Account Receivable Management

REPORTON

ACCOUNT RECEIVABLE MANAGEMENTTATA STEEL

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Date: 21-05-202

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EXECUTIVE SUMMARY

The project deals in “account receivable management at Tata Steel”. Receivable management

is one of the most important aspects of the organization, as it deals with the management of the

outstanding. The profit of the company mainly depends on the accounts receivables. Therefore it

needs a careful analysis and proper management.

Debtors occupy an important position in the structure of current assets of a firm. They are the

outcome of rapid growth of trade credit granted by the firms to their customers. Trade credit is

the most prominent force of modern business. It is considered as a marketing tool acting as a

bridge for the movement of goods through production and distribution stages to customers.

Till few years back, Tata Steel had a very strict policy of selling against advance payments. That

was an era of controlled economy. However, with an increasing domestic and international

competition, Tata Steel could no longer afford this policy, in order to maintain its premium

position. Further in order to capture a greater amount of market share, it was compelled to go by

the industry norms and thus it ushered into the new era of credit sales. This resulted in credit

sales going up significantly. A credit limit was sanctioned to every customer. The customers

were required to pay the outstanding amount on the due date.


CONTENTS PAGE NO.

COMPANY PROFILE 02

TREND OF SALES 03

TREND OF DEBTORS 04

DIVISION/PROFIT CENTRE WISE DEBTORS IN TATA STEEL FOR FY 07-08

05

TRENDS OF DEBTORS IN TATA STEEL 06

CREDIT POLICY OF TATA STEEL 07

CREDIT TERMS OF TATA STEEL 07-08

TATA STEEL’S CREDIT MONITORING AND CONTROL 08-10

OPERATIONAL WORKING AT TATA STEEL FOR MANAGING

DEBTORS

11-12

UNDERSTANDING THE DEBTOR’S PROCESS SYSTEM 13

PROJECT ACTIVITY CHART 14

CREDIT ASSESSMENT POLICY 15-16


INTRODUCTION

Accounts receivable is an accounting transaction which deals with the billing of customer who owes money to a person, company or organization for goods and services that has been provided to the customers. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms.

The term receivable management is defined as “debt owed to the firm by customer arising

from the sale of goods/ services in the ordinary course of business.” The receivable represents

an important component of the current assets of the firm. Receivables may be known as accounts

receivables, trade creditors or customer receivable. When a firm its products / services and does

not receive cash for it immediately, the firm has said to be granted trade credit to the customers.

Trade credit thus creates receivable / book debts, which the firm is expected to collect in near

future. Accounts receivable are thus amounts due from customers, which bear no interest in

essence, a company is providing no cost financing to the customer to encourage the purchase of

the company’s product/services.

Objective of receivable management “To promote sales and profit until that point is reached

where the return on investment in further funding of receivable is less than the cost of funds

raised to finance that additional credit(i.e. cost of capital)”


COMPANY PROFILE

Backed by 100 glorious years of experience in steel making, Tata Steel is the world’s 6th largest

steel company with an existing annual crude steel production capacity of 30 Million Tons Per

Annum (MTPA). Established in 1907, it is the first integrated steel plant in Asia and is now the

world`s second most geographically diversified steel producer and a Fortune 500 Company Tata

Steel has a balanced global presence in over 50 developed European and fast growing Asian

markets, with manufacturing units in 26 countries.

Tata Steel`s Jamshedpur (India) Works has a crude steel production capacity of 6.8 MTPA

which is slated to increase to 10 MTPA by 2010. The Company also has proposed three

Greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh in India with

additional capacity of 23 MTPA and a Greenfield project in Vietnam. Tata Steel, through its

joint venture with Tata BlueScope Steel Limited, has also entered the steel building and

construction applications market.

The iron ore mines and collieries in India give the Company a distinct advantage in raw material

sourcing. Tata Steel is also striving towards raw materials security through joint ventures in

Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman. Tata Steel has signed

an agreement with Steel Authority of India Limited to establish a 50:50 joint venture company

for coal mining in India. Also, Tata Steel has bought 19.9% stake in New Millennium Capital

Corporation, Canada for iron ore mining.

