“A STUDY ON RECEIVABLE MANAGEMENT IN TI CYCLES OF INDIA, AMBATTUR” BY R.PREMA (Reg.No.11807631059) OF DEPARTMENT OF MANAGEMENT STUDIES VEL TECH MULTI TECH DR.RANGARAJAN DR.SAKUNTHALA ENGINEERING COLLEGE Accredited by NBA (ISO 9001: 2000 Certified Institution) Approved by AICTE New Delhi & Affiliated to Anna University Avadi, Chennai – 600 062 A PROJECT REPORT Submitted to the FACULTY OF MANAGEMENT STUDIES In partial fulfillment of the requirement for the award of the degree OF MASTER OF BUSINESS ADMINISTRATION IN FINANCE
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“A STUDY ON RECEIVABLE MANAGEMENT IN TI CYCLES OF INDIA, AMBATTUR”
BY
R.PREMA
(Reg.No.11807631059)
OF
DEPARTMENT OF MANAGEMENT STUDIES
VEL TECH MULTI TECH DR.RANGARAJAN DR.SAKUNTHALA
ENGINEERING COLLEGE
Accredited by NBA (ISO 9001: 2000 Certified Institution)
Approved by AICTE New Delhi & Affiliated to Anna University
Avadi, Chennai – 600 062
A PROJECT REPORT
Submitted to the
FACULTY OF MANAGEMENT STUDIES
In partial fulfillment of the requirement for the
award of the degree
OF
MASTER OF BUSINESS ADMINISTRATION
INFINANCE
ANNA UNIVERSITY
CHENNAI-25
MAY-2009
VEL MULTI TECH SRI RANGARAJAN SAKUNTHALA
ENGINEERING COLLEGE
Accreditated by NBA
(ISO 9001:2000 Certified institution)
Affiliated to Anna University
BONAFIED CERTIFICATE
Certificate that this project entitles” A STUDY ON
RECEIVABLE MANAGEMENT IN TI CYCLES OF INDIA, AMBATTUR”, is a
bonafied work done by, Ms. R.PREMA (Reg no.11807631059) Who carried out
of the research under my supervision certified further that to the` best of my
knowledge, the work reported wherein does not form a part of any other project
report on the basis of which degree of award was confirmed on earlier occasion
or any other category.
Principal Hod/Dean
Assessed by
Internal Examiner External Examiner
(i)
ACKNOWLEDGEMENT
I express my gratitude to our chairman Mr.RANGARAJAN, M.E. (Elec)., M.E.
(Mech), M.S.(Auto)., and to Dr.Siddhappa Naidu, Ph.D Principal of Vel Tech
Multi Tech DR. Rangarajan DR. Sakunthala Engineering College.
I would like to extend my Sincere thanks to our head of the department
Dr.V.Bala Subramanian, M.com, M.phil, Ph.D, and to my internal guide
Mrs.Niraimathi, MBA.
I wish to express my gratitude and thanks to Mr. GOUDHAMAN, HR Manager for
giving me this wonderful opportunity to do my project work at TI CYCLES OF
INDIA, AMBATTUR, during my course of studying as student of MBA.
I express my sincere thanks to the TI CYCLES OF INDIA, AMBATTUR,
especially to Mr. Rajaseker, Finance Manager for the co-operation and
information he gave.
Finally I thank my parents and friends whose suggestions & support made my
work easier.
(R.PREMA)
(iii)
ABSTRACT
The project strives to “The study on Receivable Management” prevailing at TI
CYCLES OF INDIA and to provide considerable recommendations for better
Debtors management of the company.
The management function consists of granting credit, billing accounts, effecting
collection, analyzing outstanding accounts (aging), and providing for bad debts.
In this project report the deep study of receivables is done which is the main
constitute of working capital
Various tools has been used like Debtor Turnover ratio, Average collection
period, Bad debts to debtors ratio ,Operating cycle and correlation analysis.
In the FOR sales, goods are transported from factory to godown and from
godown to the ultimate customers. In the EX work customer goods are directly
transported from factory to consumers. In the FOR sales the collection period is
calculated between the days from godown to consumers.
The main aim of this study is to find the reason for their outstanding dues and the
Effectiveness of receivable management in TI CYCLES OF INDIA.
