Designation
Faculty Member
Office Address
House Address
Phone
0431 2520502/796
Fax
0431- 2520733
Mobile
9443349987
Kannadhasan_m@bim.edu
1
Electronic copy available at: http://ssrn.com/abstract=1819024
Abstract
No business can be successfully run without adequate amount of working capital which is
concerned with two factors namely, current assets to be held and the type of assets and the
methods by which these assets are financed. This occupies much of the finance managers time in
taking decisions. Investment in current assets represents a very significant portion of the total
investment in assets. The finance managers have to be very careful, while making any investment
decisions especially short term i.e. working capital. Empirical results show that ineffective
management of working capital is one of the important factors causing industrial sickness.
There is a direct relationship between a firms growth and its working capital needs. As
sales grow, the firm needs to invest more in inventories and debtors. The finance manager should
determine levels and composition of current assets, which will help to run the business smoothly.
Account receivables are one of the major components of working capital. Receivables are a direct
result of credit sales. The sale of goods on credit is an essential part of the modern competitive
economic system. The objective of credit sales is to promote sales and thereby achieving more
profits. At the same time, credit sales result in blockage of funds in accounts receivable.
Moreover, increase in receivables will increase the investments and also increases chances of bad
debts. Hence, if the receivables is managed effectively, monitored efficiently, planned properly
and reviewed periodically at regular intervals to remove bottle necks if any, the company cannot
earn maximum profits and increase its turnover. With this as the primary objective of the study,
the study made an effort to assess the receivables management. This study concludes that the
efficiency of the receivables management of this company was satisfactory.
2
Electronic copy available at: http://ssrn.com/abstract=1819024
INTRODUCTION
The major objective of any organisation is to make profits regularly. The objectives can
be achieved by making sufficient sales. This is possible only when there is no disruption in the
supply of required goods. The required goods may be supplied to the market, only if there is no
disruption in the production of these goods by the organization. There will be no disruption in the
production of goods only if there is sufficient machinery through permanent capital and if the
firm has enough working capital. Thus working capital forms the basis to make an organisation
successful by achieving its objectives.
Working capital is the life blood and controlling nerve of a firm. No business can be
successfully run without adequate amount of working capital. In ordinary parlance working
capital is taken to be the fund available for meeting day to day requirements of an organisation.
Working capital management is concerned with two factors namely, current assets to be held and
the type of assets and the methods by which these assets are financed. This occupies much of the
finance managers time in taking decisions. Empirical observations show that the financial
managers have to spend much of their time on the daily internal operations, relating to current
assets of the firm. As the largest portion of the financial managers valuable time is devoted to
working capital problems, it is necessary to manage working capital in the best possible way to
get the maximum benefit (Pandey, 2005). Thus, Investment in current assets represents a very
significant portion of the total investment in assets. The finance managers have to be very careful,
while making any investment decisions especially short term i.e. working capital. Empirical
results show that ineffective management of working capital is one of the important factors
causing industrial sickness (Yadav, 1986).
There is a direct relationship between a firms growth and its working capital needs. As
sales grow, the firm needs to invest more in inventories and debtors. The finance manager should
determine levels and composition of current assets, namely, Inventory, Receivables, Cash, and
Marketable securities, which will help to run the business smoothly. Account receivables are one
of the major components of working capital. The receivables are a result of credit sales which
helps to increase the profits. At the same time, credit sales result in blockage of funds in accounts
receivable and an increased chance of bad debts. In order to minimise the bad debts, it needs
careful analysis and proper management. Evaluating the credit worthiness of the customer is one
among the key factor in proper credit management. A mismatch can cause significant errors in
receivables management. Therefore the finance manager should always be careful and adapt the
proper evaluation before extending the credit facility to their customers.
Previously, the finance manager assessed the customers character such as, financial
position, liquidity position, collateral security offered and general economic conditions in which
business operates. Whereas, now a days, trade reference, credit bureaus, bank reference, balance
sheet information and direct information by sales men are the major indicators. However,
whatever may be method; it may not be proved hundred per cent fault free. In spite of this
problem, in the modern world, selling goods on credit is the most prominent force of the todays
business. The purposes of adopting this method are achieving growth in sales, increasing profits
and meeting competition which many research studies have proved. However, on the other hand,
the longer the period of credit, the greater level of debt, and greater the strain on the liquidity of
the company. Hence it is necessary to have receivables management in any organization and the
need for this study.
