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A STUDY OF RECEIVABLE MANAGEMENT AND ROLE OF e-PAYMENT IN INDIAN OIL CORPORATION LTD.
Submitted towards the Partial Fulfillment of
MASTER OF BUSINESS ADMINISTRATION ACADEMIC SESSION 2011-2013
College Guide
Student Declaration
I, Pawan kumar meena to the best of my knowledge & belief, hereby declare that the project report entitled :
A Study of Receivable Management and Role of e-Payment in Indian Oil Corporation
Ltd.
is the result of my own work in the fulfillment of academic requirement. The training is done in Indian Oil Corporation Limited (IOCL) [Eastern Region,Marketing Division, West Bengal State Office] for a period of two months commencing from 06.05.2010 to 06.07.2010. This project work is submitted to R.A.Podar Institute of Management , Jaipur. As well as in Indian Oil Corporation Limited[ Marketing Division, Rajasthan State Office]. It is not to be used copied or edited by any person. Written order has to be taken from appropriate
CERTIFICATE
Hereby it is certified that the project work entitled A Study of Receivable Management and Role of e-Payment in Indian Oil Corporation Ltd is a work carried out by
It is certified that all the subjective matter carry out by him is verified. The project report has been approved as it satisfies the academic requirements in respect of Project Work.
ABSTRACT
Indian Oil Corporation Limited, with an yearly turnover of about 2 Lac Crores is the biggest
Company in India in terms of sales. It has once again topped the Indian Companies in the Fortune 500 list of Companies with a rank of 125. In such a large sized corporation the common problem is the Receivable Management and formulating a sound Credit Policy and Collection Procedure. In this fluctuating Oil Market it is very difficult to maintain the level of the Sundry Debtors and hence the Profitability. Moreover the Private Companies are entering the Oil Industry which has provided a tough competition for IOCL. In this study the Ratios are analyzed to interpret the Financial Status of the Corporation and then it is compared with the market Competitors. The Debtors of the Eastern Region has been analysed in details and a few probable
Acknowledgement
Its a privilege to be associated with Indian Oil Corporation Limited, a fortune Global 500 Company, Indias 2nd most top brand also worlds 18th best largest company.
This acknowledgement is not only the means of formality, but to me, it is a way by which I am Getting the opportunity to show the deep sense of gratitude and obligation to all the people who
Have provided me with inspiration, guidance and help during the preparation of the project.
At the very outset, I would like to express my gratitude from bottom of my heart to Mr. Sharad Rakesh [ Manager-Finance ] for giving me the opportunity to do my Summer
RSO Indian Oil Corporation Ltd. who has spent his valuable time and guided me Throughout the training process in spite his busy schedule and provide, information about Indian Oil. I have seen the area of Finance activities like: E-payments, Service tax,Sales tax, Capital assets etc. I also like to thank Sharad Rakesh, Manager-Finance, who helped to Provide me the opportunity to undergo my summer Internship Project in Indian Oil. But last not the least I am thankful to my parents, friends and all well wishers for blessing me for my success.
MBA(Finance)
TABLE OF CONTENTS Sl. No. 1. 2. 2.1 2.2 2.3 3 4 5 5.1 5.2 5.3 5.4 5.5 5.6 6 6.1
6.2 6.3 6.4
Particulars Introduction to Oil Industry in India Company Profile of IOCL Introduction Product Profile, Markets, Organizational Structure of IOCL Business of IOCL Objectives Methodology Receivable Management Introduction Role of SAP in Receivable Management Impact of debtors in the Working Capital Management of the Company Different Ratios related to Debtor Management and Profitability Cash Conversion Cycle Credit Policies of IOCL and RTGS mode of Payment Analysis Turnover Ratio Liquidity Ratio Working Capital Analysis Comparative analysis of IOCL with BPCL and HPCL
7. 8. 9. 10.
LIST OF TABLES
Table. No Particulars 1
2 3 4 5 6 7 8 9
Page 3 45 63 64 66 68 69 72 73 77 78 79 79 81 83 84 85 86 87 89 89 90 93
Retail Market Share (as on Nov-2011) Salient Features of Implementation of SAP DTR and ACP of IOCL from 2007-08 to 2011-12 Schedule for Sundry Debtors from 2007-08 to 2010-11 Liquidity Ratios of IOCL Working Capital including Current Assets and Current Liabilities of IOCL Change of CA, CL and WC of IOCL from the previous years Cash & Bank Balances of IOCL Cash Conversion Cycle Sales in DGS&D Sector for 2010-11 & 2011-12 Sales Figure of DGS&D Customers on Month-wise basis in 2011-12(ER) Outstanding from DGS&D as on 31.03.2010 (ER) Showing Outstanding as a Percentage of Sales in DGS&D Sector as on IOCL`s Average Collection Period of DGS&D (ER) for 2011-12 31.03.2010(ER) Sales and Outstanding of Non DGS&D Customers till 31 March 2011 (ER) Average Collection Period of Non DGS&D Customers in 2011-12 Comparison DTR and ACP of IOCL with HPCL and BPCL Debtors as a percentage of Gross Sales for IOCL, HPCL and BPCL Comparison of Liquidity Analysis of IOCL with HPCL and BPCL CCC of HPCL CCC of BPCL Profitability Ratios of IOCL, HPCL and BPCL Customerwise Tabulation of Outstanding and Beyond Credit Outstanding under RSO
10
11 12 13 14 15 16 17 18 19 20 21 22 23
24 25 26 27
Productwise Tabulation of Outstanding and Beyond Credit Outstanding under RSO Pivot Table showing the outstanding status Customerwise and Productwise Invoice Details of M/s Rifle Factory, Ishapore Breakup of the invoice of M/s Rifle Factory in ED, Sales Tax and Cess
95 97 99 100
LIST OF FIGURES Particulars Structure of Oil Industry in India Market Share of Different Companies in India Formation of Indian Oil Corporation Ltd. Organisational Structure of IOCL Pipeline Network of IOCL in India Relation between Profitability and Liquidity Debt Collection Procedure Flow chart showing Debt Recovery Process Comparison of Conventional Method and Electronic Payment System Working Capital Cycle and Sources of Cash Operating Cycle Classification of Debts considered Unsecured & Good and Unsecured & Classification of Debts from Subsidiary Companies and Other Companies Doubtful Line Graph showing the different Liquidity Ratios of IOCL Bar Graph showing Working Capital including Current Assets and Current Liabilities of IOCL Area Graph showing Breakup of Current Assets Area Graph showing Breakup of Current Liabilities Bar Graph showing the Cash and Bank Balance Trend of IOCL Sales in DGS&D Sector for 2010-11 & 2011-12 Comparison of the Outstanding as a % of Sales in Eastern Region And Overall Comparison of IOCL`s ACP of DGS&D (ER) with Overall ACP for 2011-12 for the Company Comparison ofAACP of Non DGS&D Customers with Overall in 2011-12 Comparison DTR and ACP of IOCL with HPCL and BPCL Line graph comparing Current Ratio and Quick Ratios of IOCL, HPCL and Comparison of CCC for IOCL, HPCL, BPCL BPCL Area graph showing Profitability Ratios of IOCL, HPCL and BPCL Line Graph showing Return on Capital Employedand Return on Fixed Assets Bar chart showing Outstanding and Beyond Credit Outstanding under RSO Line Graph showing the Beyond Credit Outstanding as a % of Outstanding Graph showing Productwise Outstanding under RSO
Fig. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Page 2 3 5 17 20 30 34 39 43 49 52 64 65 66 68 70 71 72 77 80 82 84 85 87 89 90 91 93 94 95
This small amount of production made the oil experts from different countries predict the future of the oil industry as a dull one and also doubted India's ability to search for new oil reserves. But the Government of India declared the Oil industry in India as the core sector industry under the Industrial Policy Resolution bill in the year 1954, which helped the Oil Industry in India
vastly.
Oil exploration and production in India is done by companies like NOC or National Oil Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil companies in India that are owned by the government under the Industrial Policy Rule. The National Oil Corporation during the 1970s used to produce and supply more than 70 percent of
the domestic need for the petroleum but by the end of this amount dropped to near about 35 percent. This was because the demand on the one hand
increasing at a good rate and the production was declining in a steady rate. Oil Industry in India during the year 2004-2005 fulfilled most of demand through importing oil from multiple oil producing countries. The Oil Industry in India itself produced nearly 35 million metric tons of Oil from the year 2001 to 2005. The Import that is done by the Oil Industry in India comes mostly from the Middle East Asia. The Oil that is produced by the Oil Industry in India provides more than 35 percent of the energy that is primarily consumed by the people of India. This amount is expected to grow further with both economic and overall growth in terms of production as well as percentage. The demand for oil is predicted to go higher and higher with every passing decade and is expected to reach an amount of nearly 250 million metric ton by the year 2024.
