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INDEX

ACKNOWLEDGEMENTPREFACE

CHOICE OF THE ORGANIZATION

COMPANY PROFILE

Minda History Group Companies

Vision & Mission Major Clients International Business

INTRODUCTION OF TOPIC (RECEIVABLEMANAGEMENT)

OBJECTIVES OF REPORT MAKING

THEORIES & REVIEW

Account Receivable Policy Formulation Analysis of Informations Strategies of Account Receivable Management Debtor Management Advantages Handling Receivables Factoring the new concept

RESEARCH METHODOLOGY ANALYSIS

Debtors Value Account Chart Debtors more than 90 Days Chart Dispute Account Chart Overdue Debtors Account Chart Debtors No of Days Chart

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Debtors Ageing Analysis

INTERPRETATION

CONCLUSION

BIBLIOGRAPHY

ACKNOWLEDGEMENT

It is impossible to acknowledge the contribution of all those whocame across and therefore, I take this opportunity to acknowledge themajor contributors of this project.

I am deeply indebted to Mr. Sachin Sharma (Asst. Mgr), my industryguide, for their valuable informations and inputs which addeddimensions and meaning to my project. Without his guidance, the

report couldnt have been possible. It has a great learning experienceworking under him.

I would also like to thanks to Mrs. Ashu Khanna and otherdistinguished faculty of Department of Management Studies for theirmoral support, guidance and willing cooperation during the making of my project.

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Last but not the least, I would like to thank my parents, friends andall other people who helped me directly or indirectly in the completionof this project report.

BHAWNA MAMGAIN

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PREFACE

Receivables are direct results of the credit sales. Credit sales areresorted to by a firm to push up its sales, which ultimately results inpushing up the profit earned by the firm. At the same time, sellinggoods on credit results in blocking of funds in account receivable.Addition funds are required for the operation needs of the business,which involves extra cost in term of the interest. Moreover increases inreceivable also increases chance of bad debts. Thus the creation of theaccount receivable is beneficial as well as dangerous. The financemanager has to follow a policy, which uses cash funds as economics aspossible in extending receivable without adversely affecting thechance of increasing sales and making profit. Management of Account

Receivable may be therefore be define as the process of makingdecision relating to the investment of funds in this assets which willresult in maximization of the overall return on the investment of thefirm.

Thus the objective of the Receivable Management is to promotesales and profit until that point is reached where the return investmentin further funding of receivable is less than cost of funds raised tofinance that additional credit (i.e. cost of capital).

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CHOICE OF THE ORGANIZATION

Minda Industries Ltd. has been selected as the target group to knowthe receivable management process. The organization mainly suppliesthe product to the industrial customer or the major clients (customer)of the Minda Industries are the big automobile industries. The industrysupplies the material to the customer on the credit or the mostly salesis credit. Due to this reason Minda Industries Ltd. is found to be thebest organization to the present study.

COMPANY PROFILE(MINDA THE GROUP ON THE MOVE)

NK Minda Group is Indias foremost manufacturer of a range of automotive components. The Group has an annual turnover of Rs. 5.45billion (USD $ 121 million) and is a leading supplier to global OriginalEquipment Manufacturers.

HISTORY

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Chairman, Mr. S.L. Minda, founded the Minda Group in 1958. He beganwith a small team of five people and the vision of becoming a leadingplayer in the automotive components industry. His pioneering effortshave culminated into the Minda Group becoming a diversified,customer oriented, multi-product, and multi-location organization.

Under the dynamic leadership of Mr. Nirmal K. Minda, who took over asthe Managing Director in the year 1995, the Minda group has grownmanifold.

Today, it has an annual turnover of Rs. 5.45 billion (USD 121 million)and employs around 4000 people in 18 manufacturing facilities spreadacross India and 1 in Indonesia. Over the years, Minda Group hasacquired a customer base that includes the whos who of theautomotive sector in India and around the world.

Philosophy about Manpower :

People work best when there is a sense of ownership and thefeeling that it is a collaborative effort. Our philosophy is to empowereach individual to take his own decisions in his defined field, so that hecan add to the growth. Minda Group has a number of companies, eachof which takes pride in being professionally driven. The organization isdivided into different companies or Strategic Business Units (SBUs),and each SBU head has the overall responsibility for his operations.A special committee called the Minda Management Committee hasbeen setup which works in a consultative capacity and includes all SBUheads, besides corporate and human resource representation. With aclearly defined value proposition, which is all about respect to peopleand customer orientation, the Minda Group is a unique example of succeeding by empowering people.

The Minda group product profile comprises of :

Switches-2 wheelers Switches-4 wheelers Lighting Batteries Horns-2/3 wheelers Horns-4 wheelers Alternate fuel kits LPG /CNG fuel kits

Group foreign joint-venture :

Tokai Rika Co. Ltd., Japan TYC Brother Ind. Company ltd., Taiwan

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Fiamm S.P.A, Italy Impco Technologies Inc., USA

Corporate outline :

Established : 1958Chairman : S L MindaManaging Director : Nirmal K MindaDirector : Ashok MindaDirector : B R AgarwalDirector : Raja Ram Gupta

GROUP COMPANIES

Minda Group is a specialized automotive components manufacturerthat provides products and solutions to automobile companies acrossthe globe. The Group comprises of the following companies :

1.Minda Industries Limited

Minda Industries Limited is the flagship company of the MindaGroup. It designs, develops and manufactures switches for 2/3wheelers and off-road vehicles. In addition, Minda Industries Limitedmanufactures batteries for 2/3/4 wheelers and off-road vehicles. MindaIndustries already enjoys more than 70% market share in the 2/3wheeler segment in India and is amongst the top few globally.

Today, Minda Industries is over Rs. 3.04 billion (USD 67.5 million)company and is on a rapid expansion spree. It is geared to take onglobal competition and has already made inroads into the ASEANmarket. Minda Industries is on its way to becoming the favored vendorfor 2/3 wheeler switches globally.

Minda Industries Limited has established 8 state of the art facilitiesspread across the length & breadth of India and one in the ASEANregion and employs more than 2800 people.

