NAIL ARVIN Z.

MILLO
MBA- ACCOUNTING MANAGEMENT

RECEIVABLE MANAGEMENT
Accounts receivable is a legally enforceable claim for payment held by a
business for goods supplied and/or services rendered that customers/clients have
ordered but not paid for. These are generally in the form of invoices raised by a
business and delivered to the customer for payment within an agreed time frame.
Accounts receivable is shown in a balance sheet as an asset. It is one of a series
of accounting transactions dealing with the billing of
a customer for goods and services that the customer has ordered. These may be
distinguished from notes receivable, which are debts created through formal legal
instruments called promissory notes
Objective of accounts receivable management is to ensure that goods sold on
credit are paid back by customers as at when due.
Cost of Maintaining Receivables
Receivables are a type of investment made by a firm. Like other investments,
receivables too feature a drawback, which are required to be maintained for long that it
known as credit sanction. Credit sanction means tie up of funds with no purpose to solve
yet costing certain amount to the firm. Such costs associated with maintaining
receivables are detailed below: -
1. Administrative Cost -If a firm liberalizes its credit policy for the good reasons
of either maximizing sales or minimizing erosion of sales, it incurs two types of costs:
(A) Credit Investigation and Supervision Cost. As a result of lenient credit policy, there
happens to be a substantial increase in the number of debtors. As a result the firm is
required to analysis and supervises a large volume of accounts at the cost of expenses
related with acquiring credit information either through outside specialist agencies or
form its own staff. (B) Collection Cost A firm will have to intensify its collection efforts so
as to collect the outstanding bills especially in case of customers who are financially
less sound. It includes additional expenses of credit department incurred on the creation
and maintenance of staff, accounting records, stationary, postage and other related
items.
2. Capital Cost -There is no denying that maintenance of receivables by a firm
leads to blockage of its financial resources due to the tie log that exists between the
date of sale of goods to the customer and the date of payment made by the customer.
But the bitter fact remains that the firm has to make several payments to the employees,
suppliers of raw materials and the like even during the period of time lag. As a
consequence, a firm is liable to make arrangements for meeting such additional
obligations from sources other than sales. Thus, a firm in the course of expanding sales
through receivables makes way for additional capital costs.
3. Production and Selling Cost -These costs are directly proportionate to the
increase in sales volume. In other words, production and selling cost increase with the
very expansion in the quantum of sales. In this respect, a firm confronts two situations;
firstly when the sales expansion takes place within the range of existing production
capacity, in that case only variable costs relating to the production and sale would
increase. Secondly, when the production capacity is added due to expansion of sales
in excess of existing production capacity. In such a case incremental production and
selling costs would increase both variable and fixed costs.
4. Delinquency Cost -This type of cost arises on account of delay in payment
on customer's part or the failure of the customers to make payments of the receivables
as and when they fall due after the expiry of the credit period. Such debts are treated
as doubtful debts. They involve: - (i) Blocking of firm's funds for an extended period of
time, (ii) Costs associated with the collection of overheads, remainders legal expenses
and on initiating other collection efforts.
5. Default Cost Similar to delinquency cost is default cost. Delinquency cost
arises as a result of customers delay in payments of cash or his inability to make the
full payment from the firm of the receivables due to him. Default cost emerges a result
of complete failure of a defaulter (customer) to pay anything to the firm in return of the
goods purchased by him on credit. When despite of all the efforts, the firm fails to realize
the amount due to its debtors because of him complete inability to pay for the same.
The firm treats such debts as bad debts, which are to be written off, as cannot be
recovers in any case.
FACTORS AFFECTING THE SIZE OF RECEIVABLES
The size of receivables is determined by a number of factors for receivables
being a major component of current assets. As most of them varies from business the
business in accordance with the nature and type of business. Therefore, to discuss all
of them would prove irrelevant and time consuming.
1. Stability of Sales -Stability of sales refers to the elements of continuity and
consistency in the sales. In other words the seasonal nature of sales violates the
continuity of sales in between the year. So, the sale of such a business in a particular
season would be large needing a large a size of receivables. Similarly, if a firm supplies
goods on installment basis it will require a large investment in receivables.
2.Terms of Sale -A firm may affect its sales either on cash basis or on credit
basis. As a matter of fact credit is the soul of a business. It also leads to higher profit
level through expansion of sales. The higher the volume of sales made on credit, the
higher will be the volume of receivables and vice-versa. The Volume of Credit Sales It
plays the most important role in determination of the level of receivables. As the terms
of trade remains more or less similar to most of the industries. So, a firm dealing with a
high level of sales will have large volume of receivables.
3. Credit Policy- A firm practicing lenient or relatively liberal credit policy its size
of receivables will be comparatively large than the firm with more rigid or signet credit
policy. It is because of two prominent reasons: - A lenient credit policy leads to greater
defaults in payments by financially weak customers resulting in bigger volume of
receivables. 174  A lenient credit policy encourages the financially sound customers
to delay payments again resulting in the increase in the size of receivables. Terms of
Sale The period for which credit is granted to a customer duly brings about increase or
decrease in receivables. The shorter the credit period, the lesser is the amount of
receivables. As short term credit ties the funds for a short period only. Therefore, a
company does not require holding unnecessary investment by way of receivables.
4. Cash Discount- Cash discount on one hand attracts the customers for
payments before the lapse of credit period. As a tempting offer of lesser payments is
proposed to the customer in this system, if a customer succeeds in paying within the
stipulated period. On the other hand reduces the working capital requirements of the
concern. Thus, decreasing the receivables management.
5.Collection Policy- The policy, practice and procedure adopted by a business
enterprise in granting credit, deciding as to the amount of credit and the procedure
selected for the collection of the same also greatly influence the level of receivables of
a concern. The more lenient or liberal to credit and collection policies the more
receivables are required for the purpose of investment.
6.Collection Collected -If an enterprise is efficient enough in encasing the
payment attached to the receivables within the stipulated period granted to the
customer. Then, it will opt for keeping the level of receivables low. Whereas, enterprise
experiencing undue delay in collection of payments will always have to maintain large
receivables.
7. Bills Discounting and Endorsement -If the firm opts for discounting its bills,
with the bank or endorsing the bills to the third party, for meeting its obligations. In such
circumstances, it would lower the level of receivables required in conducting business.
8. Quality of Customer -If a company deals specifically with financially sound
and credit worthy customers then it would definitely receive all the payments in due
time. As a result the firm can comfortably do with a lesser amount of receivables than
in case where a company deals with customers having financially weaker position.
9. Miscellaneous- There are certain general factors such as price level
variations, attitude of management type and nature of business, availability of funds
and the lies that play considerably important role in determining the quantum of
receivables.