(iv)
LIST OF CONTENTS
Chapter no Title Page no
1 Introduction
1.1 Out line of Project 1
1.1.1 Need for the study 3
1.1.2 Scope of the study 4
1.1.3 Objectives of the study 5
1.1.4 Research Methodology 6
1.1.5 Limitations of study 7
1.1.6 Chapterization 14
1.2 Review of Literature 15
1.2.1 Industry Profile 28
1.2.2 Company Profile 36
1.2.3 Product Profile 45
2 Data Analysis and Interpretation
2.1 Correlation analysis 46
2.2 Aging Schedule 48
2.3 Collection period and Credit policies 49
2.4 Operating Cycle 57
2.5 Percentage of bad debts to Debtor’s 59
3 Summary and Conclusion
3.1 Findings 60
3.2 Suggestions 61
3.3 Conclusion 62
4 Annexure A1
5 Reference A2
LIST OF TABLES
S.NO TITLE PAGE NO
2.1.1 Correlation analysis 46
2.2.1 Aging Schedule 48
2.3.1 Debtor’s turnover ratio 49
2.3.2 Average Collection period 50
2.4.1 Operating Cycle 57
2.5.1 Percentage of Bad debts to Debtor’s 59
LIST OF CHARTS
S.NO TITLE PAGE NO
2.2.1 Aging Schedule 48
2.3.1 Debtor’s turnover ratio 49
2.3.2 Average Collection period 50
2.4.1 Operating Cycle 57
2.5.1 Percentage of Bad debts to Debtor’s 59
CHAPTER-1
INTRODUCTION
1.1 OUTLINE OF THE PROJECT
The project entitled “A study on Receivable Management in TI Cycles of
India, Ambattur”.
The term receivable is defined as “debts owned by the firm by customers arising
from sales of goods or services in the ordinary course of business”.
It is an accounts receivables represent the existsion of open-account credit by
firm to other firms or to individuals.
- Van Horne.
Accounts receivables are the open account credit sales. That is, no formal
acknowledgements of debt liability are taken from the buyers. The Receivables
management is also called as trade credit management. Management of
accounts receivables is nothing but the process of making decisions relating to
the investment of funds in this asset which will result in maximizing of the overall
return of the investment of the firm.
It is to promote sales and profit until that point is reached where the return of the
investment in further funding of receivables is less then the cost of funds raised
to finance that attitudinal cost.
Cost and Benefits:
Cost:
(i) Collection cost: These costs are administrative costs. These are
incurred in collecting the receivables from sundry debtors.
(ii) Capital cost: Increase in accounts receivables leads to an increased
investment in assets. Increased investment is to be financed by some
other sources involving a cost. The firm should arrange for additional
funds to meet its obligations until the customers pay the amount.
(iii) Delinquency cost: Some of the customers may fail to pay in time.
This cost arises due to steps taken to collect the over dues such as,
reminders and other collection efforts, legal charges.
(iv) Default cost: The bad debts associated with credit sales and accounts
receivable is termed as “Default cost”.
Benefits:
Growth in sales:
It is a power full marketing tool to increase sales. If the credit is not extended to
them, then they will seek credit from other concerns. Thus in order to keep the
customers with us and to increase the sales, it is essential to have book debts.
Increase in profits:
Increase in sales leads to increase in profit. By giving trade credits, the firm
has additional sales resulting in additional profit.
Capability to face competition:
If there is a tough competition in the market, it is essential that trade credit is to
be extended. If the credit terms are attractive, a firm can protect its customers
from competitors.
Collections
With businesses looking for improved bottom line performance, better account
receivables management, collections is a key focus area along with timely and
accurate billing for organizations across industries. An effective collections
strategy:
Increases receivables recovery rates
Reduces bad debts
Rationalizes costs through streamlined collections processes
1.1.1 NEED OF THE STUDY
This study helps to find the effectiveness of receivable management and the
outstanding amount in TI Cycles of India, Ambattur.
Basically the company deals in the sales activities by providing on the credit
basis and hundis discount to the already existing customers.
The objective of providing these facilities is to increase sales and to attract the
new customers towards their product.
This study helps to find the relationship between sales and debtors by preparing
correlation analysis.
The company main intension is to increase sales and profit and their by reducing
its outstanding dues.
Overall it helps to find the effectiveness of receivable management in TI Cycles
of India, Ambattur.
1.1.2 SCOPE OF THE STUDY
The study aims at analyze the Receivable Management in TI Cycles of
India, Ambattur.
