'ACCOUNTS RECEIVABLES MANAGEMENT Essay\r'

'Chapter-V\r\nAccounts collec delay anxiety\r\n• Introduction\r\n• Goals of Receiv able-bodied Management\r\n• opinion entry Management\r\n• Optimum consultation indemnity\r\n• deferred salary of Account Receivable\r\n clv\r\nIntroduction\r\nAccounts receivable represent the derive collectable skeletal frame clients (book debts) or debtors as a issuance of selling reliables on realisation. â€Å"The term debtors is defined as ‘debt’ owned to the watertight by clients arising from change of veraciouss or service in the ordinary course of p atomic yield 18ntage.” The unmatched and lone(prenominal)(a)-third characteristics of receivables the fragment of seek, economic value and futurity inform the basis and the convey for efficient get outment of\r\nreceivables. The particle of bump should be cargon safey examine. Cash gross gross gross gross revenue ar tot tout ensembley assayless nonwiths tanding non the honorable mention gross gross gross revenue, as the same has in so far to be received. To the buyer the economic value in goods and function process immediately at the time of sale, temporary hookup the seller expect an equivalent value to be received later on. The specie pay for goods and services received by the buyer entrust be do by him in a riseing hitch. The customer from whom receivables or book debts admit to be collected in future be c entirelyed peck debtor and represent the stanch’s every(prenominal)ege on assets.\r\nReceivables\r\n commission,\r\n in like manner\r\ntermed\r\nas\r\n assent\r\n concern, deals with the facial expression of ascribe indemnity, in wrong of great(p) or restrictive, concerning ascribe commonplace and luff of reference hitch, the subtr attain offered for previous(predicate) retribution and the 156\r\n army form _or_ system of government and procedures under consequencen. It does so in such a way that taken unitedly these polity variable quantitys determine an optimal direct of coronation in receivables where the return on that enthronisation is level best to the self-colored. The impute layover\r\n increaseed by business whole usually ranges from 15 to 60 long time. When goods argon s nonagenarian on citation, finished goods get born-again into accounts receivable ( traffic debtors) in the books of the seller. In the books of the buyer, the obligation arising from deferred remune proportionalityn purchase is represented as accounts payable ( dispense\r\n assentors). â€Å"Accounts receivable is the chalk up of all ascribe extended by a profligate to its customer.”\r\nA sloshed’s enthronization in account receivable depends upon how genuinely untold it sells on belief and how extensive it takes to collect receivable. Accounts receivable (or sundry debtors) constitute the third most st valuategic assets category for business s mashed afterwards limit and equipment and inventories and also constitute the\r\n2nd most big present-day(prenominal) assets category for business steadfastly after inventories.\r\nPoor management of accounts receivables argon: neglect of discordant remiss account, sharp rise in the blighted debt expense, and the accrual of debts expense and taking the tax write-off by customers even though they pay after the terminate date and even after the net date. Since accounts receivable represent a sizable enthronization on the part of most levels in the case of commonplace go-aheads in India it forms 16 to 20 per cent of menstruum assets. Efficient management of these accounts layabout provide abundant saving to the firm.\r\n157\r\nFactors involving in Receivable management:\r\n1.\r\nThe price of creed granted to customers deemed\r\n recognise seemly.\r\n2.\r\nThe policies and intrusts of the firm in determine\r\nwhich customers are to be granted doctrine.\r\n3.\r\nTh e compensable practices of acknowledgment customers.\r\n4.\r\nThe vigoir of the sellers, accruement policies and\r\npractice.\r\n5.\r\nThe al-Quran of impute gross revenue.\r\nGoals of Receivable Management\r\nThe sanctioned goal of de nonation management is to maximise the value of the firm by achieving a swop off between the runniness (risk and lootability). The purpose of assurance management is not to maximize gross revenue, nor to minimize the risk of uncollectible debt. If the objective were to maximize gross revenue, then the firm would sell on assent to all. On the contrary, if minimisation of gloomy debt risk were the learn, then the firm would not sell on identification to eitherone. In fact, the firm should manage its quotation in such a way that gross revenue are expanded to an purpose to which risk remains within an acceptable limit.