RESULT OF APPLICATION OF FACTORS AFFECTING THE CREDIT AND

COLLECTION POLICIES
 BENEFIT COST

Relaxation of -increase in sales and total -increase in credit processing cost

credit contribution margin
-increase in collection cost
standards
-higher default costs (bad debts)
-higher capital cost (opportunity cost)
Lengthening -increase in sales and total -higher capital cost (opportunity cost of higher
of credit contribution margin investment in receivables)
period
Granting -increase in sales and total -lesser profit
cash contribution margin
discount -opportunity income on
lower investment in
receivable
Intensified -lower default costs (bad -higher collection expenses
collection debts) -lower sales
efforts -lower opportunity cost or
capital costs
e

RECEIVABLES MANAGEMENT IN SELECTED STEEL COMPANIES IN INDIA:

For a successful credit management, it is essential for a firm to formulate its

credit and collection policies directed towards the achievement of the objectives of
effective use of the capital invested. For evaluating the extent of success attained by
firm in their efforts the following criteria have been followed:

1.Size of Receivables.

As discussed before in this chapter there are many factors influencing the
volume of receivables. But the level of enterprises credit sales is the most important
determinant in this respect. Any increase or decrease in the level of sales would bring
about proportionate increase or decrease in the magnitude of receivables. An efficient
credit control, however, prevents faster growth in receivables vis-a-vis sales. Table 6.2
shows the size of receivables in selected steel companies during 1999-2000 to 2008-
09 along with the percentage of receivables to current assets.

CASE STUDY:
Table 6.2

Size of Receivables Of steel Companies in India.