DOWNSTREAM
Refining&
Marketing
ONGC
IOCL
(Refining&
OilIndia
(Refining&
Limited
Marketing)
BPCL
CentreforHigh
Technology
(Refining&
Marketing)
PrivateE&P
Companies
Cairo,RIL,NIKO
GAIL
PetroFed
(GasTransport&
Petrochemicals)
OilIndustry
RIL
Safety Directoriate
(Refining&
Marketing)
EngineersIndia Ltd.(Project
Consultant)
hydrocarbon value chain. The company wise market share in sales is tabled below:
It is evident that the share of the private sector in meeting total consumption of refined petroleum products presently stands at around 15%. This proportion is however, expected to grow
IOC Group BPCL HPCL Other PSUs Total PSUs Private Total
Company Market Share (%) 46.2 18.6 16.5 2.2 83.5 16.5 100
11
COMPANY PROFILE
INTRODUCTION
In order to ensure greater efficiency and smoothe working in the petroleum sector , Government of India decided to merge the refineneries and the distribution activities.
The Indian Refineries and Indian Oil Company were combined to form the giant Indian Oil Corporation (IOCL) on 1st September 1964, with its registered office at Bombay. In 1967, the pipeline division of the corporation was merged with the refineries division. Research & Development of Indian Oil Came into Existence in 1972. In October 1981 Assam Oil Company
was nationalized and has been amalgamated with IOCL as Assam Oil Division(AOD).
Beginning in 1959 as Indian Oil Company Ltd., Indian Oil Corporation Ltd. was formed in 1964 with the merger of Indian Refineries Ltd. (established 1958). Indian Oil and its subsidiaries account for 49% petroleum products market share, 40.4% refining capacity and 69% downstream sector pipelines capacity in India
10
large
consumers,
ensuring
products
and
inventory
at
their
doorstep.
Indian Oil operates the largest and the widest network of petrol & diesel stations in the country,
numbering over 17,600. It reaches Indane cooking gas to the doorsteps of over 50 million
Indane distributors.
Indian Oils ISO-9002 certified Aviation Service commands over 62% market share in aviation fuel business, meeting the fuel needs of domestic and international flag carriers, private airlines and the Indian Defense Services. The Corporation also enjoys a do4 minant share of the bulk consumer business, including that of railways, state transport undertakings, and industrial, agricultural and marine sectors.
11 INDIANOILCORPORATIONLIMITED(IOCL)
LOCATION Registered Office : Indian Oil Bhavan, G-9, Ali Yavar Jung Marg, Bandra(East), Mumbai-400 051 Corporate Office : 3079/3, Sadiqnagar, J B Tito Marg, New Delhi- 110 049
Refineries Division
Head Office : SCOPE Complex, Core-2 7, Institutional Area, Lodhi Road New Delhi -110003 Barauni Refinery: P.O. Barauni Oil Refinery, Dist. Begusarai -861 114 (Bihar) Gujarat Refinery: P.O. Jawahar Nagar, Dist. Vadodara -391 320(Gujarat) Guwahati Refinery : P.O. Noonmati, Guwahati-781020 (Assam) Haldia Refinery:
15
Mathura Refinery: P.O. Mathura Refinery, Mathura -281 005(Uttar Pradesh) Panipat Refinery: P.O. Panipat Refinery, Panipat-132140(Haryana) Bongaigaon Refinery: P.O. Dhaligaon Dist. Chirang, Assam - 783 385
Marketing Division
Head Office: G-9, Ali Yavar Jung Marg, Bandra (East), Mumbai -400 051 Northern Region: IndianOil Bhavan, 1, Aurobindo Marg, Yusuf Sarai New Delhi -110016 Eastern Region: IndianOil Bhavan, 2, Gariahat Road, South (Dhakuria) Kolkata -700 068 Western Region: 254-C, Dr. Annie Besant Road, Worli Colony, Mumbai -400 025 Southern Region: IndianOil Bhavan 139, Nungambakkam High Road
R&D Centre
R&D Centre: Sector 13 Faridabad -121 007(Haryana)
Pipelines Division
Head Office: Northern Region: Western Region: A-1 Udyog Marg, Sector-1, Noida-201301 P.O. Panipat Refinery Panipat -132 140 (Haryana) P.O. Box1007,Bedipara, Morvi Road,Gauridad, Rajkot-360 003
16
Southern Region:
IBP Division
IBP Division: 34-A, Nirmal Chandra Street, Kolkata - 700 013 Business Group(Cryogenics) Sewri Terminal II, Sewri (East), Mumbai - 400 015 Business Group(Cryogenics), A-4, MIDC, Ambad, Nashik - 422 010
Group Companies
Chennai Petroleum Corporation Ltd.: IndianOil Technologies Ltd: 536, Anna Salai, Teynampet, Chennai - 600 018 SCOPE Complex, Core-2 7, Institutional Area, Lodhi Road, New Delhi-110003 IndianOil (Mauritius) Ltd.: IOC Middle East FZE: Lanka IOC PLC: Mer Rouge Port Louis Maruritius LOB 14209, Jebel Ali Free Zone, P.O.Box: 261338 Lanka IOC Head Office Level 20, West Tower, World Trade Center, Echelon Square, Colombo - 01, Sri lanka
17
SALIENT FEATURES Indias Most Trusted Fuel Pump Brand (ET. Brand Equity-AC Nielson Survey 2007) Indias largest commercial enterprise with leading market shares in downstream segment of oil business. Highest ranked Indian corporate in Fortunes list of worlds 500 largest Companies (2008:: 116th) 20th largest petroleum company in the world- Fortune Global500 Local Currency Rating of A1+(short-term) & LAA+(long-term) from ICRA Indias No.1 corporate in annual listing of Business Standards (BS 10000),Business India(BI Superior 100) &Economic Time (ET 500).
18
VISION, MISSION AND VALUES Vision A major diversified, trans-national, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution.
19
Mission To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services, and cost reduction. To maximize creation of wealth, value and satisfaction for the stakeholders. To attain leadership in developing, adopting and assimilating state-of-the-art technology for competitive advantage. To provide technology and services through sustained Research and Development. To foster a culture of participation and innovation for employee growth and contribution. To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity.
To help enrich the quality of life of the community and preserve ecological balance and
heritage through a strong environment conscience.
Values
Care stands for: Empathy Understanding Co-operation Empowerment Passion stands for: Commitment Dedication Pride Inspiration Ownership Zeal & Zest
Innovation stands for: Creativity Ability to learn/absorb Flexibility Change Trust stands for: Delivered Promises Reliability Integrity Truthfulness Transparency
20
To serve the national interests in oil and related sectors in accordance and consistent with Government policies.
To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation marketing activities and to provide appropriate
To enhance the country's self-sufficiency in crude oil refining and build expertise in
To further enhance marketing infrastructure and reseller network for providing assured
To create a strong research&development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to
To optimize utilization of refining capacity and maximize distillate yield and gross
refining margin.
To maximize utilization of the existing facilities for improving efficiency and increasing
productivity.
To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in
To achieve higher growth through mergers, acquisitions, integration and diversification by harnessing new business opportunities in oil exploration production, petrochemicals,
To inculcate strong core values among the employees and continuously update skill sets
To develop operational synergies with subsidiaries and joint ventures and continuously
engaged across the hydrocarbon value chain for the benefit of society at large.
12
Financial Objectives:
To ensure adequate return on the capital employed and maintain a reasonable annual dividend on equity capital. To ensure maximum economy in expenditure.
To manage and operate all facilities in an efficient manner so as to generate adequate internal resources to meet revenue cost and requirements for project investment, without
budgetary support.
Corporations business.
control measures and thereby sustain market leadership through cost competitiveness.
To complete all planned projects within the scheduled time and approved cost.
Obligations:
Towards customers and dealers:- To provide prompt, courteous and efficient service and quality products at competitive prices. Towards suppliers:- To ensure prompt dealings with integrity, impartiality and courtesy and help promote ancillary industries. Towards employees:- To develop their capabilities and facilitate their advancement through appropriate training and career planning. To have fair dealings with recognised representatives of employees in pursuance of healthy industrial relations practices and sound personnel policies. Towards community:- To develop techno-economically viable and environment-friendly products. To maintain the highest standards in respect of safety, environment protection and occupational health at all production units. Towards Defence Services:- To maintain adequate supplies to Defence and other para-military services during normal as well as emergency situations.
13
The Products produced by IOCL are broadly classified into the following cases: Class A: 1. Liquid Petroleum Gas (L.P.G) Class B: 2. Motor Spirit (M.S.)/Gasoline 3. Super Kerosene Oil (S.K.O) 4. High Speed Diesel Oil (H.S.D) Class C :
5. High Speed Diesel Oil (H.S.D)
6. 7. 8. 9. Class D :
10. Mineral Turpentine Oil (M.T.O) 11. Jute Batching Oil (J.B.O) 12. Light Diesel Oil (L.D.O) 13. Unleaded petroleum 14. Lubes & Greases 15. Fuel & Feedstock 16. Super Kerosene Oil
14
MARKETS
IndianOil has one of the largest petroleum marketing and distribution networks in Asia, with
over 34,000 marketing touch points. Its ubiquitous petrol/diesel stations are located across
customers.