The various product offerings include :

Lever and Holder AssemblyGrips Handle Bar SwitchBrake Handle Bar System AssemblySwitch

The company also designs different types of switches likeRotary Switch, Handle Bar Switch, Plunger Type Switch, RockerSwitch, Grip, Lever Holder Assembly, Panel Switch and

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Modular Switch. On an average, Minda Industries develops140 distinct products across categories each year and puts inplace 25 new assembly lines to manufacture them.

CORPORATE OFFICE :

Minda Industries Limited,Vill. Nawada Fatehpur,P.O. Sikanderpur Badda,Manesar,Distt. Gurgaon,Haryana - 122004

VISION :

To be a world-class organization by :

Business expansionManufacturing excellenceCreating world-class productsCost managementPeople excellent

MISSION :

To be the global leader (No. 1) in 2/3 wheeler and off-roadvehicles switches by volume and revenue.

Minda Industries believes in collaborative designing withthe vehicle manufacturers. Minda Industries has the capabilityto improvise existing products as well as offer cost-effectivesolutions for products already available in the market.

2.Mindarika Pvt. ltd. -

Mindarika Pvt. Ltd. is a Joint Venture between Minda Industries

Limited, Tokai Rika Company Limited, Japan and SumitomoCorporation, Japan to produce automotive switches for four-wheelervehicles. With Rs. 1.1 billion (USD 24.7 million) in revenue, it is Indiaslargest four wheeler automotive switch manufacturer. The companyhas a manufacturing facility at Gurgaon and employs 400 people.Mindarika is consistently winning accolades across categories of products in the automotive switches segment. The core strengths at

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Mindarika are skilled manpower, adherence to the highest qualitystandards and providing cost effective solutions.

3. Minda TYC Automotive Limited

Minda TYC Automotive Limited is a Joint Venture between MindaIndustries Limited and TYC Brother Industrial Company Limited, Taiwanto produce automotive lighting. The company has manufacturingfacilities in Sonepat, Gurgaon and Pune and employs around 400people.

Minda TYC produces a variety of world-class lighting products forthe 2/3 wheelers and off-road vehicles, as for four-wheeler vehicles.

4. Minda Fiamm Acoustic Limited

Minda Fiamm Acoustic Limited is a Joint Venture between MindaIndustries Limited and Fiamm S.p.A, Italy to produce 2/3 wheelerautomotive horns. The Rs. 350 million (USD 8 million) company hasmanufacturing facilities in Delhi, Gurgaon and Pantnagar and employsover 300 people.

Today, Minda Fiamm is the leader player in the Indian automotivehorn industry. It offers customized products and solutions for a range of automotive acoustic problems. Minda Fiamm utilizes the experience of its joint venture partner, FIAMM S.p.A. of Italy, to offer R&D expertiseand capabilities to the Indian customer.

5. Minda Auto Gas Limited

Minda Autogas Limited began as Minda Impco Limited - a JointVenture between NK Minda Group and Impco Technologies Inc, USA. InApril 2006, Impco, as part of their global strategy, decided to exit all

Joint ventures including the one in India. Today, Minda Autogas Limitedand is a fully owned company of the NK Minda Group. Minda Autogasprovides CNG / LPG kits and other alternative fuel solutions to variousOEMs and the replacement market.

Company Vision: To be a Rs. 1 billion company by 2008-2009. To be the preferred supplier of alternate fuel kits to theIndian market.

6. PT Minda ASEAN Automotive

Recognizing the importance of the ASEAN market, the Minda Grouphas set up a Greenfield manufacturing facility in Indonesia through acompany named PT Minda ASEAN Automotive. The project that was

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conceptualized in October 2004 began its production in Indonesia inDecember 2005. In a short span, the ASEAN venture started to acquirerenowned ASEAN OEM customers and is today exporting to Malaysia,Vietnam, Philippines & Thailand. The product range comprises of switches and locks for two wheelers and is going to start

manufacturing other Group product lines.

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MAJOR CLIENTS

TVS MOTORS CORPORATION TAFE TRACTOR HERO HONDA LML MOTORCYCLES & SCOOTERS BAJAJ ROYAL ENFIELD HONDA KINETIC SUZUKI MAHINDRA & MAHINDRA CUMMINS INDIA NEW HOLAND PIAGIO GREAVES EICHER

MAJOR OVERSEAS COUNTRIES FOR EXPORTS :

GERMANY ITALY THAILAND SRI LANKA MALAYSIA FRENCH INDONESIA

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INT RODUCTION OF TOPIC

(Receivable management):For most companies, Account Receivables are very important

investment, often dominating fixed asset investment. With the concernfor return on assets expressed by many companies in recent years,there has come ever-increasing focus on the funds committed toreceivable. Whether this current asset is managed efficiently influencesvery strongly the amount of funds invested. The optimum isdetermined by comparing benefits to be derived from a particular levelinvestment with the cost of maintaining the level.

Effective Management of Account Receivable presents importantopportunities for companies to achieve strategic advantage throughimprovements in customer service, cash management and reductionsin costs. The primary objective of Accounts Receivable in thecommonwealth public sector is to collect monies due and to assist inmeeting cash flow requirements. An effective accounts receivablefunction can assist in achieving the desired cash flow outcome throughthe timely collection of outstanding debts.

Receivable are very important cash inflow for the organization andmanaging cash flow is a critical aspect of managing any business.Many companies go out of business because they have not paidenough attention to managing their debtors effectively.

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OBJECTIVE S OF REPORT MAKING

1.) To gain maximum knowledge about the practical work.2.) To know about the debtor (receivable) management of the

Minda Industries Ltd. (switch division).

3.) To seek the financial process of the company.

4.) To identify the areas of improvement.

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THEORIES & REVIEW

ACCOUNT RECEIVABLE POLICIES -An account receivable is generated when an enterprise, havinggranted credit, aspects, in lieu of cash, a written or implied promise topay in the future for delivery of its goods or services. In todaysbusiness environment, competitive pressures, customer preferences,and promotional selling opportunities lead the management of mostenterprises to offer credit. Account receivable often constitutes asignificant portion of assets and are, therefore, a major businessinvestment. Successful control of the account receivable processdemands development of appropriate credit, collection, and financing

policies compatible with the enterprises profit, liquidity and marketshare.