(From 1999-2000 to 2008-2009)

(Rs. In crores))

compan
y JSWSL JS&AL SAIL TSL

Receivabl % of Receivabl % of Receivabl % of Receivabl % of

e C.A e C.A e C.A e C.A

1999-
2000 471.89 72.45 30.53 57.77 2893.38 36.66 1359.45 50.83
 2000-01 440.71 69.02 41.41 64.88 2899.01 35.62 1456.1 52.69
2001-02 386.94 59.44 39.64 68.83 2330.68 34.02 1168.55 44.97
2002-03 419.87 57.83 11.59 58.92 2859.49 40.3 1125.9 36.58

2003-04 627.01 62.65 4.37 68.17 2764.57 34.45 838.92 35.27

2004-05 911.9 48.27 4.89 89.56 3095.29 21.81 881.73 28.96

2005-06 1496.61 58.23 6.14 83.88 3132.79 20.18 877.43 25.69

2006-07 1024.45 41.4 6.8 82.22 3940.43 20.06 939.98 8.53

2007-08 885.95 28.94 N.A N.A 5421.04 20.81 913.66 22.58

2008 -
09 1027.88 26.67 N.A N.A 5750.85 16.9 1487.42 22.35

AVG. 769.32 52.49 18.17 71.78 3508.75 28.08 1104.91 32.84

S.D 362.07 15.8 16.21 32.05 1168.86 8.82 252.77 13.97
max 1496.61 72.45 41.41 89.56 5750.85 40.3 1487.42 52.69

min 386.94 26.67 4.37 57.77 2330.68 16.9 838.92 8.53

Sources: Annual Reports of steel Companies From 1999-2000 to 2008-2009

The size of receivable of all the steel companies shows fluctuating trend
throughout study period. The minimum size of receivable in JSWSL is 386.94 (2001-
02), JS&AL is 4.37 (2003-04), SAIL is 2330.68 (2001-02), and TSL is 838.92 (2003-
0407). The maximum size of receivable in JSWSL is 1496.61 (2000-01), JS&AL is
41.41 (2003-04), SAIL is 5750.85 (2008-09), and TSL is 1487.4 .The study of the
composition of receivable is a very important tool to evaluate the management of
receivables. It assists to show the point where receivables are concentrated most.

The receivable to current assets of all the steel companies shows fluctuating
trend throughout study period. The minimum size of receivable to current assets in
JSWSL is 26.67 (2008 -09), JS&AL is 57.77 (1999-2000), SAIL is 16.9 (2008 -09), and
TSL is 8.53 (2006-07). The maximum size of receivable to current assets in JSWSL is
72.45 (1999-2000), JS&AL is 89.56 (2004-05), SAIL is 40.3 (2008-09), and TSL is
52.69 in (2000-01 ).The study of the composition of receivable to current assets is a
very important tool to evaluate the management of receivables. It assists to show the
point where receivables are concentrated most.
 2.Growth in Average Annual Sales and Receivables.

Indexes of sales and receivables for a length of time discloses certain facts with
regards to the credit policy adopted by an enterprise e.g. If sales observe an upward
trend with downward trend of debtors, it shows that the firms credit policy is capable
of stimulating sales. But a condition contrary to this would have unfavorable effect both
on sales and operating profits. Where as if there is upward trend both sale and
receivables, it indicates that credit terms are liberal which have induced existing
customers to purchase more besides attracting new customers resulting in increased
sales and receivables. Under such circumstance there is possibility that receivables
may grow faster than sales. This disproportionate growth in receivables results in loss
rather than profit, due to inclusion of debtors of low and suspected credit standing.
Table 6.3 shows the growth in annual sales and receivables in selected steel
companies during 1999-2000 to 2008-09 along with the indices.

Table 6.3

Index Of Growth In Annual Sales And Receivables

Of Steel Companies In India.