The study finds out the operational efficiency of organization and suggests
proper utilization and allocation of each resource to improve the efficiency
of the organization.
The study helps in identifying the credit policy and collection period of the
company.
It suggests keeping the level of investment in accounts receivables to the
minimum.
The study helps in maximizing the value of the firm and controls the cost
of trade credit.
1.1.3 OBJECTIVE OF THE STUDY
PRIMARY OBJECTIVES
To study the impact of Receivable management on the profitability in
TI Cycles of India, Ambattur.
SECONDARY OBJECTIVES
To identify the relationship between sales and debtors.
To identify the current outstanding amount of the company.
To identify the credit period and collection policies to debtors.
To identify the time gap between the sales and actual realization in cash.
To identify the bad debts of the company.
1.1.4 RESEARCH METHODOLOGY
The project study mainly focuses on the critical assessment of the Receivable
Management in TI Cycles of India, Ambattur.
Definition of research:
“Research comprises defining and refining problems, formulating hypothesis (or)
suggested solutions, collecting, organizing and evaluating data making
deductions and reaching conclusion and at last carefully testing the conclusions
to determine whether they fit the formulating hypothesis”.
- Clifford woody
Definition of Research design:
“A research design is the arrangement of conditions for collections and analysis
of data in a manner that aims to combine relevance to the research purpose with
economy in procedure” The research is descriptive in design.
Research
It is a search for analysis it is done in a scientific and systematic manner is called
research. We can now define business research as an organized, systematic,
data based, critical objective, scientific inquiry or investigation into a specific
problem, undertaken with the purpose of finding answers or finding answer or
solution to it. In essence, research provides the needed information that guides
managers to make informed decisions to successfully deal with problems. The
information provided could be the result of a careful of a careful analysis of data
gathered firsthand or of data that are already available can be quantitative or
qualitative.
Research Methodology
It is a way to solve the research problem systematically the techniques of
analyzing the data, why the research has been adapted, how research problem
has been adapted are been answered.
Research Design
Research design is purely and simply the frame work or plan for a study that
guides the collection and analysis of data. The function of researcher is to
ensure that requires the data collected an accurate and economically.
Analytical research technique was adopted in the project. Generally analytical
studies are designed to analysis some thing and it collects data for a definite
purpose.
Data Collection
Several ethical issues should be addressed while collecting data. As previously
noted, these pertain to those who sponsor the research, those who collect the
data. And those who offer them. The sponsors should ask for the study to be
done to better the purpose of the organization, and not for any other self-serving
reason. They should respect the confidentiality of the data obtained be the
researcher, and not ask for the individual or group responses to be disclosed to
them, or ask to see the questionnaires. They should have an open mind in
accepting the results and recommendations in the report presented by the
researchers.
Method of Collection
The data for the analysis are collected and gathered from the printed reports of
TI Cycles of India like annual report, Official files and records.
Primary Data
As part of strengthening the study personal contacts are made the officials and
staff members of the finance department in the form of discussion and collection
of reports.
Secondary Data
Secondary data refer to information gathered be someone other than the
researcher conduction the current study. Such data can be internal or external to
organization and accessed through the internet or perusal of recorded or
published information.
The data are collected from the annual report, mainly balance sheet, income and
expenditure and other brochures of the company.
Tools and techniques used
Correlation Analysis
Aging Schedule
Debtors Turnover ratio
Average Collection period
Operating Cycle
Correlation analysis:
Correlation is the study of the degree of relationship between two variables. In
statistical analysis the study of two variables where in the change in the value of
one variable produces a change in the value of the other variable.
∑XY - ∑X * ∑Y
Nr =
√∑X² - (∑X) ² √ ∑Y² - (∑Y) ²
N N
Positive correlation:
Two variables are said to be positively correlated if for an increase in the value of
one variable there is also an increase in the value of the other variable or for a
decrease in the value of one variable there is also an decrease in the value of the
other variable; that is the two variables change in the same direction.
Negative correlation:
Two variables are said to be negatively correlated if for an increase in the value
of one variable there is a decrease in the value of the other variable; that is, the
two variables change in opposite direction.
Ageing statement
It is also commonly used techniques particularly among the small and medium
sized enterprises. Under this method outstanding receivables are grouped
against designated time intervals to find out how much of the receivables are
away from the ‘current’.
This schedule is often required by bankers making loan against receivables or
the factors deciding the acceptability of receivables and also the commission.