Exploration of opportunities in titanium dioxide business in Tamil Nadu, Ferro-chrome plant in

South Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growth and

Globalisation objective of Tata Steel.

Tata Steel’s vision is to be the global steel industry benchmark for Value Creation and Corporate Citizenship.

Tata Steel India is the first integrated steel company in the world, outside Japan, to be awarded

the Deming Application Prize 2008 for excellence in Total Quality Management.


TREND OF SALES

YEARS FY 2003-04FY2004-05

FY 2005-06

FY 2006-07

FY 2007-08

SALES 11920.96 15876.87 17144.22 19762.57 22191.8


PRODUCT WISE NET SALES ARE AS FOLLOWS

FY

2006-07

FY 2007-08

STEEL 14858 16541TUBES 1099 1217FERRO ALLOYS AND MINERALS 1454 1808BEARINGS 140 127

Analysis

The increase in the net sales of Tubes

division was due to the increase in both the

volume as well as prices. The Ferro Alloys

and Minerals division of the company

registered a growth of 24% in terms of

value though there was a decline in terms of

quantity due to the company’s decision

during the year to stop the sale of ores.

There was a decline in the net sales of the

Bearings division of the company mainly

due to lower off -take by the automotive

sector, which is a major customer sector of

the division.

TREND OF DEBTORS

YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08

DEBTORS 756.06 581.82 539.4 631.63 543.48

Analysis

There has been decrease in the trend of debtors in last five years, from Rs.756.6crores to

Rs.543.48 cores. This decrease in debtors shows a more profit to the company. The

increase in the debtors during 2006-07year might be due to the acquisition of CORUS.


DIVISION/PROFIT CENTRE WISE DEBTORS IN TATA STEEL FOR FY 07-08

PROFIT CENTERS For the FY 06-07 For the FY 07-08STEEL 509.09 397.84WIRE DIVISION 43.82 33.30TUBES 37.01 31.13BEARINGS 7.01 7.29F.A.M.D 70.44 107.59TOTAL DEBTORS

667.37 577.15

TRENDS OF DEBTORS IN TATA STEEL

Debtors Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

FY 06-07 614 688 756 663 658 753 680 670 731 709 774 667

FY 07-08 694 687 662 683 669 767 733 636 677 691 716 577


CREDIT POLICY OF TATA STEELThe credit policy provides the yardstick for measurement of credit level of receivables and is the

indentified and compared monthly, as per the requirements. The policy is influenced by the nature

of market and strength of the competition. The policy clearly defines the standard for target debtor

level, which in turn is a significant influence both ion payment terms and on the whole of the credit

control operation, since it determines how much tolerance, if any, is to be shown to slow paying

customer.

TATA STEEL has a body known as credit control committee, which formulates and gives the final

approval for many credit policy matters. The credit guidelines as they have emerged today are

combined efforts of finance and marketing department.

The credit control committee is headed by Sr.V.P & E.D (F&A) and consists of all product and

sales manager from various divisions along with G.M (F&A) and other concerned executives as

its members. The committee meets at least in two months.

The annual limit of credit sale is provided by Sr.V.P (F&A) in consultation with other

management officials. The committee then discusses in detail about the breakup of the above lump

into the credit limits for different sales offices and also for various customers i.e. both regional and

party wise credit limit is set by the body.

Hence the basic purpose this committee is to set the standard and also have the overall control of

the credit situation, thereby keeping the financing of the working capital cost effective and

preventing any liquidity problems from arising.

As a general rule, credit is allowed to customer who takes large and repeated orders. One time

customers are not entertained for credit.

CREDIT TERMS OF TATA STEEL

The credit terms, i.e. the credit period and cash discount, followed by TATA STEEL are as

follows:

CREDIT PERIOD: the credit period is decided on the basis of the type of the product

and is generally of fixed nature. However, special customer may be allowed a variance in the set

credit period depending upon the volume of sales and customer relationships.


INTEREST CHARGED: interest free credit is allowed for 30 days in most cases. A

every 30 days extension there is a 1% rise in interest rate for secured credits. The rate of interest

for unsecured credit is1% more than the corresponding rate under secured credit . there is a penal

interest of 3% over the applicable rate of interest.