(From 1999-2000 To 2008-2009)

(In Indices)
company JSWSL JS&AL SAIL TSL
indices of sales indices of sales indices of sales indices of sales
receivabl
year receivable indices receivable indices receivable indices e indices
1999-
2000 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
2000-01 93.39 144.82 135.64 581.66 100.19 99.79 107.11 116.90
2001-02 82.00 215.19 129.84 538.52 80.55 95.47 85.96 123.38
2002-03 88.98 299.72 37.96 424.58 98.83 118.59 82.82 159.00
2003-04 132.87 386.26 14.31 226.89 95.55 149.45 61.71 193.59
2004-05 193.24 756.91 16.02 183.88 106.98 195.48 64.86 257.75
2005-06 317.15 731.69 20.11 12.95 108.27 198.51 64.54 278.30
2006-07 217.10 1000.18 22.27 13.88 136.19 241.03 69.14 321.08
2007-08 187.75 1346.64 N.A N.A 187.36 280.10 67.21 360.43
2008 -09 217.82 1627.73 N.A N.A 198.76 298.97 109.41 436.03
AVG. 163.03 660.91 59.52 260.29 121.27 177.74 81.28 234.65
S.D 76.73 529.13 53.11 228.67 40.40 76.82 18.59 114.54
max 317.15 1627.73 135.64 581.66 198.76 298.97 109.41 436.03
min 82.00 100.00 14.31 12.95 80.55 95.47 61.71 100.00

Sources: Annual Reports of steel Companies From 1999-2000 to 2008-2009

The table reveals that there was an upward trend both sales and receivable of
JSWSL during the study period. The average of sales indices (660.91) and receivables
indices (163.03) indicates that the sales grow faster than receivables, which indicates
that credit
terms are less liberal. The sales had increasing trend throughout the study period while
receivable also indicates increasing trend having some fluctuations. In the beginning
of study period the receivable grow faster than sales but at the end of the study period
the sales grow faster than receivables which show that the JS&AL‘s credit policy is
capable of stimulating sales. An increasing trend can also be observed in the values
of both sales and receivable of SAIL during study period but the receivables grow
faster than sales. This disproportionate growth in receivables result in loss rather than
profit due to inclusion of debtors of low and suspected credit standing. There was an
upward trend both sales and receivable of SAIL during the study period. The average
of sales indices (177.74) and receivables indices (121.27) indicates that the sales grow
faster than receivables, which indicates that credit terms are less liberal. There was a
downward trend both sales and receivable of SAIL during the study period. The
average of sales indices of TSL (234.65) and receivables indices (81.28) indicates that
the sales grow faster than receivables, which indicates that credit terms are less
liberal.

3.Composition of Receivables.

This study of components or receivables is considered as a vital tool for solving

purpose of evaluation of management of receivables. Composition of centralization or
contraction of receivables. A careful comparison of these points with the size of
receivables enables us to apprehend the efficiency or inefficiency of the receivables
management. The receivables of steel Industry under the present study are bifurcated
into two main heads; trade debtors and loans and advances as given below:

(A) Sundry Debtors

Table 6.4.

The Size Of Sundry’s Debtors And The Percentage Of Sundry Debtors To

Current Assets In Selected Steel Companies During 1999-2000 To 2008-09 Are
Also Displayed.

(In crores)

Jindal Steel &

Steel Authority Tata Steel Ltd.
Size of J S W Steel Ltd. Alloys Ltd.
debtors Of India Ltd.
 Debtors % of Debtors % of Debtors % of Debtors % of
Ratio in Rs. C.A in Rs. C.A in Rs. C.A in Rs. C.A
1999-2000 236.4 36.3 26.8 50.6 1817.4 23.0 1182.7 44.2
2000-01 278.3 43.6 36.3 56.9 1687.6 20.7 1279.3 46.3
2001-02 256.9 39.5 26.1 45.3 1389.4 20.3 1073.7 41.3
2002-03 279.6 38.5 6.2 31.6 1660.1 23.4 958.5 31.1
2003-04 406.7 40.6 0.6 10.0 1550.0 19.3 651.3 27.4
2004-05 266.6 14.1 0.1 2.2 1908.5 13.4 581.8 19.1
2005-06 241.3 9.4 0.0 0.1 1881.7 12.1 539.4 15.8
2006-07 245.2 9.9 0.0 0.0 2314.8 11.8 631.6 5.7
 2007-08 337.4 11.0 0.0 N.A 3048.1 11.7 543.5 13.4