IndianOil has been adjudged India's No. 1 brand by UK-based Brand Finance, an independent
consultancy that deals with valuation of brands. It was also listed as India's 'Most Trusted Brand' in the 'Gasoline' category in a Readers' Digest - AC Nielsen survey. In addition, IndianOil topped The Hindu Businessline's "India's Most Valuable Brands" list. However, the value of the IndianOil brand is not just limited to its commercial role as an energy provider but straddles the entire value chain of gamut of exploration & production, refining, transportation & marketing, petrochemicals & natural gas and downstream marketing operations abroad. IndianOil is a national brand owned by over a billion Indians and that is a priceless value.
15 INDIANOILCORPORATIONLIMITED(IOCL)
STRUCTURE OF EASTERN REGION OFFICE:GM Regional Service(Eastern Region) G.M Aviation G.M Human Resource G.M Finance STRUCTURE OF STATE OFFICE:There are 16 state office all over India. Under each state office there are divisional officers, state officers, plants, terminal & depots. STRUCTURE OF WEST REGIONAL STATE OFFICE (W.B.S.O):ED W.B.S.O CRSM Retail Sales D.G.M Consumer Sales D.G.M Finance Sales D.G.M L.P.G D.G.M Operations D.G.M Lube D.G.M Law STRUCTURE OF HR DEPARTMENT UNDER W.B.S.O:One senior HR Managers One HR Officer AREA OF OFFICES UNDER W.B.S.O:W.B.S.O has three area offices: 1. Durgapur area offices. 2. Kolkata area offices. 3. Siliguri area offices. L.P.G UNDER W.B.S.O:The L.P.G plants under W.B.S.O are situated as the following places: 1. Budge Budge 2. Durgapur 3. Kalyani 4. Malda 5. Rangpo 6. Raninagar 7. Port Blair DEPOTS UNDER W.B.S.O:1. Hasimara 2. Kantapukur 3. Malda 4. Rangpo
26 INDIANOILCORPORATIONLIMITED(IOCL)
BUSINESS OF IOCL
REFINING: Born from the vision of achieving self-reliance in oil refining and marketing for the nation,
IndianOil has gathered a luminous legacy of more than 100 years of accumulated experiences in all areas of petroleum refining by taking into its fold, the Digboi Refinery commissioned in
1901.
IndianOil controls 10 of Indias 20 refineries. The group refining capacity is 60.2 million metric tonnes per annum (MMTPA) or 1.2 million barrels per day -the largest share among refining
laid out and enshrined in various customized operating manuals, which are continually updated.
IndianOil refineries have an ambitious growth plan with an outlay of about Rs. 55,000 crore for capacity augmentation, de-bottlenecking, bottom upgradation and quality upgradation. Major projects under implementation include a 15 MMTPA grassroots refinery at Paradip, Orissa, Naphtha Cracker and Polymer Complex at Panipat, Panipat Refinery expansion from 12
Barauni, Guwahati and Digboi refineries proposed to be completed by the end of 2011.
On the environment front, all IndianOil refineries fully comply with the statutory requirements. Several Clean Development Mechanism projects have also been initiated. To address concerns on safety at the work place, a number of steps were taken during the year, resulting in reduction
Innovative strategies and knowledge-sharing are the tools available for converting challenges
into opportunities for sustained organisational growth. With strategies and plans for several value-added projects in place, IndianOil refineries will continue to play a leading role in the
downstream hydrocarbon sector for meeting the rising energy needs of our country.
PIPELINES:
28 INDIANOILCORPORATIONLIMITED(IOCL)
During the year 2010-11 IndianOils crude oil pipelines registered the throughput of 38.46 million metric tonnes. Corporations largest crude oil handling facility at Vadinar
marked the berthing of 4000th tanker since inception. The terminal operates two offshore Single
Point Mooring (SPM) systems, to feed Koyali, Mathura and Panipat refineries.
Raising efficiency and emerging as the least-cost supplier, IndianOil has added the 330-km Paradip-Haldia crude oil pipeline (PHCPL) to its bustling pipeline network during the year. The PHCPL system has a Single Point Mooring installed 20-km off the Paradip coast. With this, it is now able to pump crude oil from Very Large Crude Carriers to the tank-farm set up onshore and onward to Haldia through the pipeline. The Pipeline has replaced the earlier system of receipt of
Pipeline system.
IndianOils product pipelines, connecting its refineries directly to high -consumption centres, achieved a throughput of 20.92 million tonnes during 2010-11. IndianOil has now joined the select group of companies in India which owns and operates LPG pipelines by building its first such cross-country facility linking Panipat with Jalandhar. Apart from providing better logistics, this pipeline can transport 700,000 tonnes of LPG from Kohand near Panipat refinery to IndianOils bottling plants at Jalandhar and Nabha in Punjab. The pipeline will also simultaneously to meet the requirement of LPG at Una and Baddi in Himachal Pradesh and at
capabilities of CPCL Refinery. IndianOil is also implementing a 217 km long branch pipeline
from Koyali-Sanganer Pipeline at Viramgam to existing scrapper station at Churwa along with
Panipat.
IndianOil sees gas pipelines as a major growth area in the future. The gas market in India is expanding fast, thanks to enhanced availability of the product from indigenous sources and through imports. The Corporation will commission its first regassified LNG pipeline from Dadri to Panipat (132 km) to synchronise with the completion of the first phase of the power plant
Company, Sudan.
30 INDIANOILCORPORATIONLIMITED(IOCL)
amongst others. The countrywide marketing operations are coordinated by 16 State Offices and over 100 decentralised administrative offices. Several l and mark surveys continue to rate IndianOil as the dominant energy brand in the
country and an enduring symbol for high quality petroleum products and services. The heritage and iconic association that the brand invokes has been built over four decades of commitment to uninterrupted supply line of petroleum products to every part of the country, and unique products that cater not only to the functional requirements but also the aspirational needs of millions of
customers.
IndianOil has been adjudged India's No. 1 brand by UK-based Brand Finance, an independent
consultancy that deals with valuation of brands. It was also listed as India's 'Most Trusted Brand' in the 'Gasoline' category in a Readers' Digest - AC Nielsen survey. In addition, IndianOil topped The Hindu Businessline's "India's Most Valuable Brands" list. However, the value of the IndianOil brand is not just limited to its commercial role as an energy provider but straddles the entire value chain of gamut of exploration & production, refining, transportation & marketing, petrochemicals & natural gas and downstream marketing operations abroad. IndianOil is a national brand owned by over a billion Indians and that is a priceless value.
31
LITERATURE REVIEW:
A Prescription for Debt Recovery Management, Towards Reducing Costs and Increasing Recovery of Receivables
Author: David Coyle, President, Published by: SeeWind Design 2008
Debt recovery and collections managers are always looking for less costly and more efficient ways of collecting on bad debt. This is especially true in todays business climate of diminished budgets and pressures from restructuring. This paper reviews six debt recovery management best practices that ensure swift and accurate recuperation of receivables for less operational cost than is usual within a typical collections process. As well the workflow that enables the application of these best practices is described. Finally this paper outlines the features and benefits of FORCE, a business analysis and collections management software solution that incorporates the fully automated workflow and best practices discussed. The prescription suggested here focuses on the ability to uncover and see the business reality along with the capability to detect, diagnose and action opportunities that center on TIME and MONEY:
32 INDIANOILCORPORATIONLIMITED(IOCL)
OBJECTIVES:
To find the Trend of the Sales and Debtors of the Company and to find a relation
DGS&D. To analyze the Cash Conversion Cycle and the Liquidity of the Company. To analyse the Working Capital of the Comapany and how it can be regulated.
To find out the different Ratios related to Liquidity and Profitability of the Company
and compare them with the competitors like HPCL and BPCL To know the Credit Policies of IOCL for different Customers.
Analyse the efficiency of different Collection Procedures with special emphasis on
17
METHODOLOGY
The methodology followed in this project involved the following Phases: Collection of Data Type of the project Analysis of Data Conclusion & Recommendation
Collection of Data: Data required for the project e.g. Balance Sheet, statement of Profit & Loss Account etc. were
collected from the annual reports of IOCL, for the period of 2009-10 to 2011-12. Besides for
Explanation of several issues, different articles, Internet datas, books etc were consulted. The data collected are Secondary & Published Data. Few data have been collected from the SAP module used in IOCL
Analysis: For the comparative analysis ratios were used along with graphs, charts, and necessary diagrams. The current year i.e., 2011-12 has not been taken into calculation in many ratios because, at that time of preparation of this report the Annual Report 2011-12 was not published.