Account receivable policy development is subject to internal andexternal business constraints and requires careful evaluation of thepolicies potential impact on :

Sales volume, Cash management objectives and procedures, Direct and indirect costs of receivable management, and Customer relations.

Once an account receivable policy is implemented, it should bereassessed at least annually, since policy changes could be required toadjust for changing internal and external conditions, such as changingbusiness objectives, varying competitive industry standards,fluctuating interest and foreign exchange rates, inflation, rapidlyincreasing credit volume, technological advances, and global tradepattern trends.

This guideline highlights the generally accepted industry principlesand processes used to achieve effective management of an enterprises

accounts receivable. It also addresses important issues arising fromreceivable transactions. Emphasis is placed on the development of appropriate credit, collection, and financing policies, and theevaluation and control techniques needed to ensure effectivemanagement of the accounts receivable process. The guidelineprovides prescriptive recommendations to assist managers to makerational decisions and choose effective implementation techniques.

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ACCOUNT RECEIVABLE POLICY FORMULATION

The account receivable cycle begins with the enterprises decision toextend credit and ends when settlement is received in payment for thegoods or services provided. It is critical that accounts receivable credit,collection, and financing policies complement marketing, sales, andproduction policies and, therefore, be compatible with enterprisesoverall objectives. To achieve this goal, the chief executive officershould :

Involve senior managers from all appropriate departments indeveloping account receivable policy, since the variousdepartments within an enterprise could have vested interestsand, possibly, conflicting objectives,

Assign one senior manager to be responsible for the groupspolicy determination, and Review and approve the policies that the group has formulated.

CREDIT POLICY

An enterprises Credit policy is a major, controllable element thathas a significant influence on sales, demand and profits. The factorsthat comprise credit policy should be analyzed before the decision ismade whether or not to offer credit or to make changes to currentpolicy.

Factors that could constrain or influence credit policy include :

Ability to finance the credit policy . Costs of financingreceivables by means of internal or external credit facilitiesshould be estimated to determine which approach is feasiblefor the enterprise.

Industry credit terms . Terms tend to be alike throughout anindustry. However if an enterprise has a superior product orservice, it could consider applying more restrictive creditterms than those offered by the industry in general.

Competitive issues . The initial credit policy and anysubsequent changes made to it are often limited bycompetitors and customer reactions to competitive creditbenefits, to payment convenience, and to pricing discountand financing efficiency.

The size of the customer base and relative risk profile of major customers. Credit policy should take into account major

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high-risk customers and the weighting that should be given tothem in relation to total customer base.

Sales volume. If a new or changing credit policy is expectedto increase sales volume, the ability to meet customerdemand should be considered.

Late payments and defaults. As a firm credit policy iseased, late payment and default risk usually increases.

Promotional activities. The implementation of apromotional program may require a target market base,which is provided by record of credit customers.

Sovereign risk and credit policy on export sales. Exportsales credit policy should consider political, economic, andlocal practices as well as specific banking requirements.

The development of the enterprise credit policy requires thatspecific decisions be made regarding several variables that establishthe terms of sales and the acceptable level of credit risk. The keyvariables are :

A. Credit quality standardsB. Credit periodC. Credit termsD. Cash discounts and surchargesE. Credit limitsF. Credit instruments

When implementing or varying the credit policy by changinganyone, or all, of the above variables, management must assess theimpact on net income, calculate the probability of achieving theplanned results, and determine the additional levels of risk assumed. Inparticular, any relaxation of credit policy should be considered onlyafter very careful evaluation of the impact of the change by topmanagement, because it is extremely difficult to revert to morestringent policies without experiencing adverse effects on customerrelations and sales.

A. Credit quality standards :

Credit quality standards should be established to control thereceivables risk by determining the likelihood that a given customerwill pay slowly or not at all. The standard should define the minimumfinancial strength required for a customer to be an acceptable creditclient. Some factors included in determining customer creditacceptability can be quantified to derive a probability of default.

Management should establish quality standards with care in orderto minimize the number of instances when a customer with an

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acceptable credit rating is rejected or a customer with an unacceptablerating is accepted.

To evaluate overall credit quality, the five Cs of credit should beconsidered. Each is weighted relative to its importance to theenterprise and the availability of information for constructing

probability estimates.i.) Character refers to the buyers integrity, as perceived bythe seller, and is essentially a subjective assessment. Manycredit officers consider character to be a very importantpredictor of payment patterns.

ii.) Capacity measures the customers ability to pay theobligation when it is due, and is assessed on the basis of thebuyer historical payment records and business reputation.Ability to pay may be quantified by calculating the current,quick, and working capital turnover ratios. If the buyer is anindividual or a newly formed business, capacity measures

may have to be based on credit rating information availablefrom external sources.iii.) Capital represents the long-term financial resources

available if additional liquidity is required. It is measured bythe customers general long-term financial strength asindicated by the financial ratio analysis, particularly thedebt/asset ratio, the times-interest-earned ratio, and thelambda liquidity ratio.

iv.) Collateral represents the assets available to satisfy thepurchasers obligation if cash flow is insufficient to pay forthe purchase. Customers may offer, or the supplier may

demand, an asset or assets as security to obtain credit.v.) Conditions refer to general economic trends and forecast

and specific industry, political and technological factors thatmay affect the customers ability to pay and the sellerswillingness to grant credit.

Information concerning a customers credit worthiness can beobtained from many sources : previous credit sales experience with thecustomer, external credit information available from public reportssuch as newspaper business reports or databases, credit associationreports, credit reporting agencies such as Credited, Credit Bureau, or

Dun & Bradstreet other major vendors, and financial institutions suchas the customers bank or trust company.

Whilst the materiality of the amount will dictate the degree of analysis involved, the major sources of information available tocompanies in assessing customers credit worthiness are :

Bank references. These may be provided by the customersbank to indicate their financial standing. However, the law

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and practice of banking secrecy determines the way in whichbanks respond to credit enquiries which can render suchreferences uninformative, particularly when the customer isencountering financial difficulties.

Trade references. Companies already trading with the

customer may be willing to provide a reference for thecustomer. This can be extremely useful, providing approachedare a representative sample of all the clients suppliers. Suchreferences can be misleading, as they are usually based ondirect credit experience and contain no knowledge of theunderlying financial strength of the customer.