Time period Secured credit Unsecured credit

After 30 days 18.5% 19.5%

After 60 days 19.5% 20.5%

After 90 days 20.5% 21.5%

CASH DISCOUNT:

Cash discount of 2% has also been allowed for certain products in different division. The

discounts had a positive response from certain customers who had working capital problems i.e.

whose inventory turnover have also ignored the discounts and debtor’s turnover is low or whose

operating cycle is long

COLLECTION EFFORT:

A constant touch with the customers is the best way of reminding him about his payment

schedule in a polite but firm manner. A daily, weekly and monthly report regarding the total sale

is done to keep a track on debtors and cash position. Tata steel ‘s collection efforts were not up to

the mark that is the reason why outstanding of greater than six months were increasing

continuously which has now improved to a great extent.

TATA STEEL’S CREDIT MONITORING AND CONTROL

As the most of the credit is unsecured, keeping a timely vigilance on the debtors is important

from the safety and the liquidity position of the firm. This primarily requires an efficient


collection process because slackness in the collection efforts lengthens the average collection

period, and increase the % of bad debt, for monitoring the debtors TATA STEEL is using some

steps. These steps are:

Preparation of a ageing schedule

Calculation of days sales o/s

Calculation of ACP

With the help of these, monthly reports are generated and are sent for review to credit control

committee chaired by V.P (F&A).

In case of secured credit where Tata Steel is also a debtor of its customers, it uses its accounts

payable as tool to realize its accounts receivables. In cases, which have the symptoms of

becoming the bad, a reconciliation statement is prepared and the mutual agreement arrived at.

However in the worst case legal action is pursued and bad debts are not written off before five

year.

FOLLOW UP

Proper follow up is done for the timely collection of debts. A daily, weekly, monthly report

regarding the sales is done to keep track on debtors and the cash position. Efficient and capable

Customer’s Accounts Managers are appointed for this purpose. Customer’s Accounts Managers is

responsible for the collection of debts and follow up of the customers. Now TATA STEEL has

adopted many ways to follow-ups:

Phone; Fax; E-mail ;Letters ; Personal visit


TATA STEEL PROVISION POLICY

DEBTORS STATUS AS ON ……………… SUMMARY AS ON…………………

DEBTORS PROVISION

GUIDELINE %Age Provisions required

Amount of outstanding

Provision required

1) BIFR CASES a) Above three years

I. RecoverableII. Non Recoverable

Totalb) Below three years


Total

100%100%

100%100%

TOTAL

2) LEGAL CASEc) Above three years


Totald) Below three years


Total

100%100%

100%100%

TOTAL

3) GOVT./TOWN DUESe) 6 month-1 year


Total f) 1-2 Years

0%100%50% 100%



Totalg) Above 2 years


Total

100%100%

TOTAL

4)SUBSIDIARY COMPANIESh) 6 months-2 years


Total i) Above 2 years

I. Recoverable II. Non Recoverable

Total

0%100%

100%100%

TOTAL

5)OTHERSj) 6 months-three years


Total k) 3 years-5 years


Totall) Above 5 years


Total

0%100%100%100%100%100%

TOTAL

GRAND TOTAL


OPERATIONAL WORKING AT TATA STEEL FOR

MANAGING DEBTORS

OVERVIEW

Managing the debtors for Tata steel is an important and chief function of the sales accounts

division of finance and accounts. All the transactions of commercial nature are dealt with by this

department in a detailed outline frame of working. The debtors arise each month out of the sales

made on credit and suitable feeding of the required figures has to be made once in a month. This

function is very much a difficult task owing to the various subsidiaries and associate companies

being controlled by TISCO itself.

The activities of each of the companies are diverse in operations and require different policy

formulations and strategies for complying with the existing market requirements. But they are

controlled in a centralized manner so that they give an actual overview of the standing of the

company. The profitability of each of the above is equally important to arrive at a consensus for

finding out the actual earnings and future prospects. As such each of the company under

subsidiary and associate is incorporated under distinct centres as Profit Centre.