2008 -09 398.1 10.3 3.7 N.A 3024.4 8.9 636.0 9.6

AVG. 294.7 25.3 10.0 24.6 2028.2 16.5 807.8 25.4

S.D 63.7 15.3 14.0 23.8 585.3 5.4 285.6 14.9

max 406.7 43.6 36.3 56.9 3048.1 23.4 1279.3 46.3

min 236.4 9.4 0.0 0.0 1389.4 8.9 539.4 5.7

Sources: Annual Reports of steel Companies From 1999-2000 to 2008-2009

 The table indicates that in J S W Steel Ltd. sundry debtors tend to be fluctuating
throughout the study period. The size of debtors ranged between Rs. 406.7 CRORES
and Rs. 236.4 CRORES. On an average debtors formed only 025.3 % of the current
assets. In Jindal Steel & Alloys Ltd. the amount of debtors shows a decreasing trend
having some fluctuations. Sundry debtors were Rs. 26.8 crores in 1999-2000 which
decreased to Rs. 0.6 crores in 2003-04 and it was 3.7 crores in the last years of study
period. The range of percentage of debtors to current assets had been lowest of 0.00%
and the highest of 36.3%. In Steel Authority Of India Ltd. we can observe a fluctuating
and increasing trend of size of debtors during the period of study. It ranged between
Rs. 3048.1 crores and Rs. 1389.4 crores. The percentage of debtors to current assets
had declined in 2003-04 and 2004-05 despite rise in the volume of debtors. This
discloses the fact that though the size of debtors had increased but the increase in the
size of current assets had been more than that of debtors. Debtors in Steel Authority
Of India Ltd constituted only 16.5 % of current assets. Tata Steel Ltd. Showed
decreasing trend with an average of Rs. 807.8 crores and standard deviation was Rs.
285.6 crores. The debtor ranged between Rs. 1279.3 and Rs. 539.4. The debtors are
25.4% of current assets

In nutshell, we can conclude that the steel companies had been conservative
in nature as they tend to avoid risk factor as much as possible. The percentage of
debtors to current assets was the lowest in case of Steel Authority Of India Ltd.
followed by J S W Steel Ltd., Jindal Steel & Alloys Ltd. and Tata Steel Ltd.

(B) Loans and Advances

Table 6.4 displays the size of loans and advances in the selected steel
companies during 1999-2000 to 2008-09. A long with the trend percentage to provide
objective analysis of the data.
 Table 6.5

Size Of Loans And Advances Of Steel Companies In India.

(From 1999-2000 To 2008-2009)

(Rs. In crores)
company JSWSL JS&AL SAIL TSL

indices indices indices indices

of Loan of Loan of Loan of Loan
loan & loan & loan & loan &
year advances advances advances advances advances advances advances advances