Financial accounts. The most recent accounts of thecustomer can be obtained either direct from the business, orfor limited companies, from companies house. While subjectto credit limitations past accounts can be useful in vettingcustomers. Where the credit risk appears high or wheresubstantial levels of credit are required, the supplier may askto see evidence of the ability to pay on time. This demandsaccess to internal future budget data.

Personal contact. Through visiting the premises andinterviewing senior management, staff should gain animpression of the efficiency and financial resources of customers and integrity of its management.

Credit agencies. Obtaining information from a range of sources such as financial accounts, bank and newspaperreports, court judgments payment records with othersuppliers, in return for a fee, credit agencies can approve amine of information. They will provide a credit rating fordifferent companies. The use of such agencies has growndramatically in recent years.

Past experience. For existing customers, the supplier willhave access to their past payment record. However, creditmanagers should be aware that many failing companiespreserve solid payment records with key suppliers in order tomaintain supplier, but they only do so at the expense of othercreditors. Indeed, many companies go into liquidation withflawless payment records with key suppliers.

General sources of information. Credit managers shouldscout trade journals, business magazines and the columns of the business press to keep abreast of the key factorsinfluencing customers businesses and their sector generally.Sales staffs that have their ears to the ground can also provean invaluable source of information.

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Analysis of the information :

Collection of the information in respect of any customer is not goingto serve any purpose in itself. Once all the available credit informationabout a potential customer has been gathered, it must be analyzed toreach at some conclusion regarding the credit worthiness of customer.

The 5 well-known Cs of the credit provide a framework for theevaluation of a customer has been presented in the following figure :

The enterprise that is assessing credit quality should :

Determine the information required to investigate credit approvalrequests and review customer credit worthiness status,

Payment History

Good Bad

Accept Reject

No Information

Detailed Analysis of Risk

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Acce t Re ectCredit AgencyInvestigation

Low Hi hMedium

Acce t Re ectSatisfaction Doubtful

Based onExternalCreditAnalysis

Based onDetailedApplication

Based onFinancialStatement

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Analyze the type, quality and cost of the information available,andEstablish standard information sources and develop appropriatefinancial ratios required to produce customer credit reports.

Based on the information gathered, the customers credit qualitycan be assessed. The appropriate manager should then make adecision about gathering credit and defining the credit terms, limits,due dates, and acceptable credit forms. Although the final creditassessment involves subjective management judgment, givingnumerical values to critical measures can statically assess theprobability that the customer will pay on time that the sellingenterprise has determined to be significant. Critical measures couldinclude the customers statements, interest rate levels, and pertinenteconomic and industry figures or trends. A statistical method isespecially advantageous for enterprises evaluating many customers on

a consistent basis. As a further refinement the process can becomputerized.

Customers credit quality ratings should be reassessed on a regularbasis, particularly major customers whose default could have seriousfinancial consequences for the seller.

B. Credit period :

The credit period is the length of time credit is granted (forexample, from invoice date to due date), and is normally establishedaccording to an industry standard. The credit period has a directimpact on the cost of financing receivables and on collection risk. Anenterprise may elect to deviate from the industry standard for one ormore reasons :

To obtain a competitive advantage. To reflect the enterprises classification of customer qualityOr to adjust to longer-term economic or business changes.

The date when payment is deemed to be received should bedefined. It may be based on the envelope postmark date, theremittance processing date, or the date funds are received. Customershould be clearly advised of the payment receipt date.

C. Credit Terms :

Credit terms are normally specified on the contractual documents,or on the customer invoice or statement. Frequently used paymentterms include the following :

Cash before delivery (CBD) or Cash on delivery (COD) may berequired when the buyer has been classified as a poor credit risk.

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In case of an unknown or one-time customer, a certified chequemay be required when the order is placed, or before the goods orservices are delivered.Cash term permit the buyer a payment period of about five to 10days and may be used for high-turnover or perishable goods.

Invoice terms often stipulate a net due date and a discount datethat may be calculated from various starting dates such as theinvoice, delivery, or client acceptance dates. The terms may bequoted, for example as 2/10 net meaning a payment discount of 2% is given if the invoice is paid within 10 days. Full payment isrequired after 10 days but within 30 days.Periodic statements are normally issued monthly. The statementterms may be similar to invoice terms and include discounts andinterest charges for late payment. All invoice transactions arelisted up to a cut-off date and payment is due by a specified datein the following period.

D. Cash Discounts and Surcharges :

Cash discount policies may be established for a number of reasons : To conform to the industry norm to stimulate salesOr to expedite receipt of cash.

To be an effective collection tool, the discount rate must beestablished at a rate of interest higher than that at which the customeris able to borrow. Consideration should be given to the implications of customers taking a discount to which they are not entitled.

A surcharge, or late payment charge, can be used to encourageprompt payment and to equalize treatment for customers who pay ontime versus those who delay payment.

E. Credit limits :

Credit limit categories should be established to codify the totalcredit that may be granted to customers in each credit qualityclassification. To ensure that credit limits remain appropriate, givenbusiness or other major changes, they should be regularly reviewed.Periodic credit worthiness reassessments can be simplified by

automatically reassigning customers to a higher credit limit level aftera specified period of satisfactory payment experience.

Credit factors, assigned by the credit grantor and weighted byrelative importance, can be used to calculate a single numerical valuethat could be used to assign distinctive credit limits and paymentperiods to different customers. The credit score must always betempered by informed management judgment because the accept-reject decision implicitly includes economic trade-offs : to minimize

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rejection of an acceptable credit customer (with loss of futurebusiness) versus to accept a poor credit risk.

F. Credit Instruments :

Credit Instruments are written payment contracts agreed to by theenterprise and its customers. Instruments range from simple invoicesto formal credit arrangements that are selected to reduce credit risk.When selecting an instrument to be used, the enterprise shouldconsider industry standards, market norms, and buyer risk. Theenterprise may choose different instruments at different timesdepending on the product or service sold, the customers geographicallocation, or customer quality classification. The quality to use differentinstruments provides flexibility when dealing with significant orsensitive customers and orders. Compliance with relevant consumerprotection legislation may require detailed disclosure to the buyer of

credit instrument terms.