Interpretation & Recommendation: After completion of the entire analysis, interpretation & recommendation were made on the basis of figures and diagrams. Statistical tools like Tables, Charts, Bar graphs Correlations are used for representation of data.
18 INDIANOILCORPORATIONLIMITED(IOCL)
RECEIVABLE MANAGEMENT
INTRODUCTION: A sound managerial control requires proper liquid management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume; it is not always possible to sell goods on cash basis. Sometime other concern in that line might established a practice of selling goods on credit basis. Under these circumstances it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increase profitability. After a certain level of sales this increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Receivables constitute a significant portion of current assets of a firm. But for investment in receivable a firm has to incur certain costs. Further there is a risk of bad debts also. It is therefore very necessary to proper control and management of receivables. Cash is the most important component of current assets; therefore the firm basic strategies are to reduce the operating cash requirement. The companys aim is to accelerate the collection of receivables so as to reduce the average collection period. The receivables represent an important component of current assets of a firm. The purpose of this analysis is the important dimension of efficient management of receivables within the framework of a firm objective of value maximization. OBJECTIVES: The term receivables are defined as debt owed to the firm by customer arising from sale of goods or services in the ordinary courses of business. Receivable management is also called trade credit management. Thus account receivables represent an extension of credit to customers allowing them a reasonable period of time in which to pay for the good received. The objective of receivable management is to promote sales and profit until that point is reached where return on investment in further funding receivables is less than cost of funds raised to finance that an additional credit, i.e. cost of capital. The specific costs and benefits which relevant to the determination of receivables management are examined below.
19
The major categories of cost associated with the extension of credit and account receivables are: COLLECTION COST:
These are administrative cost incurred in collecting the receivables from the customer to
collect the overdue, such as reminders and other collection efforts, legal charges etc. DEFAULT COST:
The firm may not be able to recover the over dues because of the inability of the customers. Such debts are treated as bad debts these cost associated with credit sales and
on time it can mean the difference between prosperity and failure. Credit policy
Credit policy effects debtor management because it guides management about how to control debtors and how to make balance between liberal and strict credit. If company does not restrict to sell the products on credit after a given limit of sale. This liberated credit policy will increase the amount of sale and profitability. But risk will also increase with increasing of sale. If we sell the good to those debtors whose capability to pay is not good, then it is possible that some amount will become bad debts. Company can increase the time limit for paying by such debtors. On the other hand, if companys credit policy is strict, then it will increase liquidity and security, but decrease the profitability. So, finance manager should make credit policy at optimum level where profitability and
37
Fig. 6: Relation between Profitability and Liquidity Mode of payment: Any type of payment is acceptable, but the costs involved with such
things as credit card transactions as you may need to add a surcharge to cover them must
be seen.
Dealing late payments: The policy should appear on the credit application form, and should clearly state the consequences of late payment. This may take the form of
withholding goods, not processing orders, and in some cases, legal action.
a) Collection of debtors information For analysis the financial position of debtors, we have to collect the information relating
to debtors. This information can be obtained from customers financial statements of previous years, bank reports, and information given by credit rating agencies. These information will be useful for deciding where debtors will our debt or not. It will also be
b) Credit Decisions
After collection and analysis the debtors information, manager has to decide whether company should facilitate to sell goods on credit or not. If company sells the goods on credit to particular debtor, then at what level it will be sold after seeing his position. For this manager can fix the standard for providing goods on credit. If a particular debtor is below than given standard, then he should not accept his proposal of buying goods on
credit.
Formulation Collection Policy : For getting fund fastly from debtor, the
following steps will be taken under formulation of collection policy. a) Send reminding letter for paying debt b) Take the help of debt collection agency for getting bad debt. c) To do legal action against bad debtors. d) To request personally to debtor to pay his dues on mobile or email.
e) Finance manager should monitor collection position through average collection period
from past sundry debtor and their turnover ratio. f) To make ageing schedule. Sample of Ageing schedule is given below. Credit application
To help you to decide which of your customers should be granted credit terms, it is important to have a credit application form/agreement. This sets out all the conditions of
credit, as well as the rights and obligations of both parties. Essential components of a credit application:
39
comprehensive details of all directors/partners/owners at least three trade credit references signature of the applicant to ensure that they have read and understood all the conditions
and have agreed to abide by them. A Deed of Indemnity and Guarantee for corporate
the final decision should be based on all the data collected, in particular the references, the length of time that the business has been operating and whether or not the guarantees
have been signed. Collection procedure Step 1: A statement asking for payment should be sent. Some 'Reminder' or 'Final Notice' adhesive labels can be bought. Step 2: Telephone the customer and remind them of the debt. Ask them if there is a problem. If no barrier to payment exists, ask them to settle the debt by a specific date. Step 3: If there is a cash flow problem, try to arrange a payment plan that accommodates both parties. Step 4: If the problem is recurrent then it is a good idea to review the customer's credit terms. Step 5: If the debt is not settled within the agreed timeframe, you may wish to take legal action To deal with situations as they occur so you don't contribute to any potential cash flow problems resulting from delinquent payments. If you design an effective credit policy, credit application and collection procedure, you are helping to ensure the financial security and stability of your business venture. CREDIT ANALYSIS: Two basic steps are involved in the credit investigation Process. A)OBTAINING CREDIT INFORMATION-The first step in credit analysis is obtaining the information which form the basis for the evaluation of customers.The sources of information may be internal such as the historical payment pattern of a customers,or may be external such as : I)FINANCIAL STATEMENTS-The published financial statements such as balance sheet and profit and loss account.
40 INDIANOILCORPORATIONLIMITED(IOCL)
II)BANK REFERENCES-The firms banker collects the necessary information from the applicants Bank. III)TRADE REFERENCES-Reputed Credit organization are approached about the credit worthiness of proposed customers.
IV)CREDIT BUREAU REPORTS-Credit Bureau reports from organization
B)ANALYSIS OF CREDIT INFORMATION-The information collected from different sources are analyzed to determine the credit worthiness of the applicant.The analysis should cover two aspects: I)QUANTITATIVE-The quantitative aspects is based on the factual information available from the financial statements,the past records of the firms and so on. II)QUALITATIVE-The qualitative judgement would cover aspects relating to the quality of management. Customers Evaluation-The 5 CsCHARACTER- Reputation, Track Record CAPACITY- Ability to repay( earning capacity) CAPITAL- Financial Position of the company. COLLATERAL- The type and kind of assets pledged CONDITIONS- Economic conditions & competitive factors that may affect the
profitability of the customer. Effective accounts receivable management can help you in a variety ways:
It can cut and maintain your average collection delay or DSO It can lessen your direct and indirect expenses It can considerably reduce your bad debt It can tell you various ways to take advantage of your cash-flow It can help you capitalize on your internal resources It can maximize interventions on sales, service and market share
41
of high working capital for the company which can hit the profitability badly.
2. Secondly, most of the sales are credit sales in every organization. Cash sales constitutes insignificant amount of the sales of a company. So to maintain the sales revenue company
42 INDIANOILCORPORATIONLIMITED(IOCL)
3. It is important to reach the sales potential of a company in this growing market. So if the company doesnot allow the credit to the customers then the market will be untouched. 4. To Optimize the return on investments on the assets.
5. To get a competitive advantage over the competitors and to stay in the competition it is
important to give the customers to credit period so the can utilize the extra advantage.
One must be sure to know who he is doing business with. Always obtain a signed Credit
Only three trade references cannot always be relied upon. Some organisations only pay
three customers on time just so that they can use them as references.
Always a mercantile report must be obtained and checked for previous legal actions and directors that have been associated with previously failed businesses. If one find either,
A credit limit must be set. Whilst a credit limit should always be seen as a guide, if a customer is going to exceed that limit by a considerable margin (say 20%), one must
always recheck their credit worthiness and reset the limit accordingly.
Every Company should have a written policy that clearly sets out when, and under what circumstances, the organisation offers credit. This should be distributed to all interested
Customers must not be given any excuse not to pay you on time. Make sure all your
Company should give their customers plenty of payment methods to use (i.e. cheque,
If cla and disputes are unavoidable, it must be made sure that he have an effective
Sales personnel should play an active role in ensuring that all invoices are paid on time.
43
Terms and Conditions of Sale should include retention of title clause and should be sent
to the customer with a new account welcome letter. This letter is an opportunity to advise
Customers must be asked to sign personal guarantees, if he is unable to justify the level
Personal guarantees must not be used as a reason to open an account for a customer with
Ring all new accounts before the first payment is due. Make sure that they are happy with
the service / goods and confirm that payment will be made on the due date.
Once customers are five days overdue with their payment, ring them and ask for YOUR
If Company have provided a good product or service and the customer still will not pay, the account should be closed and handover the debt over to a professional collection
agency and never trade on a credit basis with these people again.