When sales of a firm is on the rise the current and recent categories will have
more receivables holding which may not speak anything about the efficiency of
the collection department, through it may make then more complacent.
On the other end, when sales are falling, receivables holding in current and
recent categories will also be falling which once again may not speak anything
about the laxity of the collection department. In both the cases the collection
department might be doing its job extremely well by holding on to or improving
upon the established payment pattern which may not be so reflected under the
ageing statement.
Debtor’s turnover ratio:
Debtor’s turnover ratio is also called as receivable turnover ratio. A business
concern generally adopts different methods of sales. One of them is selling on
credit. When the company extends credits it its customers, book debts are
created in the company’s accounts. Book debts are expected to be converted
into cash over a short period and, therefore are included in current assets.
The liquidity position of the company depends on the quality of debtors to a great
extend. Financial analysis apply debtors turnover to judge the liquidity of debtors.
The customers who purchase on credit are called trade debtors. Debtors and
bills receivable are called “accounts receivable”.
Debtors turnover ratio = Debtors
SalesCredit
Debtors turnover ratio indicates the number of times debtors turnover each year.
Generally, higher the value of debtor’s turnover, the more efficient is the
arrangement of credit.
Debt collection period:
The average collection period measures the quality of debtors because; it
measures the speed of their collection. Shorter the average collection period,
their better quality if debtors as a shorter collection period implies the prompt
payment by debtors.An excessively long collection period implies a very liberal
and inefficient credit and collection performance. This certainly delays the
collection of cash and impairs of the company’s liquidity.
Thus the collection period ratio indicates in two aspects:
1. In determining the collection of debtors
2. In ascertaining the company’s comparative strength and advantage
relative to its credit policy a performance vis-à-vis the competitors credit
policies and performance.
RAW MATERIALS
ACCOUNTS RECEIVABLES
CASH
WORK-IN-PROGRESS
FINISHED GOODS
Debt collection period:
DebtorsCredit sales X 365 days
The objective of this ratio is to measure the liquidity of receivable or obtaining the
average period over which receivables are uncollected.
Operating cycle
The average length of time between when a company purchases items for
inventory and when it receives payment for sale of the items. A long operating
cycle tends to harm profitability by increasing borrowing requirements and
interest expense.
Operating cycle = Inventory holding period + Collection period
Operating cycle of a manufacturing business
.
1.1.5 LIMITATIONS OF THE STUDY
The study is based on information from the TI Cycles of India, Ambattur.
The project study is mainly based on information gathered from secondary
data mainly balance sheet and profit & loss a/c.
The duration of the project was short to collect all the information required.
Company has some financial information secrecy regarding its policies,
which was not disclosed at the time of the project.
The study is done only with the last 5 years details.
1.1.6 CHAPTERIATION
The project entitled “A study on Receivable Management in TI Cycles of
India, Ambattur” included three chapters.
The first chapter is about Introduction which includes outline of the
project, need for the study, scope of the study, objectives of the
study, limitations of the study, research methodologies, company
profile, industry profile, product profile.
The second chapter is about Data analysis and interpretations
which includes working capital, funds flow statement and Ratio
analysis.
The third chapter is about Summary and Conclusions which
includes finding suggestions and conclusions.
1.2 REVIEW OF LITERATURE
An account receivable is the money owed to a company by a consumer for
products and services purchased on credit. This is usually treated as a current
asset of accounts receivable after the customer is sent an invoice. Accounts
receivable are known by various names, such as accounts receivable aging,
accounts payable, days receivable, accounts receivable turnover and invoice
factoring.
According to the experts, accounts receivable or invoice factoring is one of a
series of accounting transactions. These accounting transactions deal with the
billing of customers who owe money to a person, company or organization for
goods and services purchased. If you are seriously considering using accounts
receivable as a method of obtaining a more liquid asset, then it is wise to hire
accounts receivable management specialists.
Accounts receivable management specialists can help you in a variety ways:
It can cut and maintain your average collection delay or DSO
It can lessen your direct and indirect expenses
It can considerably reduce your bad debt
It can tell you various ways to take advantage of your cash-flow
It can help you capitalize on your internal resources
It can maximize your interventions on sales, service and market share.
Hiring the best accounts receivable management will clear up the common
misconception that the selling of accounts receivable is a loan. Accounts
receivable are the amounts that customers owe a business; this is clearly shown