COLLECTION POLICY

One senior individual in the enterprise should be made responsiblefor the implementation and control of the collection policy. Thecollection policy should specify :

The employees directly responsible for maintaining the policy;Cash management techniques to be used to optimize cash inflow(including prompt invoicing);

A statement routine and payment processing method;Responsibilities of sales staff and other employees who couldhave a negative or positive impact on collections;

The consistency with which standard procedures are to beenforced;Alternative methods to reduce risk of no collection and thecircumstances in which those methods should be applied; andA detailed procedure for handling past-due accounts.

CREDIT INSURANCE

Collection risk can be reduced by purchasing credit insurance, thusshifting some of the risk of bad debt losses to a third party. The risklevel has to be high enough to warrant the insurance premium. Forexample, if a few customers make up a significant percentage of theaccounts receivable and default by one of them would threaten theviability of the enterprise, credit insurance should be seriouslyconsidered. Credit insurance terms are negotiable but will normally

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incorporate a deductible amount and a coinsurance provision so theinsurer and the seller share a percentage of the loss above thedeductible amount.

OVERDUE ACCOUNTS

The process for collecting overdue accounts may vary depending onthe monetary value of the account, the type of sale (goods or service),and past experience with the customer. Some situations will requirespecial treatment. For example, a customer with an overdue accountmay request further credit and a decision must be made concerningthe steps to be followed until that customer has been reestablished asa normal credit risk.

The following policy actions could be applied in such situations :Request prompt payment of the account,

Withhold approval or refuse to ship further goods (or provideservice) until all past due payments are made,Withhold approval until a partial payment is made, orRefuse further credit.

When partial payments are required, the policy should specifywhether the payments would be applied to the oldest amountsoutstanding to the smallest outstanding invoices (a process calledshorting), or to the largest overdue amount. Payments should be madeagainst specific invoices where possible.

If ongoing service is provided (for example, utilities such as hydro,

gas, or telephone), the enterprise may also initiate action to cut off ordisconnect service to the extent permitted under relevant consumerlegislation.

STRATEGIES OF ACCOUNTRECEIVABLE MANAGEMENT

Debtors (Accounts Receivable) are customers who have not yetmade payment for goods or services, which the department hasprovided. The objective of debtor management is to minimize the time-lapse between completion of sales and receipt of payment. The costsof having debtors are :

Opportunity Costs (cash is not available for other purposes);Bad Debts.

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Debtor management includes both pre-sale and debt collectionstrategies. Pre-sale strategies include:

o Offering cash discounts for early payment and /or imposingpenalties for late payment

o Agreeing payment terms in advanceo Requiring cash before deliveryo Setting credit limitso Setting criteria for obtaining credit

Post-sale strategies include:

o Placing the responsibilities for collecting the debt upon thecenter that made the sale

o Identifying long overdue balances and doubtful debts by regularanalytical reviews

o Having an established procedures for late collections, such asA reminderA letter

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HANDLING RECEIVABLES(DEBTORS)

Cash flow can be significantly enhanced if the amounts owing to abusiness are collected faster. Every business needs to knowwho owesthem money how much is owedhow long it is owingfor what it isowed.

Slow payment has a crippling effect on business, in particular on

small businesses that can least afford it. If you dont managedebtors, they will begin to manage your business , as you willgradually lose control due to reduced cash flow and, of course, youcould experience an increased incidence of bad debts. The followingmeasures will help manage your debtors :

1) Have the right mental attitude to the control of credit and makesure that it gets the priority it deserves.

2) Establish clear credit practices as a matter of company policy.3) Make sure that these practices are clearly understood by staff,

suppliers and customers.4) Be professional when accepting new accounts, and especially

larger ones.5) Check out each customer thoroughly before you offer credit. Usecredit agencies, bank references, industry sources, etc.

6) Establish credit limits for each customerand stick to them.7) Continuously review these limits when you suspect tough times

are coming or if operating in a volatile sector.8) Keep very close to your larger customers.9) Invoice promptly and clearly.10)Consider charging penalties on overdue accounts.Recognize that the longer someone owes you, the greater thechance you will never get paid. If the average age of your debtor is

getting longer, or is already very long, you may need to look for thefollowing possible defects :weak credit judgmentpoor collection procedureslax enforcement of credit termsslow issue of invoices or statementserrors in invoices or statementsCustomer dissatisfaction.

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Debtor due over 90 days (unless within agreed credit terms) shouldgenerally demand immediate attention. Look for the warning signs of afuture bad debt. For example,

Longer credit terms taken with approval, particularly forsmaller orders

Use of post-dated checks by debtors who normally settlewithin agreed termsEvidence of customers switching to additional suppliers forthe same goodsNew customers who are reluctant to give credit references

The act of collecting money is one which most people dislikefor many reasons and therefore put on the long finger becausethey convince themselves there is something more urgent orimportant that demands their attention now. There is nothingmore important than getting paid for your product or service. Acustomer who does not pay is not a customer. Here are a few ideasthat may help in collecting money from debtors :

Develop appropriate procedures for handling late payments. Track and pursue late payers.Get external help if your own efforts fail.Dont feel guilty asking for moneyits yours and you areentitled to it.Make that call now. And keep asking until you get some

satisfaction.In difficult circumstances, take what you can now and agreeterms for the remainder. It lessens the problem.When asking for your money, be hard on the issue-but soft onthe person . Dont give the debtor any excuses for not paying.Make it your objective is to get the money not to score pointsor get even.

Accounts receivable is an important part of any companys financialmanagement. Reducing accounts receivable risk is always a toppriority. There are a variety of tools and services available to helpassist companies in managing their accounts receivable.

Examples include : accounts receivable software tools, collectionservices, and even factoring services to allow companies to sell theiraccounts receivable, and minimize their risk.

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DEBTOR MANAGEMENTADVANTAGES

Payment arrears and open accounts can place the financialhealth of your company at risk.Reduce your Outstanding Payments.

You reduce personnel costs and debit interest, and convert fixedcosts into variable ones.

You increase your cash flow by improving liquidity, success ratiosand credit interest.

You can make optimum use of the credit limits issued. You increase capacity for your own business activity.

