Sub: Receivables (Sundry Debtors )Management

Transcription

1 Sub: Receivables (Sundry Debtors )Management The use of credit in our economy has increased dramatically over the last few decades. The predominance of cash sales exists only in certain segments, and situations where customers may purchase goods and services in exchange for promise to pay later are increasing. Determining credit terms and selecting credit customers and monitoring levels of account receivables thus becomes an important area of management decision making. Accounts Receivables constitute a significant portion of the total current assets of the business other than inventories. They are a direct consequence of Trade Credit which has become an essential marketing tool in modern business. Receivables are claims of the Company against its customers for the value of supplies effected and / or services rendered. Receivables are direct result of Credit Sales. Receivables are an inextricable though unwanted component of business finance. The causes of high receivables may be anything, but the effect on the performance of the company is suicidal. Increase in receivables more often than not increases chances of Bad Debts. Many a times, sale is directly influenced by the volume of credit allowed. Normally where the market is competitive, companies having large volumes of sales will be having larger level of receivables compared to a company with small volume of sales. The most popular measure of monitoring receivables is No. of days sales outstanding. Though the receivables amount is huge, a satisfaction is obtained by comparing receivables to the total sales and seriousness of outstanding is not felt where the volume of sales are high. Therefore the measurement of receivables through this method does not always represent the gravity or comfortability of the level of receivables. It is therefore required that the reliance of monitoring receivables should be laid on Target vs Achievement pattern approach. This method will be more realistic since it would have taken care of anticipated business environment and seasonal factors. Following are few factors that generally influence volume of receivables. i. Nature of market (Seller / Buyer ) ii. Volume of business iii. Solvency /Liquidity position of customers iv. Demand potential of customer product and nature of market in which they are operating v. Fiscal Policy of the Government vi. Trends in Industry, Economy and Geographical location vii. Behavior pattern of several customers segments viii. RBI Policy relating to Bank Credit ix. Seasonal factors affecting the industry x. Competitors Credit Policies and Strategies xi. Machinery and Methodology prevailing in the company for debt collection.

2 Apart from the above on certain occasions receivables keep soaring high solely due to delays and denials on the part of the banks in prompt remittance of funds realized, settlement of Bank Guarantee furnished as per terms thereof, meeting obligations of Letter of Credit due to avoidable procedure snags. In majority of Companies the decision as to where the operating responsibility for Credit and Collection (C&C) should be placed is not clear. For example: a) Should it be part of finance function because it effects liquidity and profitability? b) Does it belong to Sales because Credit and Collection decisions directly affect sales volume? c) To avoid over conservatism of finance and ultra liberalism of sales should it be a separate function. d) Should the operating responsibility for Credit Policy be given to finance and Collection Policy in to sales. In a few corporate sectors that are professionally managed to the core, the operating responsibility of C&C (Credit and Collection) operation is entrusted to a separate manager who either directly reports to CFO or CEO. The day-to-day credit decision is taken by the Credit Manager in the light of credit policy, makes the credit analysis, establishes credit limit and accepts or rejects potential customers depending on their credit rating. The right Credit Policy will encourage sales, increase profits and at the same time investment in receivables to a minimum. Credit Policy The basis of credit policy depends on: A) What is the acceptable level of receivables for the company? B) The influence of competition C) Nature of Product D) Steady or Seasonal Market E) Company s Marketing Strategy F) Working Capital availability Role of Credit Control Department The role of credit control department are: Periodical credit rating of customers Selection of appropriate payment terms. Controlling of Debtors Ledger. Collection from Debtors at the agreed time ensuring that trade will continue with customers. Collection of concessional forms Obtaining Bank Guarantee / Letter of Credit Raising and settlement of Insurance claims.

3 Categorisation of Debtors: Debtors are normally classified into the following 4 catergories: I. No Constraint debt Supplies made to the satisfaction of customers as per the terms of their purchase order but payment not received. II. Unit Constraint debt Supplies made but payment not received on account of technical reasons viz., - Short supplies - Rectifying the defective materials supplied - Arranging for erection and commissioning - Providing operational manuals and drawings. - Non receipt of goods by customers III. Marketing Constraint debt Supplies made but payment not received on account of administrative reasons viz., IV. Chronic Constraint Debt - Delivery date extensions - Order amendments - Submission of no loss certificates, inspection notes etc., Supplies made but payment not forthcoming on account of both technical and administrative reasons - Claims disputed - Difference in rate not agreed to - Penalty by way of liquidated damages - Interest levies - Company facing financial difficulties - Company under liquidation, - Court case etc.,