Analyse the financial status of the company you are lending to by checking their previous
financial accounts history or analysing the previous Legal Cases the customer have
Seek for the credit rating the company have. The higher arted comapanies are
such as bad debts expense. There are two ways of reporting losses from credit sales. One is the direct write-off method. Under this approach, the company does not anticipate any loss. The asset Accounts Receivable is reported at its full amount and no expense is reported until it is known with certainty that a customer will not pay the amount owed. This method is not encouraged by accountants, because it may be overstating assets and net income.
44 INDIANOILCORPORATIONLIMITED(IOCL)
The preferred way to report losses from credit sales is to anticipate that some receivables will not be collected. This approach is the allowance method. It gets it name
because of the contra account to Accounts Receivable entitled Allowance for Doubtful Accounts. The credit balance in the allowance account works to value the accounts receivable at their approximate net realizable amount. Under the allowance method, the bad debts expense and the credit to the allowance account is reported closer to the time of the salethus providing a better matching with revenues. Under the allowance method the
management system in place. Credit management strategies may include: * clearly stating terms and conditions in the credit contract * ensuring all credit transactions are documented and signed * maintaining records accurately * keeping track of due and overdue payments * checking the credit rating of debtors before extending credit * checking the credit rating of the debtor on a regular basis after giving credit * collecting a deposit from the customer before delivering goods or services * collecting portions of the payment as a project progresses * reminding customers of payments through phone, letters or visits
In spite of having an efficient credit management strategy, it is still possible to incur bad debts. All businesses will have some percentage of customers who delay payments or even avoid them. Businesses have many options to deal with delinquent customers. Some of these
45
Consultation Businesses can try to recover bad debt from customers through consultation. The
consultation can bring about an agreement between the creditor and debtor regarding the payment. In case of any disputes over the debt, the Community Justice Center can be called
Bad debts are an unavoidable side effect of extending credit. Though there are many avenues to collect debts, they are by no means easy and can cost the business a good amount of time and money. Therefore, it is better to develop an effective credit management strategy to minimize bad debts. Also, consider a partnership with a good collection agency that can take over the task of collection if your in-house resources and expertise is inadequate to resolve
the situation.
46 INDIANOILCORPORATIONLIMITED(IOCL)
Debit Card (via phone or website); direct debit; or Professional Fee Funding.Others include: Online Credit Card Payment System Electronic Cheque System Electronic Cash System and Smart Card based Electronic Payment System Real time Gross Settlement (RTGS) System NationalElectronic Fund Transfer (NEFT) System and Electronic Clearing Service (ECS).
financial transactions electronically. The term is used for a number of different concepts:
47
Direct deposit payroll payments for a business to its employees, possibly via a payroll services company
Direct debit payments, sometimes called electronic checks, for which a business debits
Electronic bill payment in online banking, which may be delivered by EFT or paper
check
Transactions involving stored value of electronic money, possibly in a private currency Wire transfer via an international banking network (generally carries a higher fee) Electronic Benefit Transfer
RBI Control:
Recognising the importance of ensuring the safety, security of the paymentsystems, the Reserve Bank of India (RBI) has put in place three modes ofelectronic payments i.e. Real time Gross Settlement (RTGS) System, NationalElectronic Fund Transfer (NEFT) System and Electronic Clearing Service (ECS).Payments by these modes have been steadily growing in the last few years. Aninternal Working Group set up by the Reserve Bank to examine the variousissues related to migration from paper-based systems to electronic
systemsrecommended a phased approach of encouraging, monitoring and mandating for this migration. The Reserve Bank has been using the approach of encouragingand monitoring resulting in almost 40,000 bank branches spanning over 9773 centres being covered by the RTGS and NEFT systems. A study conducted by the Reserve Bank revealed that during a three month period about 2,100 cheques each valued at Rs.1 crore and above were processed
in the clearing houses in the four metros. It is proposed that with effect from
April 1, 2008 all payment transactions of Rs. 1 crore and above between RBI regulated entities i.e. banks, primary dealers and NBFCs as well as in RBI regulated markets i.e. money market, Government Securities market and foreign exchange market may be mandated to be undertaken through electronic mode only. This move will not only reduce risk from moving large paper-based value retail payments to safer electronic modes, but will
also bring greater efficiency and customer convenience to the payment systems.
Recognising the importance of electronic payment systems in ensuring safe, secure and fast
payment and settlements RBI has put in place three modes of payments:
48 INDIANOILCORPORATIONLIMITED(IOCL)
Sl. No.
1
PaymentSystems
RTGS (Real Time Gross Settlement)
Features
For online real time settlement of systemically important payments. Minimum transaction value Rs.1.00 lakh. Transaction window from 9.00 a.m. to 4.00 p.m. Amount is credited to the beneficiary's account within a maximum time of 2 hours.
For settlement in batch process 6 settlements a day on week days and 3 settlements on Saturday. Customers accounts credited on the same day for first four settlements and by the next day for the last two settlements
Netted settlement for bulk transactions of repetitive nature (dividend, salary, pension payments,refunds, vendor payments).
Efficiency Of e-Collection: By migrating away from the paper check, businesses have the ability to increase
efficiency and realize numerous hard and soft benefits, both in their bottom lines and to
payments. Cost savings come from a variety of areas related to electronic payments among the most readily quantifiable are reduced head count, lower administration costs and decreased paper usage. The reduced amount of paper consumption can have a drastic and far reaching effect. By making the switch from paper check printing to electronic
49
payments, businesses can eliminate enormous amounts of check, forms and approval documents and envelopes. These savings also cascade into postage reduction. Stremlined Payment Processing
For organizations of all sizes, the move to electronic payment processing can bring additional challenges, however. Although cost savings can be found by replacing paper checks with electronic payments, many organizations are finding that in order to execute electronic payments they must log in to several proprietary vendor systems. This can add operational complexity to an already inefficient accounting process. A simpler approach is to consider working with a payment processor that can execute all payment types on your behalf. Some of these vendors, such as SunGard, can accept payment files directly from your accounting/ERP applications, and even provide least cost routing of payments, dramatically increasing payment processing efficiencies without requiring process change. The speed with which electronic payments can be received and delivered can have even further reaching effects on the bottom line when considering the effort to attain early payment discounts (generally the 2 percent 10 net 30 terms). the average business organization is unable to capture anywhere between 50 percent-60 percent of discounts offered, because their A/P departments are unable to process and pay the invoice using a paper check within the 10-day window that applies to the discount. According to statistics
from PayStream Advisors, the average paper check approval and disbursement cycle
can take between 30-40 days or more, placing the 10-day discount opportunity well out of reach. Aside from the standard discount practices among businesses, electronic, faster payments also means fewer late fees. If the average payment and approval cycle is around 30-40 days, with variances going even higher, then the likelihood of incurring late
fees and other penalties must increase dramatically, again impacting the bottom line.
Improved Visibility to cash, taking advantage of Error Detection and
process. 60 to 70 percent of all enterprises note a lack of visibility across many key aspects of the A/P process, making it increasingly difficult to mitigate risk. In
the middle office, an electronic payments process also creates faster cycling times and payments processing assists the detection of fraud in a timelier manner. Electronic payments are subject to more immediate methods of payment verifications and more
accurate matching without being exposed to as much chance for human error
Going green and improving corporat e citizenry in addition to the bottom
line
The green movement plays an important role in todays business landscape. Not only is there the environmental impact many companies are reducing, but the positive effect on their corporate culture and the way they are viewed by other organizations and consumers can also have a beneficial effect on bottom lines. According to statistics found on the non-profit PayItGreen Alliance Web site, paper checks require more than 674 million gallons of fuel and produce over 3,628,200 tons of greenhouse gases over the course of
their lifetime.