Significant advances in accounts receivable performance andprocess efficiency through the following five complementarykey management initiatives :

Re-engineering accounts receivableRisk assessmentUse of advanced technologyDebt collection processesPerformance measurement

These matters are addressed following :

RE-ENGINEERING ACCOUNTS RECEIVABLE

Some large private sector organizations have achieved realcost reductions and performance improvements by reengineeringthe accounts receivable process. Re-engineering is afundamental rethink and re-design of business processes, whichincorporates modern business approaches.

The nature of accounts receivable is such that decisions madeelsewhere in the organization are likely to affect the level of resources that are expended on the management of accountsreceivable. An illustration of this point is the extra effort thatmust be put into debt collection where credit policy is poorlyadministered or too freely given. The strong linkages betweendifferent processes means that true improvements cannot beachieved without focusing on all aspects of the management of accounts receivable.

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The following better practices present opportunities to improvethe accounts receivable function :

1) Centralized ProcessingA better practice for the delivery of finance services is theadoption of centralized processing for finance functions such as

accounts payable and accounts receivable. CentralizedProcessing groups are typically high volume transactionsprocessing centers servicing multiple operating groups. Theirestablishment achieves a number of benefits for theorganization. These include the achievement of a high degree of specialist expertise in the function supported, the establishmentof centers of excellence that develop and enforce commonpractices and standards and the achievement of cost efficienciesthrough the co-locating of systems and staff. The establishment

of these centers also frees up other staff for more value addingwork. One private sector firm reduced its total finance staff numbers by 12% through centralized processing.

2) Standing PaymentsResearch into better practice indicates that providing

customers and debtors with alternative payment approachessignificantly enhances repayment rates. In addition to therebeing alternative payment methods there are also alternatives toissuing invoices in the traditional accounts receivable processingapproach. These alternative payment strategies result inefficiencies in the management of accounts receivable.

3) Alternative Payment optionsPrivate sector organizations and public authorities are finding

that payment of account outstanding is likely to be quicker wherea number of payment methods are a marketing tool that is tobenefit in attracting and retaining customers.

The following modern payment methods are available andprovide the benefits of added customer service, reducingremittance processing costs and improving cash flow throughfaster debtor turnover :

Direct debit - involves authorization for the transfer of funds from the purchasers bank account; this approachhas the advantage of reduced processing costs, howeverit can present security exposures.

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Integrated Voice Response - a system which combinesuse of human operators and a computer based system toallow customers to make payments over the phone,generally by credit cards; this system has been provedhighly successful in organizations which process a large

number of payments regularly.

Outsourced Agency Collection payments are collectedby an external agency under a contractual arrangement.

The payment method under this approach can be cash,cheque, and credit card. This method increases flexibilityand convenience to the customer, which may lead toimprovements in the rate of payment. A variant on thisapproach is BPAY, a system whereby banks act asoutsourcing partners by collecting payments fromsuppliers customers and directly crediting supplieraccounts.

Lock Box Processing an outsourced partner capturescheque and invoice data and transmits the file to theclient agency for processing in that agencys systems.

This approach transfers the cost of data collection toservice provider.

Other payment methods such as use of data kiosks bycustomers in public use areas and payment for goods andservices via the Internet are likely to become readily available inthe near future.

Each of the above payment types has advantages anddisadvantages, which are likely to be peculiar to the environmentthat particular agencies operate in. agencies need to balance thebenefits in both the payment and receipting processes againstthe costs that some payment options may present to theagencies themselves. Customers should be aware of their liabilityat all times. A practical way of achieving this objective is theissue of monthly customer statements.

4) Use of Payment IncentivesPrivate sector practice has been to, over time, reduce the

level of reliance on discounting as an incentive for promptpayment. The agencies, which have problems with debtorturnover Discounting cab be used as an incentive for customersto pay upon receipt of services, thereby, avoiding the use of credit terms.

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Whilst discounting has the advantage of potentiallyshortening the average collection period it also reduces netrevenue. Before deciding to offer discounts agencies shouldconduct an analysis of the effect that the utilization of discounting will have on net revenue. This estimate should be

balanced against the costs of continuing to hold receivables attheir existing levels, which is effectively the market interest rateapplied to the annual carrying cost of receivables. Another issuefor consideration is the alternative uses to which the funds tiedup in receivables could be put. In addition to developing a rangeof incentives for early payment agencies should consider theimposition of penalties on late payment. In designing penalties,agencies should be aware of legislative and policyconsiderations, which may reduce the potential for majorpenalties such as removal of service.

5) Case Management ApproachWhere individual customers have strategic importance to thecompany a case management approach may be adapted to themanagement of the company-customer relationship. Under thisapproach all aspects of the relationship are drawn togetherincluding debt management. The increased knowledge of thecustomer that derives from the adoption of a case managementapproach can assist in the design of strategies for the promptrepayment of debt.

RISK ASSESSMENT

Risk assessment is a major component in the establishmentof an effective control structure. Once risks have been properlyidentified, controls can be introduced to either reduce risks to anacceptable level or to eliminate them entirely. A proper riskassessment also creates opportunities for freeing processes frominefficient practices. In managing accounts receivable the keyareas that management should focus on for the purpose of conducting a risk assessment are :

1) Debt Management Processes The risk analysis involves a re-think of processes andquestioning the way that tasks are performed. A riskassessment opens the way for efficiency and effectivenessbenefits in the management of accounts receivable. Inparticular, processes can be re-designed to achieve thefollowing benefits :

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The establishment of clear and concise policies for issuingcredit and for recovery of debt;

The removal of non value adding tasks and clarification of roles and responsibilities;

By, for example, streamlining delegations; The establishment of controls where exposures are noted; Allowing staff to apply more initiative and ingenuity to

every day tasks; and The identification of new and more effective ways of

delivering services.

2) Outstanding Debts and Debtors The application of a credit policy will not be fully effective

unless there has been a comprehensive risk analysis of thecustomer population performed. This can be achieved by

having detailed information on the characteristics of customers(and potential customers) and through the establishment of criteria against which to assess the credit worthiness of individual customers.

USE OF ADVANCED TECHNOLOGY

Advances in technology present an opportunity forimprovement in accounts receivables processes. The principalinnovations available are the integration of systems used in themanagement of accounts receivable, the automation of debtcollection processes and the use of electronic commerce.