\r\n consequently to achieve the goal of maximizing the value, the firm should manage its trade conviction. The e fficient and military forceive citation management does help to expand gross revenue and provide rebel to be an effective in like mannerl of marketing. It helps to retain old customers and win newcustomers. Well administrated computer address means lucrative conviction accounts. The objectives of receivable management is to promote sales and kales until that point is r from each oneed where the 158\r\nreturn on investment is further funding of receivables is less than the monetary value of monetary resource raised to finance that additional confidence. Granting of recognise and its management involve approach. To maximize the value of the firm, these monetary values must(prenominal) be incorporateled. These thus include the credit government expanses, b/d losses and hazard exists of the funds tied up in receivable. The aim of credit management should be to regulate and conquer these apostrophizes, not to eliminate them altogether. The approach can be reduced to zero, if no credit is granted. lone whatever(prenominal) if the profit foregone on the judge volume of sales arising due to the\r\nextension of credit.\r\nDebtors involve funds, which have an opportunity address.\r\n therefore, the investment in receivables or debtors should be optimized. Extending liberal credit stires sales and thus pass ons in high profitability but the change magnitude investment in debtors results in increasing cost. and so a trade off should be sought between cost and benefits to bring investment in debtors at an optimum level. Of course the level of debtors, to a great uttermost is influenced by outer components such as persistence norms, level of business activity, seasonal worker factors and the degree of completion. But there are a lot of inner(a) factors include credit harm, standards, limits and hookup procedures. The internal factors should be well administered to optimize the investment in debtors.\r\n159\r\n assent Management\r\nIn drift that the credit sales are praiseworthyly managed it is\r\nnecessary to determine take placeing factors:\r\n1.\r\n opinion insurance\r\n2.\r\n reference Evaluation of individualist Buyers\r\n3.\r\n ascribe Sanction Decisions\r\n4.\r\nControl and Monitoring of Receivables\r\n credit rating constitution\r\nThe commen cementum stage of credit sales is to determine form _or_ system of government in which most authorized variable is whether credit sales should be make or not and if yes to what extent i.e. what region of sales should be done on cash and what section on credit. The discussion with cement companies marketing and financé section cl primordial suggest that the credit policy is to a greater extent subject upon market forces and less on go with specially in heads when there is excessive opposition which has happened a upshot of times in the biography of cement perseverance after decontrol and manufactures have been forced to provide credit if they wa nted full utilization of capacity. If in the market there is practice of providing credit, those companies who do not fall in cablegram have trim down sales and so unhopefuler utilization of instilled capacity. The management has to weigh whether it should avoid risk of realization and business of arranging funds for big sales on credit or decide for reduced capacity utilization thereby resulting in higher(prenominal) cost per tonne of cement produced.\r\nclx\r\nActually the policy should be establish on cost benefit abstract of these factors but oft policy is decided without detailed calculations. In material practice when one waits to push sales the marketing department pressurizes the management to provide liberal credit to buyers to realize sales targets.\r\n assurance Rating\r\nThe morsel virtual point of credit policy is to whom to\r\n cause credit and whom it should be denied. Whether it should\r\nbe given to everyone or on selective basis? As per standards one can utilization\r\nimpact of credit sales on lettuce by undermentioned formulae:\r\n∆P = ∆S (1-V) †K * ∆I †B, ∆S\r\nin the higher up formula\r\n∆P = Change in profit\r\n∆S = Change in sales\r\nV = Ratio of variable cost to sales\r\nK = comprise of capital i.e. interest cost of credit\r\n∆I = Increase in receivables investment\r\nB = Bad debts balance on additional sales\r\nThe change in profits (∆P) is pendant upon proportion of\r\nvariable cost and fixed cost and change in sales. The figure is worked out by deducting variable cost from sales i.e. sales disconfirming variable cost is change in profits.\r\nThe preceding(prenominal) formula appears to be very simple but for policy purposes it requires that policy reach outr should be able to estimate precisely the impact of credit on sales value, the variable cost and defective debts anyhow the cost of capital. In practice besides the cost of capital, it is very diffi cult to measure extent of attach in sales as a result of credit and it is only broad estimate of sales department. Similarly, it is very difficult if not impossible to workout likely bad debts. The variable cost can be worked out with great precision if fitting costing system is maintained. Because of difficulties in quantifying various variables in the formulae often credit policy is decided without operative flesh out on prevailing market conditions and the need of the companionship to push sales at a point of time. It has been by various companies that no details are worked.