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Key Challenges Ensure accounting of correct quantities in business transactions Ensure on-time update of end-product rates Prevent delays in signing of joint certificates (JCs) Prevent mismatch between JC and system quantities to prevent disputes in transactions Use correct valuation for transactions
Why SAP Was Selected Support for open XML Java standard Integration with the existing SAP ERP application Harmonized with all other components of the SAP NetWeaver technology platform Integration tool for all SAP solutions Support for industry-standard adapters such as RosettaNet and chemical industry data exchange (CIDX)
Implementation Best Practices Embraced open source software the Linux operating system supported by SAP Completed implementation through
resource planning (ERP) deployment for this project too Deployed more economical option of
21 INDIANOILCORPORATIONLIMITED(IOCL)
using open source software Reduced cost of business transactions with other oil companies by accelerating the frequency of settlements from monthly to daily Completed deployment in 9 months, on time and within budget
partners
reconciliation at the plant level Streamlined supply chain performance for Improved data accuracy by 99% Minimized inventory levels Eliminated paper-based JC exchange process Replaced old system with reconciled data flow Reduced cost of exchanges by as much as 95%
53
22
23 INDIANOILCORPORATIONLIMITED(IOCL)
3. Must for Maintaining Solvency and Continuing Production: In order to maintain the solvency of the business, it is but essential that the sufficient
amount t of fund is available to make all the payments in time as and when they are due. Without ample working capital, production will suffer, particularly in the era of cut throat competition, and a business can never flourish in the absence of adequate working
interest and payment of principal in time. 5. Easy Loans from the Banks:
An adequate working capital i.e. excess of current assets over current liabilities helps the company to borrow unsecured loans from the bank because the excess provides a good security to the unsecured loans, Banks favor in granting seasonal loans, if business has a
24
losses, business oscillations, etc. can easily be overcome, if company maintains adequate working capital. 9. High Morale:
The provision of adequate working capital improves the morale of the executive because they have an environment of certainty, security and confidence, which is a great psychological, factor in improving the overall efficiency of the business and of the person
who is at the hell of fairs in the company. 10. Increased Production Efficiency:
A continuous supply of raw material, research programme, innovations and technical development and expansion programmes can successfully be carried out if adequate working capital is maintained in the business. It will increase the production efficiency, which will, in turn increases the efficiency and morale of the employees and lower costs
25 INDIANOILCORPORATIONLIMITED(IOCL)
BALANCE SHEET
CAPITAL SUPPLIED
ASSETS
-Current(ShortTerm) -Fixed (Long Term) -Others
LIABLITIES
-Current -Long Term
DEBT
Shareholder`s EQUITY
STOCK
CASH FLOW
SELL EQUITY ISSUE DEBT <BUY ASSETS> <BUY INVENTORY> MAKE SALES <PAY TAXES> <PAY COSTS> <PAY INTEREST> <PAY DIVIDENDS> Retain profits or repay Debt holders (with Interest) and Stock Holders (with Dividends)
Debtors have the following effect on the working capital of a company: 1. Provides high liqidity position for the company 2. The business depends more on the external sources for financing the day-to-day activity
because payment by the debtors depends on their will. Though the company have the definite credit terms laid down for the debtors but it depends on them and the efficiency
of the collection procedure for the rules to get implemented. 3. If debtor Collection period is moderate or low then it increses the working capital
57
i) Current Ratio- This ratio is most commonly used to perform the shortterm financial analysis. Also known as the working capital ratio, this ratio matches the current assets of the firm to its current liabilities. Current ratio = Current Assets /Current liabilities
ii) Acid Test Ratio/ Quick Ratio- One defect of of Current Ratio is that it fails to convey any information of the composition of the current assets of the firm . A rupee of Cash is
considered as equivalent to a rupee of Inventory which is not the same as the cash is more readily available to the Business. So it is called the Quick Ratio which measures the firm`s ability to convert current assets quickly into cash. The Acid Test Ratio is the ratio between Quick Current Assets and Current Liabilities.
26
Acid Test Ratio = Quick Assets / Current Liabilities iii) Cash Ratio- It is a measure of the absolute liquidity of the firm where only cash and bank balances in hand is considered. It is the indicators which shows how
immediately a firm can meet its liability obligations. It the Ratio between the Cash and Bank
Balances and Current Liabilities. Cash Ratio = Cash and Bank Balances / Current Liabilities
Turnover Ratios
Turnover ratios are used to indicate the efficiency with which assets and resources of the firm are being utilized. These ratios are known as turnover ratios because they indicate the speed with which assets are being converted or turned into sales. These ratios, thus, express the relationship between sales and various assets. A higher turnover ratio generally indicates better use of capital resources which in turn as a favorable effect on the profitability of the
firm.
i) Debtors Turnover Ratio This ratio indicates the relationship between net credit sales and trade debtors. It shows the rate which cash is generated by the turnover of debtors. It is
computed as follows: Debtors Turnover Ratio = Credit sales /Average debtors Where, Average debtors = Opening debtors + Closing debtors 2
Average Collection Period The debtors turnover ratio is usually supplemented by average collection period. The debtors turnover ratio together with average collection period involves
the following steps: a) Calculation of daily sales This is computed as follows: Sales per day = Net sales/No. of working days in a year b) Calculation of average collection period This is calculated as follows: Average collection period = Days in the year / Debtors turnover ratio
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CASH CONVERSION CYCLE: In management accounting, the Cash Conversion Cycle (CCC) measures how long a
firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections
CCC = Days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations.
Revenue / 365
COGS / 365
28 INDIANOILCORPORATIONLIMITED(IOCL)
Cashflows insufficient. The term "cash conversion cycle" refers to the timespan between a firm's disbursing and collecting cash. However, the CCC cannot be
directly observed in cashflows, because these are also influenced by investment and financing activities; it must be derived from Statement of Financial Position data
and (2) collecting cash to satisfy the accounts receivable generated by that sale.
Equation describes a firm that buys & sells on account. Also, the equation is written to accommodate a firm that buys and sells on account. For a cash-only firm, the equation would only need data from sales operations (e.g. changes in inventory), because disbursing cash would be directly measurable as purchase of inventory, and collecting cash would be directly measurable as sale of inventory. However, no such 1:1 correspondence exists for a firm that buys and sells on account: Increases and decreases in inventory do not occasion cashflows but accounting vehicles (receivables and payables, respectively); increases and decreases in cash will remove these accounting vehicles (receivables and payables, respectively) from the books. Thus, the CCC must be calculated by tracing a change in cash through its effect upon receivables, inventory, payables, and finally back to cashthus, the term cash conversion cycle, and the
observation that these four accounts "articulate" with one another. five important intervals, referred to as conversion cycles (or conversion periods):
cash
29
the inventory conversion period or "Days inventory outstanding" emerges as interval between owing cashbeing owed cash
the receivables conversion period (or "Days sales outstanding") emerges as interval
determine :
a) Whether or not to extend credit to a customer considering market demand and how much
credit to be extended b) Peroid of credit c) Whether not to change interest rate and if so at what rate d) Analyse the acceptable mode of security e) Firms credit evaluation f) What would be the net margin after credit outgo g) Consider the performance of the party in past 5 years or so h) Bank`s evaluating data of party`s performance Therefore the credit policy decision of firm has two broad diamensions : 1. Credit Standard & 2.Credit Analysis
DGS&D Sector:
Most of the customers in IOCL`s DGS&D Sector are government Companies and they make payment on boll basis, means when bills are submitted the bills are paid within 2-3 days. These credit poplicies are determined by the Central Goverment itself at the time of determining Budget. These credit terms are also determined by them on individual customer requirement basis. Therefore these customers cannot be treated as credit customers. But it is true that IOCL
has given credit to them but all are determined and controlled by the government.
30
Payment Procedure: Generally all the Para- Military forces give their requirement to MCO New Delhi. Then MCO
Places the order to IOCL in favour of these customers.After supplying the required materials, IOCL sent the bill to MCO office and MCO has paid the billing amount to IOCL. Government of
Credit Ananlysis: Besides established credit standards , a firm has developed procedure for evaluating credit applications. The second aspect of credit policies is credit analysis and investigation. Two Basic steps are involved in this process: a) Obtaining credit information b) Analysis of credit information After analysing the information, the decision is taken for granting credit to customers. IOCL has been obtaining this information from various sources like Internal & External. Internal Sources: Various Forms, Documents, Trade Reference and the contacts of firm`s to judge the suitability of the customer`s for credit. External Sources: Financial Statements, Bnaks Reference, Trade Refernce and Credit Bureau Reports. Generally IOCL take bank gurranty and all required documents for credit supply to their Non DGS&D customers. But in case of DGS&D customers Govt. takes responsibility.
CREDIT TERMS: Credit terms have components Credit Period, Cash Discount, Interest, Security, Volume of Sales. For IOCL the customer especially the DGS&D customers are Govt. customers and they paid their dues immediately after submitting the bill. This whole procedure takes hardly takes 4 to 8 days. Cash discount is generally given to Railways and to DGBR units @ Rs. 150/Kl.
31
CASH DISCOUNT: The cash discount has implecations for the sales volume, avarage collection period, average in
investments receivables and profit per unit. The chages in discount rate would have both positive
purcahse more to get the maximum benefit and the debtors decreases drastically
Since the customers would likely to pay within the discount period, the average collection period would be reduced. The reduction in the collection period would lead to reduction
the key mantra of IOCL`s success. Due to all these policies two aspects are covered:
Degree of effort to collect the overdues: A very rigorous collection strategy would involve increased collection costs as a result the average collection period will be reduced
and profit will be decreased for that reason IOCL has a very strict Collection Policy Type of collection effort: The second aspect of collection policy relates to the steps taht should be taken to collect overdues from the customers. A well-established collection policy should have clearcut guidlines as to the sequency of collection efforts. IOCL`s collect effort is in the beginning is very polite and moderate, but, with the passage of time, it gradually become strict. The steps which are usually taken by IOCL are a) Letters, including reminders, to expedite payment b) Telephonic calls for personal contact c) Personal visits d) Help from collection Agencies like MCO e) Legal Action
32 INDIANOILCORPORATIONLIMITED(IOCL)
there is any beyond credit Outstanding Reasons for beyond credit Outstanding and Action Plan for collecting the same.
