A STUDY ON RECEIVABLES MANAGEMENT

(WITH SPECIAL PREFERENCE TO A MANUFACTUING FIRM

IN CHENNAI CITY

INTRODUCTION

Trade credit creates accounts receivables or trade debtors (also referred to as

book debts in India) 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
care called trade debtors or simply debtors and represent the firm’s claim or
asset.

A credit sale has three characteristics:

• Involves an element of risk that should be carefully analyzed
• Based on economic value.
• Implies futurity.

CREDIT POLICY: NATURE AND GOALS:

A firm’s investment in accounts receivable depends on :

a. The volume of credit sales and
b. The collection period.

For example, if a firm’s credit sales are Rs. 30 lakhs per day and customers, on
an average, take 45 days to make payment, then the firms average investment in
accounts receivable is : Rs. 30 lakhs x 45 = 1,350 lakhs.

The volume of credit sales is a function of the firm’s total sales and the
percentage of credit sales to total sales. Total sales depend upon the market
size, firm’s market share, quality of the product, intensity of competition,
economic conditions etc. The financial manager has hardly any control over
these variables.
There is only one way in which the financial manager can affect the volume of
credit sales and collection period and consequently investment in accounts
receivable. That is through the change in credit policy. The term credit policy is
sued to refer to the combinations of three decision variables :

a. Credit standards : which 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 or default.
b. Credit terms : which specify duration of credit terms of payment by
customers. Investment in accounts receivable will be high if customers
are allowed extended time period for making payments.
c. Collection efforts : which determine the actual collection period. The
lower the collection period, the lower the investment in accounts
receivable and vice versa.

Efficient receivables management can be difficult to achieve. But without the

proactive management of past-due accounts, profits can remain elusive and
account receivables employees are pressured to process more and more
individual receivables as quickly as they can. The results: unnecessary errors,
receivables losses, and the soaring costs of inefficiency – all of which a company
can easily avoid.

Efficient receivables management has always been at the top of the wish list for
many companies. That may be even more true today as traditional past-due or
dunning notices seem to have less impact upon a customer’s willingness to settle
outstanding invoices. Many companies are instead choosing individual
management of accounts in important customer segments.
The brunt of this decision usually falls upon receivables management employees,
who have the unenviable – often impossible – task of processing an ever-
increasing receivables balance as fast as possible. For some companies,
proactive management of overdue or outstanding invoices is simply not feasible.
The results for the creditor are fatal: reduced working capital, a deteriorating cash
flow, an escalating risk of losses, and outsized costs and effort for receivables
management.

OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVES :

1. To evaluate the revenue generation process as adopted by the company with

respect to collection of receivables.

SECONDARY OBJECTIVES :

1. To calculate the opportunity cost of investment in accounts receivables and its

impact on working capital requirements.
2. To prepare a revenue projector of the First quarter of the financial year 2006-
2007 only with respect to receivables. .
3. To study the effectiveness of the billing / invoicing process adopted by the
company
4. To study the impact of receivable investment on profitability
5. To apply Z-Score analysis to test the performance of the company on the
whole.
6. To offer suitable suggestions to accelerate the speedy collection of overdue
accounts and thereby increase the liquidity and profitability of the company.