\r\nCredit Period\r\nThe credit decimal point is the time distance for which seller\r\nagrees to provide credit to the buyers. It varies according to the practice of trade and varies between 15 to 60 days. In some cases for an early payment pre-agreed tax write-off is given to induce buyer take up an early payment. For late payment in the understanding there is provision for interest payment by buyer . If credit is given for longstanding expiration it induces to push up sales but this is true only when one provides longer period credit than competitors. The customer-distributor, dealer, consumers is\r\nattracted to a firm who provides longer period credit. The\r\nimpact of credit on profits and sales can be worked out from the spare-time activity formula:\r\n∆P= ∆S (1-V)*K*∆1-b, ∆S\r\nThe various components are as under :\r\n162\r\n∆ P= Change in profit\r\n∆ S= Change in sales\r\n∆ 1= Change in investments receivables\r\nV= Ratio of variable cost to sales\r\nK= live of vainglorious credit\r\nb= bad debits ratio to change magnitude credit\r\nThe discussion with the attention suggests that they\r\nrarely take decision on period of credit ground on formula. It is market conditions and practices in the trade, which decides the period of credit and hardly any calculations of cost are done. In practice it is marketing department whose advice plays an important and decision making role. In the period when sales have to be pushed up more than credit is provided and there is no uniform policy overtime. During rainy season (July-Sep.) when crave is more often than not slack more liberal credit is granted than rest of the year.\r\nFurther, when stocks accumulate due to dumb sales, producers accept the terms of their customers and traders about the period of credit but when market conditions are tight, the seller becomes more strict in providing credit.\r\nOptimum Credit Policy\r\nCredit policy refers to those decision variables that\r\ninfluence the amount of trade credit i.e. the investment in\r\nreceivables. The firm’s investment in receivable are affected by general economic conditions, industry norms, pace of\r\ntechnological change, competition etc. though the firm has no control on these factors, yet they have a great impact on it and it can legitimately influence the level of trade credit through its 163\r\ncredit policy within their constraints imposed externally. The purpose of any commercial enterprise is the earning of profit. Credit itself is utilized to increase sales, but sales must return a profit. Further, whenever some external factors change, the\r\nfirm can accordingly adopt its credit policy. R.J. Chambers\r\nsays, â€Å"The responsibility to administer credit and solicitation policies whitethorn be assigned to a fiscal decision maker or marketing executive or both of them jointly depending upon the original structure and the objectives of the firm.”\r\n different types of credit policy are:\r\n1.\r\nLoose or Expansive Credit Policy†Firms following this\r\npolicy tend to sell on credit to customers very liberally. Credits are granted even to those whose credit worthiness is not\r\nproved, not known and are doubtful.\r\nAdvantages of Loose or Expansive Credit Policy:\r\n(i)\r\nIncrease in Sales (higher sales),\r\n(ii)\r\nIncrease in profit (higher profit),\r\nDisadvantages of Loose or Expansive Credit Policy:\r\n(i)\r\nHeavy bad/debts.\r\n(ii)\r\nProblem of liquidity\r\n(iii)\r\nIncrease in cost of credit management.\r\n2.\r\n mingy or Restrictive Credit Policy†Firms following this\r\npolicy are very selective in extending credit. They sell on credit, only to those customers who had proved credit worthiness.\r\nAdvantages of Tight of Restrictive Credit Policy:\r\n(i)\r\ndownplay cost.\r\n(ii)\r\nMinimize chances of bad debts.\r\n164\r\n(iii)\r\nHigher sales in long run.\r\n(iv)\r\nHigher profit in long run.\r\n(v)\r\nDo not pose the serious problem of liquidity.\r\nDisadvantages of Tight or Restrictive Credit Policy:\r\n(i)\r\nRestrict Sales.\r\n(ii)\r\nRestrict good Margin.\r\nBenefits of Credit fender:\r\n(i)\r\nIncreases the sales of the firm.\r\n(ii)\r\nMakes the credit policy liberal.\r\n(iii)\r\nIncrease the profits of the firm\r\n(iv)\r\nThe market value of the firms share would rise.\r\nCost of Credit Extensi on:\r\n(i)\r\nBad debt losses\r\n(ii)\r\n ware and selling cost.\r\n(iii)\r\nAdministrative expenses.\r\n(iv)\r\nCash discounts and opportunity cost.\r\nCost Benefit shift off Profitability\r\n one hundred sixty-five\r\nAspects of Credit Policy:\r\n(i)\r\nCredit terms\r\n(a)\r\nCredit Period\r\n(b)\r\nCash Discounts\r\n(ii)\r\nCredit Standard\r\n(iii)\r\n accretion policy or collection efforts.\r\n(i)\r\nCredit terms †The stipulations under which the\r\nfirm sells on credit to its customers are called credit terms. (a)\r\nCredit Period †The time distance for which credit is\r\nextended to the customers is referred to as credit period. It is the length of time for customers under which they are allowed to pay for their purchases. It is generally varies between 15-60 days. When a firm does not extend any credit the credit period would obviously be zero. It is generally stated in terms of a net date, for example, if firm allows 30 days of credit with no\r\ndiscount to ind uce early payments credit then its credit terms are stated at ‘net 30’. usually the credit period of the firm is governed by industry norms, but firms can extend credit for longer duration to stimulate sales. If the firm’s bad debts build up, it whitethorn tighten up its credit policy as against the industry norms.