Past payment track record of the customer with specific instance of default. if any, with
OMCs/ retentions of existing business etc. Whether the credit is secured and if so what is the security
Assesment of Creditworthiness of the Customer through CRISIL module in line with
existing guideline duely signed Whether the credit is interest bearing and if not the reason for the same
Whether the Retained margin as per unit basis after reckoning the cost of credit at IOC`s current borrowing rate and all the other costs for positioning the product at the intended supply locations and any other incentives like discount, free delivery etc. but before
reckoning the marketing cost is positive. Whether it is a one time credit or for a specific period.
If existing customer the sale of product upto the date of the proposal for the Current Financial Year and the Volume of Sale of the Customer during the cirresponding period of the previous year to access incremental volume/ incremental earnings of retained
margins
Whether the customer enjoys similar fecilities from other Sate Offices/ Region if product
65
any enhancement sought in this within the policy and reason for the same.
If exixting customer to whom discount is sought to be enhanced or to be extended for further period , the sale of products upto the date of proposal for the current financial year and the volume of sale of the customer during the corresponding period of the previous
Interest free Credit, free delivery etc. but before reckoning the marketing cost is positive.
Whether there is a growth in the profitability of the margin level for the existing year as
is uplifted from there. Whether it is a one time basis or for a specific period. Whether the proposal is only for the purpose of quoting in a tender.
66 INDIANOILCORPORATIONLIMITED(IOCL)
IOCL`s bank (SBI) on Real Timeand on Gross basis. Major features of this system as follows: 1.This network is provided by RBI across the country among all the banks.
2.The RTGS service window for customers transactions are available from 9.00 hours to 15.30 hours during week days (Monday to Friday) and 9.00 hours to 11.30 hours on
Saturdays.
3.While remitting the amount, IOCL customers have to give following details to his
bank: a. Amount to be remitted b. Their own A/c. No. With the bank which is to be debited c. Name of the beneficiary bank (i.e. SBI in our case) d.Name of the beneficiary customer (i.e. IOC) e.A/c. No. Of IOC with SBI (18 digit) f.The IFSC (Indian Financial System Code) of receiving branch
In the proposed system, every payment will be accompanied by an 18 digit code (which is mandatory) to enable data downloading into SAP and uploading into the
individual customers a/cs in their Specific Credit Control Areas (CCAs). 1. As a precaution, an enrolment form is designed which is to be filled up before allowing any of our customers using RTGS mode of payment. This format should be signed by state finance & by the field officer under seal and stamp and acknowledgement of customer along with customer contact detail should be obtain on the form. One copy of sign format be sent to HO banking as scanned copy for control purpose.
2. The data of RTGS collection received in SBI A/c will be downloaded centrally by HO
banking at frequent intervals and uploaded into the Customers A/cs through SAP.
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Other important points / features to be noted are given below: 1.Besides the details to be given as mentioned in points a-f above, every payment must
bear an 18 digit code as a mandatory requirement to enable downloading the payment
The logic and structure of this 18 digit code is explained below: First 11 digits reflects IOCs RTGS A/c No. With SBI. 12th is an alphabet field where each alphabet relates to Specific Credit Control Area in our SAP. Last 6 digits indicate SAP Customer Code of the party remitting the payment. With the above structure, every payment is taken not only to the customer code but also taken up to specific credit control area. 1.A table showing the mapping of each alpha to specific CCA is given in Annexure-B. Alphabets like B I O are deliberately ignored to avoid confusion in mistaking as numeric which may be noted. 2.All RTGS payments will be posted in Owning state of Customer. In all such cases where customers are taking supplies from other states, the above feature must be borne in mind the supplying location and supplies should be effected against available overall credit balance in the account irrespective of the company code. Owning state of the customer should take full responsibility in monitoring the a/c and ensuring credit limits or payment against supplies. 3.Every payment through RTGS is identified with a Unique Transaction Number (UTR) which will be captured while posting collections in SAP and the same will be reflecting in the PAD also. 4.From the time the customer remits the payment to the tome his a/c in IOC receives the credit, the process takes about 2/3 hrs. which may be appraised to the customer while enrolling. 5.The posted RTGS transaction can be viewed in SAP vide t-code: FBL5N in GL Code 6010100061 in Co Code 0100
68 INDIANOILCORPORATIONLIMITED(IOCL)
Precautions 1. Customer should strictly adhere to filling up 18 digit code for each payment which only enables proper accounting of the payment.
2.Any payment transfer not complying the 18 digit structure will get rejected and result in infructuous interactions between banks, IOC, State Offices and customers which should
be totally avoided.
3.SV/TV remittances by LPG distributors are not permitted under RTGS system since the SAP code for SV/TV customers is 7 digit and the 18 digit code structure will
ensure smooth functioning of the process. Benefits1.Enormous manual work of handling instruments, preparation of cash receipts,
cash of DD/Pay Order/Cheque funds are credited in IOCL account after 2-3days.
3.Administrative convenience to customers since they are required to advice their own banker to transfer funds to IOCL account without any further botheration of
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ANALYSIS
33 INDIANOILCORPORATIONLIMITED(IOCL)
3.66
3.05
2.73
2.06
2.14
2009-10 36.63
9.96
2011-12 46.74
7.81
Table 3: DTR and ACP of IOCL from 2007-08 to 2011-12 From the table it is seen that Debtors turnover ratio of IOCL shows an increasing trend
with the exception of the year 2011-12 and it indicates that the debts are being collected more quickly. The changes of the ratio shows that the efficiency in the companys credit policy or better performance in its ability to collect from its debtors. For the Year 201110 the sales has decreased for the company by 5.79%. Though the Debtors has also decreased but not that the same ratio, so the ratio has jumped up. The reasons cannot be
34
2007-08 2008-09 Sundry Debtors Over Six Months From Subsidiary Companies 24.28 197.39 Unsecured, Considered Good From Others 0.00 0.00 Secured, Considered Good 62.44 28.13 Unsecured, Considered Good 255.04 247.24 Unsecured, Considered Doubtful 341.76 472.76 Subtotal Other Debts From Subsidiary Companies 2,145.40 1,790.77 Unsecured, Considered Good From Others 0.00 0.00 Secured, Considered Good 4,465.91 4,719.77 Unsecured, Considered Good 0.70 2.47 Unsecured, Considered Doubtful 6,953.77 6,985.77 TOTAL 255.74 249.71 Less: Provision for Doubtful Debts 6,698.03 6,736.06 Consolidated Total Table 4: Schedule for Sundry Debtors from 2007-08 to 2010-11
2009-10
2010-11
162.19
0.00 43.70
28.69
8.18
540.30 746.19
ANALYSIS:
Fig.12: Classification of Debts considered Unsecured & Good and Unsecured & Doubtful
35 INDIANOILCORPORATIONLIMITED(IOCL)
Fig. 13: Classification of Debts from Subsidiary Companies and Other Companies Table 4 shows the Breakup of the Total Sundry Debtors under different heads like Over Six Months and Other Debts.
Among the debts over 6 months 71.23% has been proposed to be doubtful on an average. And the whole of it from Other Companies. The Debts over 6 months for subsidiary
increasing over the years and this whole part is contributed by the Other Companies.
From the Fig.13 it can bee seen that the Debts from Subsidiary Companies has fluctuated over the years but in case of Other Companies the debts has increased round the years
36
Fig. 14 : Line Graph showing the different Liquidity Ratios of IOCL From the above Table 5 it can be seen that the current ratio is getting decreased in the year 2008-09 and in 2010-11, whereas it is considerably high in the year 2009-10.
The Quick Ratio is keeping constant in 2007-08 & 2008-09 but in 2009-10 it is climbing
increased slightly. In the case of 2008-09 the decrease in current ratio is mainly due to the the following:
The current liabilities and provisions has increased at a higher rate than the current assets. Thus there has been an decrease in the working capital of the
37 INDIANOILCORPORATIONLIMITED(IOCL)
There has been a steep rise in the inventory level along with the loans and advances but along with this the current liabilities also increased. The cash demand was met due to this.
But this effect was not shown in the Cash & Bank balance as it maintained a
Quick Ratio decreased as well. The main reason behind this are the following:
There has been a steep fall in the Inventory Level as the excess stock was
liquidated. More strict control was implemented on the Loans & Advances. The debtors came down even further to Rs. 5937.86 Crores.
In 2011-12, the Inventory has increased by 44.75% , which has resulted in the increase of the Current Ratio, when actually the Quick Ratio has decreased to 0.51:1. But the Cash Ratio has increased also which shows the Absolute Liquidity has increased for the
Comapany.
CONCLUSION: All the Liquidity Ratio are well within the alarming limits of the Industry. But the Current Ratio is highly fluctuating for the Company whereas the Acid Test Ratio is more or less stable. This shows that the fluctuation is due to the Inventory level. So company should try to maintain an even inventory level by following a proper Inventory Control Technique/Model like EOQ Model
or ABC Model.