1999-
2000 3.7 100.0 1.7 100.0 363.9 100.0 395.5 100.0

2000-01 0.6 16.9 1.7 101.8 369.1 101.5 482.5 122.0

2001-02 91.3 2493.7 1.7 101.8 345.4 94.9 532.2 134.6

2002-03 0.0 0.0 0.0 0.0 263.0 72.3 602.0 152.2

2003-04 0.0 0.0 0.0 0.0 395.7 108.8 489.5 123.8

2004-05 0.6 15.8 0.0 0.0 327.8 90.1 1082.4 273.7

2005-06 0.0 0.0 0.0 0.0 285.8 78.5 894.1 226.1

2006-07 3.5 96.2 0.0 0.0 323.9 89.0 2751.3 695.6

2007-08 14.5 395.9 N.A 397.3 109.2 2101.7 531.4

2008 -09 774.3 21154.9 N.A 441.0 121.2 3926.7 992.8

AVG. 88.84 2427.35 0.63 37.95 351.30 96.55 1325.80 335.21

S.D 242.47 6624.91 0.87 48.89 53.79 14.78 1205.27 304.74

max 774.27 21154.92 1.70 101.80 441.02 121.21 3926.74 992.83

min 0.00 0.00 0.00 0.00 263.00 72.28 395.51 100.00

Sources: Annual Reports of steel Companies From 1999-2000 to 2008-2009

 It can be seen from the table that JSWSL had a highly fluctuated trend of loans
and advances during the study period. The loans and advances were Rs. 3.7 crores
in 1999-2000 which increased to Rs. 774.3 crores in 2008-09. The average of indices
is 2427.35, showing a healthy increase. JS&AL had also recorded decrease in the
volume of loans and advances. The trend remained above 100% for first three years
of study period. In SAIL, though the value of loans and advances had observed a
continuous increase till 2007-08 (reaching the highest of 441.0 percent). In 2002-03
and 2005-06 the same marginally fell which indicates that SAIL had exercised a
reasonable control over the loans and advances. The average of indices during the
study period was 96.55percent which shows tremendous decrease. In TSL the loan
and advances ranged between Rs. 3926.74 in 2008 -09 and Rs. 395.51 in 1999-2000.
The trend of loan and advances was increasing during the study period.

It may be concluded that the average of trend percentage of loans and

advances in steel companies disclose that all the four companies had increased the
volume of their loans and advances.
 4. Accounts Receivable Turnover Ratio:

The receivables turnover ratio shows the relationship between sales and
accounts receivables of a company. While calculating this ratio some prefer to divide
sales by average book debts for the year (the average of book debts at the beginning
and at the end of the year) to get a more reliable indicator. It can therefore be
calculated as:

Receivables Turnover = Net Sales

Ratio Average Accounts Receivables

Where,
= Opening + Closing
Receivables 2
Average Accounts
Receivables

According to Spiller and German, "The turnover of receivables provides

information on liquidity of receivables." It indicates the speed or sloweres with which
receivables are converted into cash. It also serves as a primary indicator of efficiency
in this area of investment." An efficiency of receivables management lies in a higher
turnover ratio. The profitability of the firm can be further maximized through prompt
collection of receivables.

An increase in the volume of receivables without corresponding increase in the

total current assets may cause decrease in the volume of investment in other
components of current assets. Jerome and Sidney are of the opinion. "If the investment
in inventory is reduced, it may in turn affect total sales and consequently reduce the
profits of the firm.'20 but a total opposite of this may happen to be true if the investment
in receivables is reduced. Table 6.6 carries the figure of accounts receivables turnover
ratio in the selected steel companies during 1999-2000 to 2008-09.
 Table 6.6

Accounts Receivable Turnover Ratio Of Steel Companies In India.

(From 1999-2000 To 2008-2009)

(Ratio In Times)