\r\nAccording to Martin H. Seidhen, â€Å"Credit period is the duration of time for which trade credit is extended. During this period the overdue amount must be paid by the customer. The length of credit period directly affects the volume of investment in receivables and indirectly the net worth of the company. A long credit period may blast sales but it also\r\n166\r\nincrease investment in receivables and lowers the choice of trade credit.”\r\n(b)\r\nCash Discounts †It is the an different aspect of credit terms.\r\nMany firms offer to grant cash discount to their customers in order to induce them to pay their measurement early. The c ash discount terms indicate the rate of discount and the period for which discount has been offered. If a customer does not avail this offer, he is evaluate to make the payment by the net date. In the talking to of Martin H. Seiden â€Å"Cash Discount prevents\r\ndebtors from victimization trade credit as a source of Working\r\nCapital.”\r\nLiberalizing the cash discount policy may mean that the\r\ndiscount percentage is change magnitude and or the discount period is lengthened. Such an action tends to enhance sales (because the discount is regarded as price reduction), reduce the number collection period (as customers pay promptly). Cash Discount is a premium on payment of debts before due date and not a\r\ncompensation for the so †called prompt payment.\r\n(iii)\r\nCredit Standard †The credit standard followed by the firm has an impact of sales and receivables. The sales and receivables level are likely to be high, if the credit standard of the firm are con genatorly low. In contrast, if the firm has relatively low credit standard, the sales and receivables level are expected to be relatively high. The firms credit standard are influenced by troika â€Å"C” of credit. (a) purpose †the willingness of the customers to pay, (b) Capacity †the ability of the customers to pay, and (c) motive †the prevailing economic conditions.\r\nNormally a firm should lower its credit standards to the extent profitability of increased sales exceed the associated costs. The cost arising due to credit standard realization are administrative cost of supervising additional accounts and servicing increased volume of receivables, bad debt losses, production and selling cost and cost resulting from the vagueer middling collection period.\r\nThe extent to which credit standard can be liberalized should depend upon the duplicate between the profits arising due to increased sales and cost to be incurred on the increased sales.\r\n(iii) accumulation policy- This policy is needed because all customers do not pay the firm’s bill in time. There are certain customers who are slow payers and some are non-payers.\r\nTherefore the collection policy should aim at accele order collections from slow payers and non-payers and reducing bad debt losses. According to R.K. Mishra, â€Å"A collection policy should incessantly systematization emphasize in promptness, collection efforts.\r\nIt mode will and have a psychological effect upon the customers, in that, it will make them realize the stead of the seller towards the obligations granted.”\r\nThe collection programme of the firm aimed at timely collection of receivables, any consist of many a(prenominal) things like monitoring the state of receivable, despatch of letter to customers whose due date is approaching, telegraphic and telephone advice to customers roughly the due date, threat of legal action to overdue accounts, legal action against overdue acco unts.\r\nThe firm has to be very cautious in taking the stairs in order to collect from the slow paying customers. If the firm is strict in its collection policy with the steadfast customers, who are temporarily slow payers due to their economic conditions, they will get offended and may shift to competitors and the firm may loose its permanent business. In following an optimal collection policy the firm should compare the cost and benefits. The optimal credit policy will maximize the profit and will consistent with the objective of maximizing the value of the firm.\r\nCredit Evaluation\r\nBefore granting credit to a prospective customers the financial executive must judge, how credi dickensrthy is the customer. In judging the creditworthiness of a customer, often financial executive keep in mind as basic criteria the four (i) Capital â€refers to the financial resources of a company as indicated primarily by the financial report of the firm. (ii) Capacity †refers to the ab ility of the customers to pay on time. (iii) Character †refers to the reputation of the customer for honest and fair dealings. (iv) corroboratory †represents the security offered by the customer in the form of mortgages.