A STUDY ON RECEIVABLES MANAGEMENT

Dr. K.Baranidharan
Associate Professor in MBA
Sri Sairam Institute of Technology
West Tambaram, Chennai -600044.

N.Padmavathy
Research Scholar in MBA
Sri Sairam Institute of Technology
West Tambaram, Chennai -600044.

Abstract

The study is carried out to understand how effectively the company is managing the
debts from its customers and the liquidity position of the company in the
manufacturing industry. The objective of the study is to examine the receivable
management practices followed and the relationship between sales and receivables, to
foster the debtor’s turnover ratio, average collection period of receivables, to analyse
the reasons and to suggest some remedial measures for the delay in payment in the
company. The study will help the researcher to know about the receivable
management practices followed, the debt collection period and the liquidity position
of the firm. The study will also be useful for the investors who want to invest in the
company whether to know that they will get high rate of return or not.

Key word: Receivables, Effectiveness, Debtors, etc.

INTRODUCTION:

The term ‘Accounts Receivable’ is defined as ‘debt owed to the firm by customers
arising from sale of goods or services”. The word ‘Account Receivables’ is also
known as ‘Sundry Debtors’ or ‘Trade Debtors’ or ‘Book Debts’. The objectives of
Receivable Management are to increase the volume of sales, to ensure credit
worthiness or financial soundness of the concern and to measure the effective handling
of accounts Receivables. The study of accounts receivable management on financial
performance is important due to the fact that most firms have be liquidated as a result
of poor management of accounts receivables. The accounts receivable forms part of
the working capital used in running day to day activities of business and so if not
managed properly can make a firm not meet its daily obligations. Accounts receivable
management directly contributes to a company’s profit because it reduces bad debt.

The company also has a better cash flow and higher available liquidity for use in
investments or acquisitions. For instance, in India trade debtors after inventories are
the major component of current assets. Receivables from about one-third part of
current assets and near about 11-15 per cent of the total business assets. Granting trade
credit and creating debtors result to the blocking of the firms funds loosing current
incomes.

REVIEW OF LITERATURE

Hitesh and Shukla J (2018) examined the Receivable Management of sample

companies using working capital ratios and ANOVA test. The authors found that there
was significant relationship between and within the groups of the sample companies.
The study found that the pharmacy industries were efficient in managing their
Receivables

Pedro Juan Garcia Teruel and Pedro Martinez Solano (2018) the SME firms have
efficiently managed their accounts receivable and inventories. The study used a
sample of small and medium-sized Spanish firms. However, the study also suggested
that the manager can only add more value to the company by reducing the cash
conversion cycle and by improving the firm’s profitability.

P.Nageswari & S. Parasuraman (2019) study the efficiency of the receivables

managed by the Cement Industry during the study period with help of a sample of ten
companies. They concluded that the cement industry was efficiently managing their
receivables and based on the future sales forecast, the sales turnover and profit would
be good in the near future

Manoj Anand (2019) analysed the firm's inventory, receivables and payables in order
to achieve a balance between risk and return and thereby contribute positively to the
creation of a firm value. The study has been designed to identify some quantitative
working capital benchmarks in order to help Corporate India to manage its working
capital more efficiently.

STATEMENT OF THE PROBLEM

The need for the study is that the company faces difficulties in receiving payments
from their customers and this widely affects the liquidity of the company. Today, the
problem of managing cash has got the recognition of separate entity so that the study
is made to analyse how effectively the company manages bad debts and this also made
to know the proportion of quality customers. Every firm has a set of credit terms and
policies under which goods are sold on credit and every policy has a cost and benefit
associated with it. This project attempts to study the debtor’s turnover ratio and the
average collection period of receivables. The issue on accounts receivable
management for the past four consecutive years has not been widely studied so that
the researcher undertaken the research to address the reasons for the delay in receiving
payment and to ascertain the trend for the profit over the years is favourable or not.

OBJECTIVES OF THE STUDY

 To examine the Receivables Management practices followed by TVS Sundram

Fasteners Limited.
 To examine the profit for the past four years.
 To analyze the Average collection period.

RESEARCH METHODOLOGY

The research design used in this project is analytical research. Analytical in nature
using which researcher has to use the facts or information already available and to
analyse these to make a critical evaluation of the performance. The study is made to
analyse the receivable management in TVS-sundaram Fasteners limited

TOOLS USED IN THE STUDY:

FINANCIAL ANALYSIS:
Ratio Analysis:

 Debt collection period

 Debtor turnover ratio

STATISTICAL ANALYSIS:

 Trend Analysis for profit

LIMITATIONS OF THE STUDY

 The study is limited only to TVS Sundaram Fasteners limited.

