73.83.9

44.14.24.34.44.54.64.7

Debtors Turnover Ratio

Debtors Turnover Ratio

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Debtors turnover ratio = Total Sales

Debtors

Debtors collection period = No. of days in theyear

Debtors Turnover

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70

75

80

85

90

95

Debtors Turnover Period

Asset turnover ratio= Sales

Net Asset

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0

0.5

1

1.5

2

2.5

3

3.5

4

Assets Turnover Ratio

Assets Turnover Ratio

The debtor’s collection period is not so good.

The quick ratio of Wipro Limited is showing a fluctuating trend but it is good & above standard ratio 1:1.

The current ratio of Wipro Limited is not satisfactory but it is above the standard ratio i.e. 2:1 in 2012-11 but it below in 2011-10 & 2009-08.

Inventory turnover period has decreased from 9 days to 8 days in 2011 & 2012, because of lack control of inventory.

Debtors collection period has come down from 90 to 79 & 78days due to efficient credit Management

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The company should go for Factoring services for all the credit line customers. This will improve the cash flow of the company and reduces the risk.

The company should remind the customer periodically before the due date by sending reminder letters / personal visit by marketing executives.

The marketing department is to be advised for increasing the cash sales by offeringquantity discounts.

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Project Financing and Receivables Management are interrelated and interdependent concepts.

Receivables management plays an important role in maintaining customers relationship. A good credit policy maintains good relationship with customer.

Project financing is emerging as the preferred alternative to conventional methods of self-financing of infrastructure and other large-scale projects worldwide.

Throughout my project I have analyzed company’s financial position and I have also interpreted the data. In spite of some limitation we try to analyze and interpreted the facts and figures with accuracy.

Based on the analysis and interpretation I tried to give my findings and suggestions for the company as per my best knowledge.

Finally project really helps us in knowing the practical things of the corporate world. Really I enjoyed this project work in its real spirit.

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