\r\nCredit evaluation involves a large number of activities ranging from credit investigation to contact with customers, appraisal review, follow up, inspection and recovery. These activities required decision-making skills which can partly be developed through experience but partly it has to be learned externally. This is particularly true in area of pre-credit appraisal and post-credit follow up.\r\nIt is an important element of credit management. It helps in establishing credit terms. In assessing credit risk, two types of error occur †(i) A good customer is misclassified as a poor credit risk. (ii) A bad customer is misclassified as a good credit risk.\r\nBoth the errors are costly. typecast (i) leads to loss of profit on sales to good customer who are denied credit. Type (ii) leads in bad debt losses on credit sales made to risky customer. While misclassification errors cannot be eliminated wholly, a firm can mitigate their occurrence by doing proper credit\r\nevaluation.\r\nThree broad approaches use for credit evaluation are:\r\nA.\r\n conventional Credit psycho outline †This approach to credit analysis calls for assuming a prospective customer in terms of 5 of credit: (i) Character, (ii) Capacity, (iii) Capital, (iv) Collateral, and (v) Conditions.\r\nTo get the selective information on the 5 firm may rely on the\r\nfollowing.\r\n1.\r\nfiscal statements\r\n2.\r\nBank references\r\n170\r\n3.\r\n4.\r\nCredit agencies\r\n5.\r\nExperience of the firm\r\n6.\r\nB.\r\nTrade references\r\nPrices and yields on securities\r\nSequential Credit outline †This method is more\r\nefficient method than higher up method. In this analysis,\r\ninvestigation is carried further if the benefits of such analysis outweighs its cost.\r\nC.\r\nNumerical Credit Scoring †This system involves the\r\nfollowing steps.\r\n1.\r\nIdentifying factors relevant for credit evaluation.\r\n2.\r\nAssign weights to these factors that reflect their relative\r\nimportance.\r\n3.\r\nRate the customer on various factors, using a suitable\r\n paygrade scale (usually a 5 pt. subdue or a 7pt. Scale is utilize).\r\n4.\r\nFor each factor, multiply the factor rating with the factor\r\nweight to get the factor malt whisky.\r\n5.\r\nAdd all the factors score to get the overall customer\r\nrating magnate.\r\n6.\r\nBased on the rating index, classify the rating index.\r\nD. Discriminant Analysis †The credit index described above is somewhat ad hoc in nature and is based on weight which are\r\nsubjective in nature. The nature of discriminate analysis may be employed to construct a better risk index.\r\nUnder this analysis the customers are divided into two\r\ncategories:\r\n1.\r\nwho pay the dues (X)\r\n171\r\n2.\r\nwho ha ve defaulted (O)\r\nThe straight line seems to decompose the x’s from o’s, not completely but does a fairly good stage business of segregating the two groups.\r\nThe equation of this straight line is\r\nZ = 1 Current Ratio + 0.1 return on equity\r\nA customer with a Z score less than 3 is deemed credit\r\nworthy and a customer with a Z score less than 3 is considered not credit worthy i.e. the higher the Z score the stronger the credit rating.\r\n(V)\r\n fortune Classification Scheme †On the basis of information\r\nand analysis in the credit investigation process, customers may be classified into various risk categories.\r\n run a risk Categories\r\nDescription\r\n1. nodes with no risk of default\r\n2. node with negligible risk of default\r\n(< 2%)\r\n3. node with less risk of default\r\n(2% to 5%)\r\n4. guest with some risk of default\r\n(5% to 10%)\r\n5. customer with significant risk of default\r\n(> 10%)\r\nCredit Granting Decision †After ass essing the credit\r\nworthiness of a customer, next step is to take credit granting decision.\r\nThere are two possibilities:\r\n(i)\r\nNo repetition of order.\r\nProfit = P (Rev-Cost) †(1-P) Cost\r\n172\r\nWhere P is the chance that the customer pays his\r\ndues, (1-P) is the probability that the customer defaults,\r\nRev is revenue for sale and cost is the cost of goods sold.\r\nThe expected profit for the fend credit is O. Obviously,\r\nif the expected profit of the course of action offer credit is positive, it is desirable to extend credit otherwise not.\r\nCustomer pays (Rev-cost)\r\nOffer credit\r\nCustomer default (1-P)\r\nRefuse credit\r\n(ii)\r\nRepeat wander †In this case, this would only be accepted\r\nonly if the customer does not default on the first order. Under this, once the customer pays for the first order, the probability that he would default on the second order is less than the\r\nprobability of his defaulting on the first order. The expected profi t of offering credit in this case.\r\n pass judgment profit on initial order + opportunity of payment\r\nand repeat order x expected profit on repeat order.\r\n[P1 (Rev1 †Cost1)-(1-P1) Cost1] + P1 x [P2(Rev2-Cost2)-(1P2) Cost2] The optimal credit policy, and hence the optimal level of\r\naccounts receivable, depends upon the firm’s own unique\r\n in operation(p) conditions. Thus a firm with excess capacity and low variable production cost should extend credit more liberally and carry a higher level of accounts receivable than a firm\r\noperating a full capacity on a slim profit margin. When a sale is made, the following events occur:\r\n173\r\n(1)\r\nInventories are reduced by the cost of goods sold.