JSWS
company L JS&AL SAIL TSL

ratio ratio ratio ratio

in in in in
times indices times indices times indices times indices

1999-
2000 1.97 100.00 1.52 100.00 5.64 100.00 4.53 100.00

2000-01 3.05 155.07 6.51 428.83 5.61 99.60 4.94 109.14

2001-02 5.17 262.44 6.30 414.76 6.68 118.52 6.50 143.53

2002-03 6.64 336.85 16.98 1118.41 6.76 120.00 8.69 191.98

2003-04 5.73 290.70 24.06 1585.10 8.82 156.42 14.21 313.71

2004-05 7.72 391.68 24.06 1585.10 10.30 182.73 18.00 397.39

2005-06 4.54 230.71 0.98 64.38 10.34 183.34 19.53 431.19

2006-07 9.08 460.71 0.95 62.30 9.98 176.98 21.03 464.36

2007-08 14.13 717.27 N.A N.A 8.43 149.50 24.29 536.30

2008 -09 14.72 747.27 N.A N.A 8.48 150.42 18.05 398.52

AVG. 7.27 369.27 10.17 669.86 8.10 143.75 13.98 308.61

S.D 4.30 218.35 9.83 647.91 1.83 32.48 7.26 160.30

max 14.72 747.27 24.06 1585.10 10.34 183.34 24.29 536.30

min 1.97 100.00 0.95 62.30 5.61 99.60 4.53 100.00

Sources: Annual Reports of steel Companies From 1999-2000 to 2008-2009

It may be observed from the table that the accounts receivables turnover ratio
of JSWSL had fluctuated throughout the period of study from 1999-2000 to 2008-09.
The ratio was 1.97 times in 1999-2000 which increased to 3.05 times in 2000-01. In
2001-02 the ratio increased to 5.17 times but thereafter it shows increasing trend and
increased to 14.72 times in 2008-09 with an average of 7.27.The average of accounts
receivable turnover ratio of JS&AL was 10.17 times. JS&AL had produced the best of
turnover ratio among the selected steel companies. It ranged between 24.06 times in
2003-04 and 0.95 times in 2006-07.The receivable turnover ratio of SAIL 4.53 times
in 1999-2000 and increased to 18.00 times 2004-05 and then it went down to 8.48
times in 2008 -09. In SAIL there was a fluctuated trend in accounts receivables
turnover ratio during the study period. The average of 8.10 times too discloses a very
slow speed with which the company's receivables get converted in cash. The average
of indices of accounts receivable turnover ratio worked out at 143.75 showing poor
performance during study period. The average ratio was 8.10 times in which showed
progressive trend during the study period. The ratio was the highest of 10.34 times
and lowest of 5.61 times. The receivable turnover ratio was 4.53 times in 1999-2000
and then it went high to 14.21 times in 2003-04 and then after it has again gone up to
24.29 times in 2007-08 with an average of 13.98 times.

In nut shell, the accounts receivables turnover ratio during the study period was
the highest for TSL followed by JS&AL, SAIL and JSWSL. The TSL displayed very
good ratio while the JSWSL recorded proportionately very low turnover ratio.

5.Receivables to Sales Ratio

Another method of analyzing the level of investment in receivables is proportion

of accounts receivables to sales. This ratio holds considerable importance in
indicating the credit and collection policy adopted by a company. A higher ratio
indicates greater investment in receivables and slackness in credit collection policies.
While a lower ratio points out that a company is practicing strict credit and collection
policy resulting in effective receivables management control. Table 6.5 shows the
figures indicating receivables to sales ratio in selected steel companies during 1999-
2000 to 2008-09.

Table 6.7

Receivable to Sales Ratio Of steel Companies in India.

 (From 1999-2000 to 2008-2009)
(Ratio in Percentage)
company JSWSL JS&AL SAIL TSL JSWSL JS&AL SAIL TSL
%of %of %of %of
Receivabl Receivabl Receivabl Receivabl
Ratio e indices e indices e indices e indices
1999-
2000 50.76 100.00 65.88 100.00 17.74 100.00 22.08 100.00
2000-01 32.74 64.49 15.36 23.32 17.81 100.40 20.23 91.63
2001-02 19.34 38.10 15.88 24.11 14.97 84.37 15.38 69.67
2002-03 15.07 29.69 5.89 8.94 14.78 83.34 11.50 52.09
2003-04 17.46 34.40 4.16 6.31 11.34 63.93 7.04 31.88
2004-05 12.96 25.53 5.74 8.71 9.71 54.72 5.56 25.16
2005-06 22.00 43.35 102.33 155.33 9.68 54.54 5.12 23.19
2006-07 11.02 21.71 105.75 160.52 10.02 56.50 4.76 21.54
2007-08 7.08 13.94 N.A N.A 11.87 66.89 4.12 18.65
2008 -09 6.79 13.38 N.A N.A 11.79 66.48 5.54 25.09
AVG. 19.52 38.46 40.13 60.90 12.97 73.12 10.13 45.89
S.D 13.39 26.37 42.51 64.53 3.14 17.72 6.80 30.79
max 50.76 100.00 105.75 160.52 17.81 100.40 22.08 100.00
min 6.79 13.38 4.16 6.31 9.68 54.54 4.12 18.65
Sources: Annual Reports of steel Companies From 1999-2000 to 2008-
2009