System Integration Improvements are available from the integration of

the revenue and accounts receivable systems. Thisintegration results in remittances being automaticallycredited against a customer account with a simultaneousupdate of the general ledger. This process avoids thedownloading of data and re keying.

Electronic Commerce Electronic commerce is a term applied to the use of

computer and telecommunications technologies,particularly on an inter-organizational basis, to supporttrading in goods and services. It uses technologies suchas electronic data interchange (EDI), electronic mail,electronic funds transfer (EFT) and electronic cataloguesystems to allow the buyer and supplier to transact

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business by exchanging information between computerapplications systems. This achieves cost savings byremoving the need for direct negotiation between theparties.

There is, in addition, an unrealized potential for thewider application of other electronic commercetechnologies.

The statement indicated that individual departmentsshould : take account of the opportunities offered byelectronic commerce in their business planningprocesses, and include in their information technologyand telecommunications strategic plans relevantprovisions covering the use or intended use of electronicdata interchange both for core functions and in support

applications.

DEBT COLLECTION PROCESSES

Debt collection processes should be undertaken with the

objective of reducing outstanding accounts while keeping sight of the need to maintain customer goodwill, in an environment of cost restraint. Better practice in debt collection includes thefollowing :

Assessment of debt against a financial threshold beforeproceeding with recovery actions;Review of the accuracy of invoices following failure bydebtors to respond to a letter of demand;Categorize debtors in accordance with their ability andwillingness to pay. Tailor debt collection processes inaccordance with results of this analysis;Prioritize debt on the basis of risk indicators. Theindicators could include the payment history of thecustomer, debt level, demographics, etc;Communicate directly with debtors most probably byphone and obtain personal commitment as to repaymentschedule;

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Staff have the authority to negotiate payment optionswithin guidelines, without further approval frommanagement;

Of vital importance in the design of debt collection procedures

is the need to be proactive about the recovery process. Creditindustry advice is that the more a debt ages, the greater is therisk of non-recovery. Estimates are that allowing a debt to agemore than 90 days increases the risk of non-recovery by at least20 %.

PERFORMANCE MEASUREMENT

An integral part of the re-engineering of any finance functionis to develop a suite of indicators, which will measure progressover time. Following is an outline of the possible users of some of the measures of effectiveness in Accounts ReceivableManagement :

o Debtors turnover This ratio measures the average periodfor which sales revenue will be held in accounts receivable.

This measures the efficiency and effectiveness of receivables collection.o Accounts Receivable to Revenue Ratio This ratio can be

used to highlight trends in the level of investment inaccounts receivable. Where accounts receivable as aproportion of monthly revenue exceeds an establishedbenchmark, thereby indicating the possibility of interestforegone, the matter can be highlighted for managementattention.

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FACTORING AN EVALUATION(Factoring the new concept)

It already has seen that maintaining the receivables by a firmrequire funds to be invested in receivable. The firms have to beraise funds from various sources in order to finance thereceivables. While maintaining receivable, a firm may face twotype of problem. First, of problem of rising funds to finance toreceivable and second, the problem relating to collection, delaysand defaults of the receivables. Since the receivablemanagement is a specialized type of activity involving a lot of time and effort, a firm, not having many receivable, may be in aposition to give a direct attention to each and every customer on

a regular basis. However, in a big firm the receivablemanagement may not be so direct and the firm may be exposedto more and more defaults from customers. In such case, a firmcan avail the services of specialist organization engaged inreceivable management. These specialists firms are known asfactoring firm .

Factoring may be defined as the relationship between theseller of goods and a financial firm, the factor, whereby the latterpurchase the receivable of the former and also administer thereceivable of the former. Factoring involves sale of the

receivables of a firm to another firm under and already exitingagreement between the firm and the factor. So the factoring is atool to release the working capital tied up in credit extended tothe customer, for more profitable uses and thereby relieving themanagement from sales collection chores so that they canconcentrate on other important activities. In a way, the factorfirm works as the collection department of the selling firm.

The procedure of factoring can be explained as follows :

1) Under an agreement between the selling firm and thefactor firm, the latter makes an appraisal of the creditworthiness of the potential customer and may also set thecredit limits and terms of credit for different customer.

2) The sales documents will contain the instruction to makethe payment directly to the factor, which is responsible forthe collection.

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3) When the payment received by the factor on the due date,the factor shall deduct its fess charge and credit thebalance to the firm amounts.

4) In some cases, if agreed, the factor firm may also provideadvance finance to the selling firm. In a way this

tantamount to the bill discounting by the factor firm.However the factoring is something more than mere billdiscounting as the former includes analysis of the creditworthiness of the customer also.

The factor may pay whole or a substantial portion of the salesvalue to the selling firm immediately on sales being effected thebalance if any may be paid on the normal due date.

The mechanism of factoring has been presented in following

figure:

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TYPES OF FACTORING :

There are two types of factoring service :-

1. Non-recourse factoring - It is where the factoringcompany purchases the debts without recourse to theclient. This means that if the clients debtors do not paywhat they owe, the factor will not ask for his money backfrom the client.

2. Recourse factoring On the other hand, it is where thebusiness takes the bad debt risk. With 80% of the value of debtors paid up front (usually electronically into the clientsbank account, by the next working day), the remaining20% is paid over when either the debtors pay the factor (incase of recourse factoring), or, when the debt becomesdue (non- recourse factoring). Factors usually charge fortheir services in two ways : administration fees and financecharges. For the finance made available, factors levy aseparate charge, similar to that of a bank overdraft.

ADVANTAGES :

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Provides faster and more predictable cash flows. Finance provided is linked to sales, in contrast to overdraft

limits, which tend to be determined by historical balancesheets.

Growth can be financed through sales, rather than havingto resort to external funds.

The business can pay its suppliers promptly (perhapsbenefiting from discounts) and because they havesufficient cash to pay for stocks, the firm can maintainoptimal stock levels.

Management can concentrate on managing, rather thanchasing debts.

The cost of running a sales ledger department is saved andthe company benefits from the expertise (and economiesof scale) of the factor in credit control.

DISADVANTAGES :

The interest charge usually costs more than other form of short-term debt.

The administration fee can be quite high depending on thenumber of debtors, the volume of business and thecomplexity of the accounts.