\r\n(2)\r\nAccounts receivable are increased by the sales price, and\r\n(3)\r\nThe differences is recorded as a profit. If the sale is for\r\ncash.\r\n in the main two methods have been commonly suggested\r\nfor monitoring accounts receivable.\r\n(1)\r\nTraditional glide p ath\r\n(a)\r\n(b)\r\n(2)\r\n reasonable collection period\r\n maturement Schedule\r\n army\r\nMargin\r\napproach\r\nor\r\nPayment\r\nPattern\r\nApproach\r\n(a)\r\n add up Collection Period (AC): It is also called Day\r\nSales gravid (DSOI) at a given time ‘t’ may define as the ratio of receivable dandy at that time to average day by day sales figure.\r\nACP =\r\nAccounts receivable at time â€Å"t”\r\nAverage daily sales\r\nAccording to this method accounts receivable are\r\ndeemed to be in control if the ACP is equal to or less than a certain norm. If the value of ACP exceed the specified norm, collections are considered to be slow.\r\nIf the company had made cash sales as well as credit\r\nsales, we would have heavy on credit sales only, and\r\ncalculate average daily credit sales.\r\nThe widely apply index of the efficiency of credit and\r\ncollections is the collection period of number of days sales\r\n174\r\noutstanding in receivable. The receivable d isorder is simply ACP/360 days.\r\nThus if receivable disturbance is six times a year, the\r\ncollection period is necessarily 60 days.\r\n(b)\r\nAging Schedule †An agedness memorial breaks down a\r\nfirm’s receivable by age of account. The purpose of classifying receivables by age group is to gain a encompassing(prenominal) control over the quality of individual accounts. It requires difference back to the receivables’ ledger where the dates of each customer’s\r\npurchases and payments are available.\r\nTo evaluate the receivable for control purpose, it may be\r\nconsidered desirable to compare this information with precedent age classification in that very firm and also to compare this information with the experience of other firms of same nature. Financial executives get such catalogue get tod at periodic\r\nintervals for control purpose.\r\nSo we can say Aging Schedule classifies outstanding\r\naccounts receivable at a given point of time into d ifferent age brackers. The actual age schedule of the firm is compared\r\nwith some standard ripening schedule to determine whether\r\naccounts receivable are in control. A problem is indicated if the actual maturement schedule sights a greater proportion of receivable, compared with the standard aging schedule, in the higher age group.\r\nAn inter firm comparison of aging schedule of debtors is\r\npossible provided entropy relating to calendar periodical sales and collection experience of\r\n private-enterprise(a) firm are available. This spear,\r\n175\r\ntherefore, cannot be used by an external analyst who has got no approach to the details of receivable.\r\nThe above both approaches have some deficiencies. Both\r\nmethods are influenced by pattern of sales and payment\r\nbehaviour of customer. The aging schedule is distorted when\r\nthe payment relating to sales in any month is unusual, even\r\nthough payment relating to sales in other months are normal. II.\r\nPayment Pattern Approach †This pattern is developed to\r\nmeasure any changes that susceptibility be occurring in customer’s\r\npayment behaviour.\r\nIt is defined in terms of proportion or percentage. For\r\nanalyzing the payment pattern of several months, it is\r\nnecessary to prepare a conversion matrix which shows the\r\ncredit sales in each month and the pattern of collection\r\nassociated with it.\r\nThe payment pattern approach is not dependent on sales\r\nlevel. It focuses on the key issue, the payment behaviour. It enables one to analyze month by month pattern as against the combined sales and payment patterns.\r\nFrom the collection pattern, one can judge whether the\r\ncollection is improving, stable, or deteriorating. A secondary analysis is that it provides a historical record of collection percentage that can be useful in projecting periodical receipts for each budgeting period.\r\nControl of Accounts Receivable\r\n rough of the important techniques for controlli ng\r\naccounts receivable are ratio analysis, discriminate analysis, 176\r\ndecision tree approach, and electronic selective information processing.\r\nInformation system with regard to receivables disorder, age of each account,\r\nprogress of collection size of bad debt losses, and number of delinquent accounts is also used as one of the\r\ncontrol measures.\r\nRatio analysis is widely used in the control of accounts\r\nreceivable. Some of the important ratios used for this purpose are discussed below:\r\n(1)\r\nAverage collection Period (Receivables x 365/yearly\r\nCredit Sales):\r\nThe average collection period indicates the average time\r\nit takes to transform receivables into cash. Too low an average collection period may reflect an excessively restrictive credit policy and suggest the need for relaxing credit standards for an acceptable account. On the other hand too high an average\r\ncollection period may indicate an excessively liberal credit policy leading to a large n umber of receivables macrocosm past due and some being not collectable.