 Some information are considered highly confidential and thus the researcher
had to convince them that the purpose of information is for academic research
only and may not be used for any intentions.
 Accounts receivable keeps on changing from period to period depending on
prevailing economic situations and product market demand. The findings
therefore may not reflect the true effects of accounts receivables on financial
performance of the company
 The Findings of the study is applicable to TVS and cannot be generalized

DATA ANALYSIS AND INTERPRETATION

TABLE 2.1 SHOWING DEBTOR TURNOVER RATIO
NET CREDIT AVERAGE
YEARS SALES RECEIVABLES RATIO
(IN CRORES) (IN CRORES)

2015-2016 3474.2 541.29 6.41 times

2016-2017 3541.95 597.715 5.92 times

2017-2018 3887.81 723.875 5.37 times

2018-2019 4396.06 840.25 5.23 times

FORMULA:
Debtors Turnover Ratio = Net credit sales/
Average receivables
 YEARS DAYS IN A YEAR DEBTORS TURNOVER RATIO DAYS

2015-2016 365 6.41 56

2016-2017 365 5.92 61

2017-2018 365 5.37 67

2018-2019 365 5.23 69

INTERPRETATION:

From the table it is found that the Debtors Turnover Ratio in 2016 is 6.41, 2017 is
5.92, 2018 is 5.37, 2019 is 5.23. On average the company should collects its
receivables 6 times in a year. It can therefore be inferred that the debtor’s turnover
ratio has decreased year by year. A low and decreased receivables turnover ratio
indicates that a company’s collection of accounts receivable is inefficient and that the
company has a low proportion of quality customer

FIGURE 2.1 SHOWING DEBTOR TURNOVER RATIO

TABLE 2.1.1 SHOWING DEBTORS COLLECTION PERIOD

FORMULA: Debt Collection Period = Days in a year/Debtor’s turnover ratio

INTERPRETATION:

From the table it is found that the Debtors collection period in 2016 is 56 days, 2017 is
61 days, 2018 is 67 days, and 2019 is 69 days. A reducing period of time is an
indicator of increasing efficiency. Here the debtor’s collection period increases year
by year. It can therefore be inferred that an increase in the period of time indicates the
company inefficiency to collect its receivables and has a poor quality of debtor

FIGURE 2.1.1 SHOWING DEBTORS COLLECTION PERIOD

TABLE 2.2 SHOWING TREND ANALYSIS FOR PROFIT

YEAR(X) PROFIT(y) x= X- x² Xy
A

2016 125.08 -1 1 -125.08

2017 388.18 0 0 0

2018 388.17 1 1 388.17

2019 458.97 2 4 917.94

 Y= a+bx
N=4
Where, a = Ʃy b = Ʃxy
N Ʃx²
a = 1360.4 b = 1181.03
4 6
a = 340.1 b = 196.8

FINDINGS
Profit in 2015-2016
Y= a+bx
Y= 340.1+196.8(-1)
= 143.3
Profit in 2016-2017
Y= a+bx
Y= 340.1+196.8(0)
= 340.1
Profit in 2017-2018
Y= a+bx
Y= 340.1+196.8(1)
= 536.9
Profit in 2018-2019
Y= a+bx
Y= 340.1+196.8(2)
= 733.7
INTERPRETATION:

From the above it shows that the profit for 2015-2016 is 143.3, 2016-2017 is
340.1, 2017-2018 is 536.9 and 2018-2019 is 733.7. It can be inferred that the Profit
has increased year by year. An increase in profit shows that the company is more
efficient at converting sales into actual profit.

FIGURE 2.2SHOWING TREND ANALYSIS FOR PROFIT

FINDINGS:

 The company should collect its receivables 6 times in a year. The debtor’s
turnover ratio has decreased year by year. This indicates that the company’s
has a low proportion of quality customers
 Here the debtor’s collection period increases year by year. An increase in the
period of time indicates the company inefficiency to collect its receivables on
time.
 For the past 4 years the Profit has increased year by year. An increase in profit
shows that the company is more efficient at converting sales into profit

SUGGESSTIONS:

 Presenting clear payment terms and conditions and charging interest for
overdue can reduce the collection period from debtors.
 Adequate communication and automated remainder mails for the overdue
debtors may increase the chance of getting prompt payments
 Even though Profit increases the debtor collection policy should be strict in
order to receive proper payments.

CONCLUSION:

This study has analyzed how effectively the company manages its accounts
receivables. In this study the financial statement for past four years has been used to
understand the financial performance of the company year by year. This study helps to
understand the average collection period and debtor’s turnover ratio and the delay in
payment period. Through this study it was more convenient for the researcher to
understand the receivables management practices and the financial performance of the
company for the past four years effectively. Thus the study concludes that though
there is an increase in profit the company needs to strict the debtors collection policy
to stabilize its sales growth and the profitability of the company.
 REFRENCE:

 Adam, O.D. and Caroline, A.(2018), Effect of Accounts receivables Management On

Financial Performance in Small and Medium Firms In Mogadishu-
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2348-7585, Vol. 6, pp: 378383.
 Anastasia,N.D, Michael, C.E&Innocent, I.O.(2014),Accounts Receivable
Management and Corporate Performance of Companies in Food and Beverage
Industry: Evidence from Nigeria, European Journal of Accounting and Finance
Research, Vol. 2 No. 10, pp 34-47.
 Francis, M and Charles, Y.T(2018), Accounts Receivable Management and Financial
Performance of Embu Water and Sanitation Company Limited, Embu County, Kenya,
International
 Wanyoike, J.E (2017), Accounts Receivable Management Practices and Financial
Performance of Manufacturing Firms in Kenya, Academic Research Insight Journal,
Volume 1, Issue 1, pp.

 https://financialexpress.com/