By paying the factor directly, customers will lose somecontact with the supplier. Moreover, where disputes overan invoice arise, having the factor in the middle can lead toa confused three-way communication system, whichhinders the debt collection process.

Traditionally the involvement of a factor was perceived in anegative light (indicating that a company was in financialdifficulties), though attitudes are rapidly changing.

FACTORING IN INDIA :

Factoring in India is recent origin. In order to study thefeasibility of the factoring services in India, the Reserve Bank of India constituted a study group for examining the introduction of the factoring services, which submitted its report in 1988. On thebasis of the recommendation of this study group, the RBI has

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come out with specific guidelines permitting bank to startfactoring in India through their subsidiaries. For this purpose, thecountry has been divided into 4 zones.

In India the factoring is still not very common and only fewcommercial banks have established the factoring agencies. The

first factor, i.e., the SBI factor and Commercial Services Limitedstarted working in April 1991 in western India. The Canara BankFactoring Ltd. has also started operation since September 1991in Southern India. The Punjab National Bank and Allahabad Bankhave also established subsidiary companies to take up factoringbusiness in the Northern India and Eastern India, respectively.

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RESEARCH METHODOLOGY

The objective of Research is the systematic and in-depth study or

search for any particular topic, subject or area of investigation, backedby the collection, compilation, presentation and interpretation of relevant details or data.

Types of research:

Exploratory Research

Descriptive Research

Entire information and data were gathered from the annual reports andmonthly information report of Minda industries. All the figures aretaken from their internal documents, which were personally shown bythe members of company in our interest.

DATA COLLECTION METHOD

Collection of data is the first step in statistics the goal of conclusion.

The data collection process follows the formulation of research design

including the sample plan. Data can be secondary or primary or can be

collected using variety of tools.

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RESEARCH DESIGN

Research design includes the various type of sampling. It includedthe 3 years back data and current financial years 2 months data.

DATA COLLECTION SOURCES

SECONDARY SOURCES : Annual reportsMonthly information reportsManuals

The companys various types of data record like disputestatements, overdue statement of the debtor, debtors ageanalysis statements.

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ANALYSIS

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DEBTORS VALUE ACCOUNT CHART

DEBTORS (VALUE)

1720.54

2842.36

3847.76

4862.57

0

1000

2000

3000

4000

5000

6000

AVG. 04-05 AVG. 05-06 AVG. 06-07 TARGET 07-08

YEARS

R s

i n L a

k h s

ANALYSIS

Debtors value of the company is increasing. In the FY 2004-05,they were worth of Rs. 1720.54 Lakhs which was increase by 65.20%

and reached to the Rs. 2842.36 Lakhs in the year 2005-06. In the FY2006-07, it is increase by 35.37% and reached to the Rs. 3847.76Lakhs.

The company set the target of Rs. 4862.57 Lakhs debtor value for thefinancial year 2007-08. The increase in the debtor value is also a signof increase in the sales.

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DEBTORS MORE THAN 90 DAYS CHART

DEBTORS >90 DAYS

157.71

285.21

105.5

00

50

100

150

200

250

300


YEARS

R s

i n L a

k h s

ANALYSIS

The companys debtor more than 90 days were worth of Rs. 157.71Lakhs in the year 2004-05which was increased by 81% and reached to

the Rs. 285.21 Lakhs in the year 2005-06. During the FY 2006-07 thegraph is showing a decrease of 63% and it comes at Rs. 105.5 Lakhs.

The company has set the target of zero debtors more than 90 daysfor the FY 2007-08 because of the companys policies. The companyhas the policies of less than 90 days debtor credit period.

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OVERDUE DEBTORS ACCOUNT CHART

OVERDUE DEBTORS

202.2

130.1151.67

00

50

100

150

200

250


YEARS

R s

i n L a

k h s

ANALYSIS -

Overdue debtor account chart is showing improvement duringprevious years. They were worth of Rs. 202.20 Lakhs in the year 2004-

05 which is decrease by 35.65% and reaches to Rs. 130.10 Lakhs inthe year 2005-06. During the financial year 2006-07 there is anincrease of 16.5% and it reaches up to Rs. 151.67 Lakhs.

The company set the target of zero overdue of the financial year2007-08.

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DEBTORS NO. OF DAYS CHART

DEBTORS (NO. OF DAYS)

50

59

55

50

44

46

48

50

52

54

56

58

60


YEARS

D A Y S

ANALYSIS -

The debtor no of days or the collection period of the company in thefinancial year 2004-05 was of 50 days, which increase in the year

2005-06 and reached to 59 days. But during financial year 2006-07collection period decreases and comes at of 55 days.

The company set the target of 50 days for the financial year 2007-08.

Debtors Age Analysis as on 28/02/08

(Rs. In Lakhs)

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CONCLUSION

Receivable (Debtor) Management is a very important department inthe organization. Effective receivable management of the companyprovided to kind of the costs benefits these are :

Opportunity CostBad debts Cost

Debtors (Account Receivable) are customers who have not yetmade payment for goods or services, which the department hasprovided. Cash flow can be significantly enhanced if the amountsowing to a business are collected faster. A customer who does not payis not a customer. The companys working capital position depends

upon the receivable of the company. If the company is collecting themoney on the time, then the companys working capital will be strong,it is very easy to sell the product or services on the credit but it is verydifficult to collect the money.

If the companys debtor collection period is increasing it means, thecompany losing a high amount by not collecting the money with in thecredit limit given to the customers. Slow payment has a crippling effecton business, in particular on small businesses that can least afford it. Incase, the companys customers ageing of the debtors are increasingso the company should take the appropriate decision to control the

receivable because we all know that the profits comes only from thepaid sale.

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BIBLIOGRAPHY

Annual report, Minda Industries Ltd. 2004-05 Annual report, Minda Industries Ltd. 2005-06 Annual report, Minda Industries Ltd. 2006-07 Monthly Information Report, Minda Industries of the month

of Jan, Feb. Chandra Prasanna, Financial Management Khan M.Y. and Jain P.K., Financial Management

Websites Visited :

o www.mindaweb.como www.google.co.ino www.yahoo.com
http://www.mindaweb.com/http://www.google.co.in/http://www.yahoo.com/http://www.mindaweb.com/http://www.google.co.in/http://www.yahoo.com/

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