It may be observed from the table that the accounts receivables turnover ratio
of JSWSL had fluctuated throughout the period of study from 1999-2000 to 2008-09.
The ratio was 50.76 percent in 1999-2000 which decreased to 17.46 percent in 2003-
04. In 2005-06 the ratio increased to 22.00 percent but thereafter it shows decreasing
trend and reached to 6.79 percent in 2008-09 with an average of 19.52 percent. The
average of accounts receivable turnover ratio of JS&AL was 40.13 percent. JS&AL
had produced good turnover among the selected steel companies. It ranged between
105.75 percent in 2006-07 and 4.16 times in 2003-04.The receivable turnover ratio of
SAIL 17.74 percent in 1999-2000 and decreased to 11.34 percent 2003-04 and then
it went down to 9.68 percent in 2005-06. In SAIL there was a fluctuated trend in
accounts receivables turnover ratio during the study period. The average of 10.13
percent too discloses a very slow speed with which the company's receivables get
converted in cash. The average of indices of accounts receivable turnover ratio
worked out at 45.89 showing poor performance during study period. The average ratio
was 10.13 percent which showed downward trend during the study period. The ratio
was the highest of 22.08 percent and lowest of 4.12 percent. The receivable turnover
ratio was 22.08 percent in 1999-2000 and then it went high to 5.56 percent in 2003-
04 and then after it has again gone up to 5.54 percent in 2007-08 with standard
deviation of 6.80 percent.

In nut shell, the accounts receivables to sales ratio during the study period were
the highest for Jindal Steel & Alloys Ltd followed by Tata Steel Ltd., J S W Steel Ltd.
and Steel Authority Of India Ltd. The TSL displayed very good ratio while the JSWSL
recorded proportionately very low turnover ratio.

6. Average Collection Period

The average collection period refers to the average time lag between sales and
collection measurable in terms of number of days. In other words, it may be regarded
as rough estimate of number of a debtor. Hence, it is a significant measure of the
collection activity and quality of. Collection of book debts is the concluding stage in the
function of sales transaction. It is given as:

Average Collection
Period = 365
Turnover of
Receivables.

Prolonged collection period owing to delays and other reasons creates hazards
in the way of sustaining business operations because of financial scarcity. Thus, slow
paying customers have to be handled. As an old account causes heavy collection
expenses and increase the profitability of bad debt losses. Shorter average collection
periods signify better credit management and liquidity of accounts receivables. As
shorter average collection period means lower of customer. Further, the sooner the
firm receives the cash due on sales, the sooner it can put the money to work for
earning interest. That is the cost of a long collection period is a return (interest) lost on
these funds. A rule of thumb is that the collection period should not exceed 1/3 times
the regular period; that is if the company's typical terms call for payment in net 30
days, it is said that average collection period should not exceed 40 days i.e. [30+
(30x1/3] Table 6.8 presents the average collection period of selected steel companies
during 1999-2000 to 2008-09.
 Table 6.8

Average Collection Period Of Steel Companies In India.

(From 1999-2000 To 2008-2009)

(Period in Days)

Comp 1999- 2000 2001 2002 2003 2004 2005 2006 2007 2008 AV S.D ma mi
anies 2000 -01 -02 -03 -04 -05 -06 -07 -08 -09 G. x n

JSWS 185 119 71 55 64 47 80 40 26 25 71. 48. 185 24.

L 26 87 .29 80

JS&A 240 56 58 22 15 15 374 386 N.A N.A. 145 155 386 15.
L .74 .58 .00 17

SAIL 65 65 55 54 41 35 35 37 43 43 47. 11. 65. 35.

34 47 01 32

TSL 81 74 56 42 26 20 19 17 15 20 36. 24. 80. 15.

99 82 60 03

avg. 143 79 60 43 36 30 127 120 28 29 75. 60. 179 22.

33 18 .23 58

Sources: Annual Reports of steel Companies From 1999-2000 to 2008-2009

 Graph No.6.1

It can be observed from the table JSWSL had a long average collection period
of 71.26 day on an average tends to increase the possibility of bad debts losses. A
wide variation from 185.29 days to 24.80 days had been registered. JS&AL must be
praised for having longest ten seven years‘s average collection period of 145.74 days.
Though during the first four study year this period the ratio had been more than the
recorded ten year average. JS&AL had failed to prove the liquidity of accounts
receivable. SAIL had a short average collection period of 47.34 days on average
indicating towards the solvency of accounts receivables. , on the whole SAO may be
regarded as having better credit management and liquidity of accounts receivables.
The average collection period of TSL was 36.99 days with standard deviation of 24.8
percent. The ratio showed down ward trend. This indicates that the company may
suffer from financial sacristy if prompt credit collection would not be made a practice.