To flatten the organizational structure and developed authority and responsibility for the quicker

responsiveness to changing market conditions and greater initiative in dealing with different

target markets, Tata steel has brought in the concept of profit centre. For all practical purpose,

each profit centre functions as a separate company within the hold of Tata steel. From the

debtors management point of view also each profit centre has the responsibility of appraising and

dealing with its customers. However the overall control is centralized and is in the hands of the

finance department. The main function which lies at the hands of Tata steel, Jamshedpur is to

report such standings of the actual debtors as on a particular date to the MD in the form of a

monthly report. The figures thus arrived at give an overview of which profit centres contribute

the most to the debtor’s standing and the specific reasons for the same.


Being a steel manufacturing concern, Tata steel is mainly concerned with the actual debtors

arising for the following profit centres:

STEEL

WIRE DIVISIONS

FERRO ALLOYS AND MINERALS DIVISION

TUBES DIVISION

BEARINGS

Each of the above profit centers have debtors of their own which are handled and managed in a

centralized manner. For an example, tubes division is one of the most important division which

has the maximum contribution to the total sales taking together all the profit centers at a point of

time. It has various parties of its own as debtors such as ESSAR STEEL LIMITED, BLUE

STAR LIMITED, TATA CHEMICALS LIMITED, MECHATRONICS and many debtors.

A database relating to the different parties is maintained in a pre specified format which helps in

understanding the actual standing of the debtor from the point of view of the actual sale being

made to the party on credit till date. This format helps in maintaining the records in a form which

helps in judging the actual ageing of the debtors and the amount being recovered from the total

debt. By ageing we mean to give an actual definition to the debtors in terms of how old has the

debt been to him and thereby categorizing him for the purpose. A same prescribed format is used

by all the profit centers for managing their respective debtors.

EXPLANATION Through this preparation we get to know the actual total debtors figures and the major parties

that have contributed to the increase and decrease in the debtors as when compared with the

previous financial period. It mainly emphasizes upon the total debtors figures and the overdue

debtors and their major contributors in the form of party names and figures. It also gives all list

of indications for the debtors whose standing are for periods beyond six months. This reporting is

crucial for the reason that it gives the management the indicative areas for focus, the reasons for

a rise in debtors and suitable control for future standing which is profitable to the company as a

whole.


UNDERSTANDING THE DEBTOR’S PROCESS SYSTEM

During this project I got an opportunity to become a part of an ongoing project “understanding

the debtor’s process system” &“Recovery of Outstanding” of TATA MAIN HOSPITAL

(medical services provided by TATA STEEL to its employees and to its other associates). This

project is basically to get in touch with the customers and finding out the reason for their default

of payment. Four trainees. (Nidhi Kedia, Shital Verma, Abhinav Kumar, Binita Gupta) were

selected as a part of this ongoing project at Tata steel, finance & A/c s dept, guided by Mr.

K.S.M. Mathew (Head Sales & EPA a/c)

TATA MAIN HOSPITAL (TMH) was introduced in 1908 and restructured in 1909 and as the

days passed, TMH is now a days the biggest hospital in the city with most appropriate and

valuable services to the city. This hospital has the most sophisticated equipments for the

investigation of medical purposes with well experienced Doctors, Specialists, Surgeons,

Facilities & sufficient no. of Medical and non Medical Staff.

TATA STEEL and its associates provide free services to their employees and their dependants

through TATA MAIN HOSPITAL, for these services companies are paying to hospital. In this

process TMH has accumulated a huge outstanding from its corporate customers, even after

TATA STEEL’S reminder calls customers are not paying their outstandings. So TMH has

stopped its services for a day, for that company whose books of accounts showed outstandings

for a long period.