\r\n(2)\r\nReceivables\r\nTurnover\r\nSales/Receivables):\r\n(Annual\r\nCredit\r\nThis ratio also indicates the slowness of receivables. Both\r\nthe average collection period ratio and receivables ratio must be analyzed in social intercourse to the billing terms given on the sales. If the turnover rates are not satisfactory when compared with\r\nprior experience, average industry turnover and turnover\r\nratios of comparable companies in the same industry, an\r\nanalysis should be made to determine whether there is any\r\n177\r\nlaxity in the credit policy or whether the problem is in\r\ncollection policy.\r\n(3)\r\nReceivables to Sales (Receivables/Annual Credit Sales x\r\n100)\r\nReceivables can be expected to fluctuate in direct relation\r\nto the volume of sales, provided that sales terms and collection practices do not change. The tendency towards more lenient\r\ncredit extension as would be suggested by rest of\r\ncollections and increase in the number of slow paying accounts needs to be detected by carefully watching the relationship of receivables to sales. When credit sales figures for a period are not available, total sales figures may be used. The receivables figures in the calculation usually represent year-end\r\nreceivables. In the case of firms with seasonal sales, year-end receivables figures may be deceptive. Therefore, an average of the monthly closing balances figures may be more reliable.\r\n(4)\r\nReceivables as percentage of Current\r\n(Receivables/Total Current Assets Investment)\r\nAssets\r\nThe ratio explains the amount of receivables per rupee of\r\ncurrent asset investment and its size in current assets.\r\nComparison of the ratio over a period offers an index of a\r\nfirm’s changing policies with regard to the level of receivables in the\r\nworking capital.\r\nSome other ratios are:\r\n1.\r\nsizing of receivable = receivable/total current assets\r\n2 .\r\nSize of debtors = debtors/total current assets\r\n178\r\n3.\r\nSize of loans and advances = loans and advances/total\r\ncurrent assets\r\nThe size of receivables of selected companies has been\r\ngiven in table 5.1\r\nTable 5.1\r\nSize of Receivables of the makeed cementum Companies\r\nfor the old age from 2003-04 to 2007-08\r\n yr\r\nACC\r\nMangalam Gujarat\r\nAmbuja\r\n0.52\r\n0.35\r\n0.43\r\n0.35\r\n0.46\r\n0.52\r\n0.43\r\n0.54\r\n0.38\r\n0.54\r\n0.44\r\n0.46\r\nShree\r\ncementum\r\n0.58\r\n0.55\r\n0.63\r\n0.61\r\n0.66\r\n0.61\r\nIndia\r\n cement\r\n0.54\r\n0.72\r\n0.79\r\n0.84\r\n0.87\r\n0.75\r\nIndustry\r\nAverage\r\n0.53\r\n0.53\r\n0.61\r\n0.61\r\n0.62\r\n0.58\r\n2003-04\r\n0.68\r\n2004-05\r\n0.61\r\n2005-06\r\n0.67\r\n2006-07\r\n0.64\r\n2007-08\r\n0.62\r\n political party 0.64\r\nAverage\r\n germ: Based on selective information provided annual spread overs of the cement companies.\r\nThe size of receivable of all the cement companies shows move crusade throughout the field of honor period except Gujarat Ambuja, and Shree. Both the companies show increasing slue. The minimum size of receivable in ACC is 0.61 (2004-05), Mangalam is 0.38 (2007-08), Gujarat Amubja is 0.35 (2003-04\r\nand 2004-05), Shree cement is 0.55 (2004-05) and in India cement is 0.54 (2003-04). The maximal size of receivable in ACC is 0.66 (2003-04), Mangalam is 0.52 (2003-04), Gujarat\r\nAmbuja is 0.54 (2007-08), and Shree cement is 0.66 (2007-08) and in India cement is 0.87 (2007-08). The subject field of the composition of receivables is a very important tool to evaluate the management of receivables. It assists to show the point where receivables are concentrated most.\r\nThe size of sundry debtors in cement manufacturing companies in India has been computed and presented in the\r\ntable 5.2.\r\nTable 5.2\r\nSize of Sundry Debtors of the Selected Cement Companies for the old age from 2003-04 to 2007-08\r\nShree\r\nCement\r\n0.22\r\nIndia\r\nCement\r\n0.11\r\nI ndustry\r\n0.21\r\nMangalam Gujarat\r\nAmbuja\r\n0.34\r\n0.05\r\n2004-05\r\n0.29\r\n0.32\r\n0.05\r\n0.33\r\n0.08\r\n0.22\r\n2005-06\r\n0.32\r\n0.34\r\n0.07\r\n0.32\r\n0.11\r\n0.23\r\n2006-07\r\n0.28\r\n0.31\r\n0.08\r\n0.27\r\n0.14\r\n0.22\r\n2007-08\r\n0.27\r\n0.21\r\n0.09\r\n0.26\r\n0.12\r\n0.19\r\n friendship 0.28\r\n0.30\r\n0.07\r\n0.28\r\n0.11\r\n0.21\r\nYear\r\nACC\r\n2003-04\r\n0.19\r\nAverage\r\n rootage: Based on data based on Annual Report of Cement companionship\r\nIt is ostensible from the table 5.2 that the size of sundry debtors in ACC, India Cement, Mangalam and Shree show\r\n move trend throughout the take period. contribution to current assets was highest to 0.32 in ACC in 2005-06 and highest 0.33 in Shree in 2004-05. Gujarat Ambuja shows increasing trend throughout the study period. The percentage of sundry debtors to current assets where reduced shows that in those eld the speed of increase in current assets was much more than that of the sundry debtors. The s ize of receivable of all the cement companies shows fluctuating trend throughout the study period except Gujarat Amubja.