CR
LR
WTR
CSTS
DTR
ACP
CTR
APP
1999
1.156
0.940
18.26
0.75
30.71
12
2.915
125
2000
1.189
0.824
24.55
0.75
20.41
18
2.344
155
2001
1.396
0.875
13.32
0.80
10.92
33
2.607
140
2002
1.533
0.992
9.16
0.80
6.69
55
2.484
146
2003
1.287
0.814
15.23
0.85
6.00
57
2.231
163
Mean
1.312
0.889
16.104
0.79
14.945
35
2.516
146
SD
0.155
0.076
5.760
0.042
10.521
20.652
0.264
15.55
CV
11.805
8.577
35.768
5.295
70.39
59.001
10.502
9.979
Debtors Turnover Ratio (DTR): The debtors velocity indicates the number of times
the debtors are turned over during a year. Generally, the higher the value of debtors
turnover is the more efficient in the management of debtors. Similarly, lower debtors
turnover implies less efficient in the management of debtors and less liquid debtors. Here
the company, the debtors turnover ratio is decreasing every year, except 2001 and 2002
turnover more than 11 times. But at the latest, it comes to 6. It shows that the company
debtors level of turnover is somewhat satisfactory level. The correlation coefficient of
debtors and sales was positive and it reveals the amount of sales increases and the amount
of debtors also increases. The coefficient of correlation between debtors and sales of this
company was 0.95; this was tested through the following hypothesis.
H0 = Correlation between debtors and sales of this company is not significant.
Since the calculated value (5.51) is greater than the Critical value (2.132); Null
hypothesis is rejected and hence concluded that the correlation between debtors and sales
is significant.
Average Collection Period (ACP): This type of ratio for measuring the liquidity of a
firms debtors is the average collection period. This is, in fact, interrelated with, and
dependent upon, the receivables turnover ratio. It is calculated dividing the days in a year
by the debtors turnover. The table 1 shows that the firm average collection period is
increasing trend in every year. It is because of the stiff market competition and also
liberalizing the credit standards. On an average, the company is maintaining the credit
period was 35 days; the collection effort of this company was satisfactory level and it
needs more attention.
Creditors Turnover Ratio (CTR): It is a ratio between net credit purchases and the
average amount of creditors outstanding during the year. A low turnover ratio reflects
liberal credit terms granted by suppliers, while a high ratio shows that accounts are to be
settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can
reduce its requirement of current assets by relying on suppliers credit. As it can be
observed from the table 1, the ratio is decreasing trend. The highest ratio is 2.915 in 1999
and the lowest ratio is 2.231 in 2003 which implies that creditors tightening the credit
standards.
Average Payable Period: This shows the strength of the company that is avail maximum
credit for its purchases and allows less credit on its sales so as to make margin out of its
interest burden and cash out flow. The average payable period of this company varies
from 125 days to 163 days. Generally, the companys payable period should be greater
than the average collection period which will be appreciable. The company payable
management was good.
In addition to mean and SD, an effort has also been made to measure the consistency
among all eight parameters of receivables management more precisely by applying the coefficient
of variation (CV). The variable for which the CV is greater that indicates the variables is to be
more fluctuating or conversely less consistent, less stable or less uniform. On the other hand, the
variable for which the CV is less that indicates the variables is to be is regarded as less
fluctuating, more consistent, more stable or more homogenous. Table 1 reveals that out of the
eight different parameters of receivables management of the sample company, the CSTS is most
consistent and stable followed by LR, CTR, APP, CR, WTR, ACP and DTR respectively.
Amongst the eight variables, DTR and ACP are the highest variable and inconsistent.
Inventories /
Working
capital
Debtors /
Working
capital
1999
18.66841
4.950404
49.07153
27.309657
2000
30.75632
21.6854
12.80247
34.75580146
2001
37.31506
36.87615
12.41562
13.39317247
2002
35.25719
45.53621
5.820076
13.3865254
2003
36.7575
46.07504
6.277647
10.88981092
Mean
31.7509
31.02464
17.27747
19.94699345
The companys payable period should be greater than the average collection period which
will be appreciable. The company payable management was good and the company sales
performance is not desired level. It is because of cutthroat competition, poor collection
policy and other external factors.
As this business firm is a profit seeking one, it has to utilise all of its resources to achieve
this goal. This company is trying to enhance the value of its own and thereby that of its
shareholders. While searching for Profitability, the liquidity and solvency position are crucial
elements to be watched carefully. On the basis of the analysis and observation, an attempt is made
to offer some suggestions as below.
The average collection period should be maintained the same level because the debtors
collection period is found to be satisfactory. At the same time, this company payable period is
found to be very high, this will affect the liquidity position positively and it may be call for
low fewer investments in receivables will arrives. So the company should maintain a
proportional changes in collection policies in order strengthen the collection department.
There was decrease in trend in the net profit it is because of investment in all receivables
increased substantially. So the company should increase the sales level in order to achieve the
impressive profit.
CONCLUSION
It could be inferred from the above analysis that, the efficiency of the receivables
management of this company was satisfactory. The competition is a major challenge that every
finance manager encounters during their working capital decision making process for optimum
utilisation of scarce resources. To examine the effects of receivables management, it is important
to note the difference between liberalised credit period and the profitability. It is the change in the
investments in receivables level and costs involved in that creates crucial difference between
these two. Therefore, the finance manager should take into cognizance the effect of credit policy
to manage effectively, monitor efficiently, plan properly and review periodically to remove bottle
necks to reap maximum profits and increase its turnover.
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