The GURU MANTRA of the project was DMAIC (Determine, Measure, Analysis,

Implementation and check/control). The whole process consisted of eight steps:

Step 1.Take out Customer wise Statement

Step 2. Collect the Outstanding list

Step 3. Reconcile and identify the bills pending

Step 4. Take Print outs of Bills - As duplicate copy

Step 5. Fix an appointment with the Customer

Step 6.Finalise Reconciliation with customer

Step 7. Collect MoneyStep 8.Make documents for write off proposals if

required


PROJECT ACTIVITY CHART


CREDIT ASSESSMENT POLICY

Credit management module (based on lotus notes)

Behind every credit decision there is an inherent potential for loss informed credit decision will

minimize the risk, enhance the profitability and lead to better structuring of credit. For credit

appraisal and risk assessment customers are broadly classified into three groups namely

ORGANISED SECTOR (public and private ltd, companies including govt. undertakings)

UNORGANISED SECTOR (traders, partnership firms, SIS units etc)

GOVERNMENT DEPARTMENT (defence , irrigation, power , railways, PWD, CPWD)

Credit risk assessment of the customer is assessed based on the following parameters:

ABILITY TO PAY- It is easy to assess the ability of the customer to pay and is applicable to the organized sector

Solvency Financial viability

Technological soundness Commercial feasibility WILLINGNESS TO PAY- it is based on the judgement and is applicable to both

organised and unorganised sectors. This is the only criterion adopted for assessing the customers in the unorganised sectors.

The assessment criteria are: Quality of management Credibility Past performance Health of group companies

CREDIT DECISION: Risk classification of the entry i.e. low/medium/ high Should we extend credit to this entity? If yes, the recommended credit limit The structure of the credit i.e.

Secured (%)


Unsecured (%) Recommend credit as per % of the net worth Sanctioned credit limit(specify the structure and the amount)

Individual firm / company wise credit limits(in case the entity has different firms or

companies)

Sales centre wise allocation of the sub limits

The assessment criteria are:

1. SOLVENCY

2. FINANCIAL VIABILITY

3. TECHNOLOGICAL SOUDNESS

4. COMMERCIAL FEASIBILITY

Depending upon the above basis Tata steel have developed a module for assessing the risk

associated with each and every accounts and to judiciously take a decision based on the

information available.


CONCLUSIONA key strategy in lowering bad debt is reducing the time to recover the invoiced amounts.

Together with stock days; debtor and creditor days are a crucial link between the company's

income statement, its balance sheet and its cash-flow.

While in the income statement a company can book sales and profits to its heart's content, if it is

slower than before at collecting its bills and suppliers demand faster payment, then cash receipts

will not reflect the trend in profits. It is this divergence between profits and cash that is often the

biggest and best signal that a company might be in trouble.

RECOMMENDATION

The state government & other government departments are another problem area in town

division. The company must send frequent reminders, ex-once in 15 days that they have

to pay their dues. The company must negotiate with the government about their

repayment of dues.

The company is facing problem in collecting the medical bills from corporate customers.

The company must make the list of defaulter in medical bills, which must be kept with

the concern authority. The person in charge must see that the defaulter must not be

entertained, even though it is an emergency case, until he pays his old dues.

The selection of customer must be done carefully, by properly checking the company’s

background, its repayment capacity etc. The company should rate the parties by seeing its

past performances. These ratings must be updated every year.

Channel financing is a way through which problems of dues can be controlled to a great

extent but it should be taken care that the company won’t be liable for any default made

by the middle person.

Now a day, it has become a normal practice of appointing a third party for collection of dues which should be taken into account as it removes the burden of collection for the company. Proper agreement between the third party and the company should be formulated in which all the terms and conditions must be mentioned. It should be without recourse and a third party should be legally appointed, thus not hampering the goodwill of the company and also taking care of the collection process


BIBLIOGRAPHY

Websites

www.tatasteel.com

www.tatasteel100.com

www.economywatch.com

www.businesslink.gov.uk

www.studyfinance.com

www.financialexpress.com

www.worldsteel.org/?action=programs&id=64

www.indianindustry.com

http://steel.nic.in/

http://en.wikipedia.org/wiki/steel

www.newssteel.com

Book

Modern Working Capital Management Frederick C. Scherr


http://WWW.NEWSSTEEL.COM/

http://EN.WIKIPEDIA.ORG/WIKI/STEEL

http://STEEL.NIC.IN/

http://WWW.INDIANINDUSTRY.COM/

http://WWW.WORLDSTEEL.ORG/?ACTION=PROGRAMS&ID=64

http://www.financialexpress.com/

http://www.studyfinance.com/

http://www.businesslink.gov.uk/

http://www.economywatch.com/

http://www.tatasteel100.com/

http://www.tatasteel.com/

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