\r\nThe minimum size of receivable in ACC is 0.21 (2003-04), Mangalam is 0.21 (2007-08), Gujarat Ambuja is 0.05 (2003-04 and 2004-05), Shree cement is 0.22 (2003-04) and in India Cement is 0.08 (2004-05). The maximum size of receivable in ACC is 0.32 (2005-06), Mangalam is 0.34 (2003-04 and 2005-06), Gujarat Ambuja is 0.09 (2007-08), and Shree Cement is 0.33 (2004-05) and in India\r\nCement is 0.14 (2006-07).\r\nThe average collection period of selected cement companies has been given in table 5.3\r\nTable 5.3\r\nAverage Collection Period in Selected Cement Companies\r\nfor the years from 2003-04 to 2007-08\r\n(in days)\r\nYear\r\nACC\r\nMangalam\r\nGujarat Ambuja\r\nShree\r\n1999-00\r\n34\r\n36\r\n7\r\n46\r\nIndia\r\nCement\r\n18\r\n2000-01\r\n43\r\n36\r\n7\r\n47\r\n20\r\n2001-02\r\n43\r\n33\r\n8\r\n49\r\n22\r\n2002-03\r\n41\r\n27\r\n10\r\n48\r\n37\r\n2003-04\r\n 26\r\n28\r\n10\r\n37\r\n47\r\nCompany\r\n39\r\n32\r\n8\r\n45\r\n29\r\nAverage\r\nSource: Based on data provided in appendage\r\nThe minimum Average Collection Period in ACC is 34\r\n(2003-04), Mangalam is 27 (2006-07), Gujarat Ambuja is 7 (200304 and 2004-05), Shree Cement is 37 (2007-08) and in India Cement is 18 (2003-04). The maximum Average Collection\r\nPeriod in ACC is 43 (2004-05 and 2005-06), Mangalam is 36\r\n(2003-04 and 2004-05), Gujarat Ambuja is 10 (2006-07) and 2007-08), and Shree Cement is 49 (2005-06) and in India Cement is 47 (2007-08).\r\n181\r\nThe Creditor turnover of selected cement companies has\r\nbeen given in the table 5.4.\r\nTable 5.4\r\nCreditor turnover of Selected Cement Companies\r\nor the years from 2003-04 to 2007-08\r\nShree\r\n11.10\r\nMangalam Gujarat\r\nAmbuja\r\n8.77\r\n1.12\r\n1.63\r\nIndia\r\nCement\r\n1.40\r\nIndustry\r\nAverage\r\n4.80\r\n2004-05\r\n12.60\r\n6.98\r\n0.71\r\n1.15\r\n1.38\r\n4.56\r\n2005-06\r\n12.93\r\n5.80\r\n0.63\r\n1.41\r \n1.09\r\n4.37\r\n2006-07\r\n12.19\r\n5.48\r\n0.95\r\n1.93\r\n0.97\r\n4.30\r\n2007-08\r\n13.42\r\n3.71\r\n0.73\r\n1.58\r\n0.90\r\n4.07\r\nCompany 12.45\r\n6.15\r\n0.83\r\n1.54\r\n1.15\r\n4.42\r\nYear\r\nACC\r\n2003-04\r\nAverage\r\nSource: Based on data based on Annual Report of the cement companies\r\nIt is evident from the table 5.4 that Creditor turnover in\r\nACC and Gujarat Ambuja and Shree fluctuating trend.\r\nMangalam and India Cement show decreasing trend all over the study period. The minimum Creditor turnover in ACC is\r\n1.10 (2003-04), Mangalam is 3.71 (2007-08), Gujarat Ambuja is 0.62 (2005-06), Shree Cement is 1.15 (2004-05) and in India\r\nCement is 0.90 (2007-08). The maximum Creditor turnover in\r\nACC is 13.42 (2007-08), Mangalam is 8.77 (2003-04), Gujarat\r\nAmbuja is 1.12 (2003-04), and Shree Cement is 1.93 (2006-07) and in India Cement is 1.40 (2003-04).\r\nThe debtors turnover in cement manufacturing companies in India has been computed and presented in thetab le 5.5.\r\n182\r\nTable 5.5\r\nSize of Receivable of Selected Cement Companies for the years from 2003-04 to 2007-08\r\nYear\r\nACC\r\n10.65\r\nMangalam Gujarat\r\nAmbuja\r\n10.21\r\n50.26\r\n2003-04\r\n2004-05\r\n8.58\r\n10.21\r\n2005-06\r\n8.45\r\n2006-07\r\n2007-08\r\nShree\r\n7.90\r\nIndia\r\nCement\r\n20.45\r\nIndustry\r\nAverage\r\n19.89\r\n52.07\r\n7.78\r\n17.85\r\n19.30\r\n11.19\r\n44,17\r\n7.47\r\n16.66\r\n17.59\r\n8.95\r\n13.64\r\n36.79\r\n7.67\r\n9.92\r\n15.39\r\n10.20\r\n13.06\r\n37.41\r\n9.94\r\n7.73\r\n15.67\r\nCompany 9.37\r\n11.66\r\n44.14\r\n8.15\r\n14.52\r\n17.57\r\nAverage\r\nSource: Based on data based on Annual Report of the Cement Companies\r\nIt is evident from the table 5.5 that the debtors turnover\r\nin ACC is fluctuating maintains approximately a fixed level. Mangalam and Gujarat Ambuja show fluctuating trend throughout the study period. Debtors turnover was highest to 13.64 in Mangalam and 9.94 in Shree in 2006-07 and 2007-08 respectively. India Cement s hows decreasing trend throughout the study period. The minimum debtors turnover in ACC is 8.45 (2005-06), Mangalam is 10.21 (2003-04 and 2004-05), Gujarat Ambuja is 36,79 (2002-03), Shree Cement is 7.47 (200506) and in India Cement is 7.73 (2007-08).\r\nThe maximum\r\ndebtors turnover in ACC is 10.65 (2003-04), Mangalam is 13.64 (2006-07), Gujarat Ambuja is 52.07 (2004-05), and Shree Cement is 9.94 (2007-08) and in India Cement is 20-45 (2003-04).\r\n183\r\nSelect References:\r\nO.M. Introduction to Financial Management (Homewood illnois: Richard D. Irwin, 1978).\r\nLawerence D. Schal and Charles W. Haley, Financial\r\nManagement, 3rd Edition. New York, McGraw Hill, 1973).\r\nS.E Bolten, Managerial pay, (Boston: Houghton Mitten Co., 1976).\r\nR.J. Chambers, Financial Management, (Sydney: GTE Law throw\r\nCompany Ltd,. 1967).\r\nJoseph L. Wood, ‘Credit and Collections’ in Daris Lillian, ed., Business Finance Handbook, (Englewood, Cliffs, New Jersey :\r\nPrentice Hall, 1962.\r\nMartin H. Seiden, The Quality of Trade Credit (New York :\r\nNational Bureau of Economic Research, 1964.\r\nTheodore N. Backman, Credit and Collection: Management and\r\nTheory (New York : McGraw Hill record book Company, 1962).\r\n184\r\n'