4 Collection Policy Apart from laying down the credit policy, collection policy of the company should be spelt out - The period when the dues are payable - Issue of communication to the customer i.e communication is issued just before and after the amounts become due for realization. - The tone and tenor in which the reminder should be issued - Personal follow up at various stages depending on volume of outstanding and types of problems. - Regular internal meetings between various levels concerned to discuss the outstanding. - Examining pros and cons of stoppage of supplies where the payment is not forthcoming - Threat of legal action - Legal action - Black listing of customers - Incentive policy for timely collection to curb the growth of aged outstanding. Reasons for non-recovery of outstanding resulting in accumulation of aged debts i. Lack of co-ordination amongst personnel right from the grass root level to the top management viz a. Non availability of the concerned personnel for timely deliberations b. Adoption of could not careless attitude to the executive to accept the responsibility of their predecessors. c. Lack of courage of conviction to accept responsibility of collection of debts particularly aged ones. d. Want of relentless pursuit of collection of aged outstanding till its logical conclusion e. Absence of team sprit and joint endeavour to achieve the common goal of collection of aged outstanding. f. Want of earnestness and dedication in collection of outstanding. ii. Customers reaction in making payments iii. Bank s inefficiency in transfer of funds from upcountry branches, settlement of bank guarantee and honoring letters of credit. iv. Failure to strictly comply with terms and conditions of the customers orders viz. a. Supplies made not as per the requirement of customers b. Supplies of defective materials requiring rectification c. Non supply of Technical Manual, Operating Instructions and Drawings d. Difference in rates. e. Non-adherence of delivery dates. f. Failure to obtain No loss certificate for delay in delivery

5 v. Absence of proper understanding of the importance and effect of speedy collection vi. Inadequate collection machinery vii. Inadequate systems and procedures for data maintenance and follow up viii. Lack of well articulated Credit Policy a. Complete thorough business and reference checks before offering credit to new customers. b. Set reasonable but fair credit limits. c. Instruct staff to notify where a customer wishes to exceed agreed credit limit. d. Approve additional credit extensions in advance. e. Include clear payment conditions in the terms of trade agreement ix. Lack of education about importance of collection at the following levels a. The goods dispatch clerk who passes on the advise to the invoicing section b. The invoicer who hands over the invoice to mail dispatch clerk c. Mail dispatch clerk who delivers invoices to attender for delivery / mail x. Absence of team spirit and not exhibiting of adequate involvement in discharging the assigned responsibilities for collection effort at the middle management level. xi. Non availability of concerned personnel for timely deliberation Skills required for collection A variety of skills are required for expeditious collection of dues from customers in the present credit oriented market. Mainly the skills could be categorized into: a. Managerial Skills b. Technical Skills c. Commercial Skills These skills are developed from out of experience on continuous basis. Managerial Skills Managerial Skills cover the following articulated responsibilities at various concerned levels a. Negotiating b. Planning c. Organizing d. Co-ordinating and Control e. Communicating f. Team Working g. Trouble Shooting

6 Technical Skills Technical Skills cover about a. Knowledge about the product b. Production Techniques c. Quality Requirements d. Customer Needs e. Product Training f. Resource Mobilization Commercial Skills Commercial Skills includes a. Credit Rating of Customers b. Credit Policy Formulation and implementation c. Understanding the customers organizations, their Financial position d. Understanding parameters of Working Capital Cycle e. Use of Financial Instruments viz., Hundis, LCs, Bill Discounting etc., f. Development of relations through good PR with Banks, Government Agencies, Financial Institutions etc., g. Firmness yet fairness in decisions, positive personality, confidence, humility and willingness to listen When a Debt or part of a Debt considered not recoverable A suitable provision is made in the books of accounts under the head Provision for Doubtful Debts when the following measures initiated failed to fetch the desired results A provision is also considered where a. Initial follow up reminders through telephone, mail, letters etc., b. Personal follow up c. Registered Post acknowledgement due reminder d. Threat of stoppage of further supplies e. Stoppage of supplies f. Threat of Legal Action g. Legal Action - Closure of Debtors Business on account of Death, Dissolution etc., - Debtors applied for IP(Insolvency Petition) - Debtors sustained heavy loss on account of Fire and other accidents - Confiscation of business by Government Authorities Normally dues from Government Company / Organizations, PSUs are not considered for provisions unless the dues are on account of the following

7 Collection Agencies i. Recovery of Interest ii. Recovery of Freight, Insurance as per terms of PO iii. Recovery of Liquidated damages attributable to delay in supplies of goods (where specific provision exists in terms of PO) iv. Dispute on account of deduction of Sales Tax, Excise Duty, Entry Tax etc., Like in advanced countries, agencies for collection and underwriting book debts are catching up in our country too. Business units can concentrate on more challenging areas of Production and Marketing when the function of Receivables is entrusted to specialized agencies. The quantum of commission payable to agencies would be a small percentage when compared to total outstanding, while it can be substantially lucrative from the angle of the agency. In the Indian environment it is far easier for a Private Agencies to incur and account for collection expenses than for the business units, which are subject to several Audits / Tax disallowances. Conclusion Receivable Management is not applicable only to Sales, Marketing and Finance but to the entire organization. In order to have Our money in our hands it should be the endeavour of all the concerned in the organization who come into contact with customers directly or indirectly to work together in order to minimize outstanding. Our Services Few professionals from various fields have joined together and floated a Special Purpose Vehicle Company M/s. SPV Resources Pvt. Ltd., to provide professionals services in various areas interalia Receivable Management Services offered i. Credit Rating of customers. ii. Credit Policy of the company. iii. Collection Policy of the company. iv. Controlling of Debtors Ledger. v. Classification of Debtors constraint wise. vi. Reminders to customers for payment. vii. Personal follow up of collection. viii. Initiation of legal action. ix. Coordinating court cases. x. Arranging Insurance cover on default / delayed payment. We could be contacted on telephone No (Please note that this is a guide only and should neither replace competent advice, nor be taken or relied upon as financial or professional advice. Seek professional advice before making any decision that could affect your business).