38
Net Working Capital 10806.73 9351.31 18350.32 9177.15 Table 6 : Working Capital including Current Assets and Current Liabilities of IOCL
14637.07
Fig. 15 : Bar Graph showing Working Capital including Current Assets and Current Liabilities of
IOCL 39 INDIANOILCORPORATIONLIMITED(IOCL)
The Working Capital Requirement of IOCL as in most Public Sector Enterprises, are met through cash credit and advances arranged mainly with the State Bank of India and other
Nationalized Banks.The excess over the margin money if required is usually covered by a gurantee from the Central Government. Whenever the total requirements of working capital cannot be met by Cash-Credit arrangements by SBI, IOCL can approach the Government for term loans. On Such a request the Government ususally examines the validity of the request visa-vis the internal resources of the undertaking and makes the decision to grant the term loans.
This process of taking term loans is undertaken at the Head Office Level.
05-06 to 06-07 06-07 to 07-08 07-08 to 08-09 08-09 to 09-10 7.05% 15.69% -13.46% 35.6% 16.41% 96.23% -16.93% 2.24% -49.98% 33.35% 26.56% 59.49%
Table 7: Change of CA, CL and WC of IOCL from the previous years From the above Tables and Figs. the following interpretation can be done: The Company tries to maintain a stable working capital around Rs.10,000 Crores but has failed to do so in the years 2009-10 and 2011-12. This is mainly because the company could not maintain a stable Inventory Level in those years. As the inventory constitute about 65% of IOCL`s Current Assets a strict regulation over it can largely affect the Working Capital of the Company. As Petroleum is an essential commodity it has an even demand in the market. So as there is no huge fluctuations in the demand it helps in predicting the sales. But the main cause of concern for the company is the availability of the fuel at international markets and the rise in the International Fuel Prices over the years. As the major part of the requirement is imported from South East Asian countries, the Ecomonic and Political scenario of these countries also imporment from IOCL`s business point of view.
40
From Table 7 we can see that 2009-10 has been an year of huge turmoil when there was
a 36.6% increase of Current Assets which occured mainly due to increase in the Inventory Level and Loans and Advances. The Loans and Advances increased as Govenment issued Oil Bonds for IOCL in that year to Compensate the huge losses which the company suffered during this year due to rise in the Crude Prices. Due to in increase in the Fuel Prices there was a problem in the cash flow of the company. So to finance the short term obligations the company had to go for the Short-Term Loans. Hence the Current Liabilities had increased. The Net result was a 96.23% surge in the Working
Capital.
In 2010-11, the situation came back to normal when the Current Assets droped by 16.93% and Working Capital Decreased by 49.98%. This was mainly due to a strict credit policy which brought down the Debtors and lowering of the inventory due to high
demand of fuels.
Breakup Of the Current Assets and Current Liabilities Under different Heads
like Cash & Bank, Debtors, Loans & Advances, Inventory & current
Fig. 17: Area Graph showing Breakup of Current Liabilities From Fig. 16: it can be seen that : Cash and Other Current Assets has increased at a constant rate and Sundry
Debtors has decreased at a constant rate when the Sales of the Company has
from the year 2009-10 by receiving the Oil Bonds. From Fig.17 : it can be seen that: The provisions has drastically increased by about 294% in the year 2011-12.
The current liabilities had incresed in the year 2009-10 but after that IOCL has maintained a stable current liability level which is good because it finances the
42
85.37
712.65
798.02
123.98 10.14 0.16
134.28
3. Bank balances with Non Scheduled Banks: a) Current Account Myanmar Economic Bank Branch (5), Rangoon [ Maximum balance during the year- 0.88 crore] TOTAL(1+2)
0.88
0.88
0.88
744.17
925.97
824.43
798.02
Fig.18 :Bar Graph showing the Cash and Bank Balance Trend of IOCL
ANALYSIS:
From the Table it can be seen that almost 92% of the Cash & Bank Balances comes from the
Cheque Balance. But it would be better if this Balance comes more from the Cash Balances or
2010-11 Average 8.25 34.95 27.20 16.00 11.17 44.40 31.81 23.76
Days of Payable Outstanding Cash Conversion Cycle Table9: Cash Conversion Cycle ANALYSIS:
Cash conversion cycle is likely to be negative as well as positive. A positive result indicates the number of days a company must borrow or tie up capital
while awaiting payment from a customer. A negative result indicates the number of days a
company has received cash from sales before it must pay its suppliers.
Of course the ultimate goal is having low CCC, if possible negative. Because the shorter
the CCC, the more efficient the company in managing its cash flow.
It can be seen that the Cash Conversion Cycle for Indian Oil is on the higher side with an average of 23.76 days. It means that IOCL have to borrow for 23.76 days to finance its
Holding to lower this CCC even negative to better it Cash Flow position.
81
Registration with DGS&D Registration with DGS&D is a process by which firms can get enlisted as an approved supplier to qualify for participation in DGS&D procurement programme.
DGS&D registers suppliers for specialized items after verification of their technical
Different Categories of Registration: Indigenous Items: Indian Manufacturers/ Assemblers/ Converters. Authorized Agents/ Distributors of registered Indian Manufacturers Stockist of certain specified indegenous stores Imported Items: Foreign Manufacturers with or without Indian Agents Stockist of Imported Stores Suppliers of Inported Stores
Advantages In Associating with DGS&D: To Suppliers: Its registration is held in high esteem by all Govt. Departments. Award Of Contract lends respectability & Image enhancement. Marketing effprt requires is nominal. Consistent & Uniform purchases policies & procedures
82 INDIANOILCORPORATIONLIMITED(IOCL)
Availability of Technical guidance for upgrading manufacturing process & for building product quality Uniform Quallity Assurance techniques lead to standardization Registered Suppliers are given prior intimation about tenders.
To Buyers: Facility of Bulk purchase of lowest competitive price. Enables buying as & when required Saves effort involved in tedious & frequent tendering Just in Time availability of suppliers & inventory management Availability of quality goods with full quality assurance back-up
Benefits of DGS&D Registration: Rate contracts for Govt. Purchases concluded with registered firms. Registered firms granted exemption from earnest money/ security deposit. Tender enquiries are supplied free of cost to Small-scale Units Issue of advance tender notices to concerned registered firms.
Quality Assurance Wing: Quality Assurance wing of DGS&D(formally Known as Inspection Wing) is the Inspection Agency of the Govt. Of India.
Consists of a team of professionally qualified experts, trained in India & abroad in
various disciplines of Engineering. Renders inspection & technical services for Quality Assurance in procurements activities
Technical arm of DGS&D providing complete support in purchase activities by laying down specifications, assessing the vendors, technical evaluation of bids & assuring
quality of stores for their conformity. It has 35 centres covering all industrial locations in the country. Provides third party inspection service for civil indentors.
83
Functions: Quality assurance of products at various stages of manufacture, commissioning & testing
Preparation of technical specifications for tender enquiry & technical evaluation
of bids Vendor assesment for placement of contracts and registration Testing & evaluation of stores Failure investigation of stores Development of small scale industries and KVIC units Quality Audit of supplies at users end
Provides single window service by giving information about DGS&D functions to
the indentors & the industry Assisting BIS in preparation and updating of National Standards.
84 INDIANOILCORPORATIONLIMITED(IOCL)
Sales in DGS&D Sector for 2010-11 & 2011-12 in the Eastern Region:
Amt.(in Crores)
Month April May June July August September October November December January February March
2010-11 123.84
143.04 149.02 143.08 147.71 166.80 138.15 178.70 193.01 167.24 183.37 243.85
2011-12
176.48 199.98 192.26 243.59 222.28 242.80 219.22 202.12 214.90 166.47 187.41 199.04
% Increase(Decrease)
42.51 39.81 29.02 70.25 50.48 45.56 58.68 13.11 11.34 -0.46 2.20 -18.38 24.71
Total 1977.81 2466.55 Table 10 : Sales in DGS&D Sector for 2010-11 & 2011-12
85
ANALYSIS: It can be seen from the above table that the Sales in the DGS&D Sector for Eastern
Region has seen a constant growth in 2011-12 over the previous year. For every month, except January and March, the sales has increased from 70 to 2%. The overall growth of
sales for the year is also showing positive trend and has a stable growth of 24.71%.
This is mainly due to the excess demand of Lubes and MS/HSD in the Railways and
AirForce.
The drop in Sales in the month of March is due to the stricter credit policy due to the year
Customers Month April May June July August September October November December January February March Total
DGS&D
Rly
Army
Air Force
DGBR
8.74 15.58 16.03 17.21 14.47 23.94 15.85 18.64 19.88 18.86 11.81
5.68
17.75 21.92 24.71 24.55 24.82 28.61 24.40 23.33 25.15 16.73 20.32 25.69 277.98
42.36 43.61 34.21 43.60 40.02 50.92 40.29 45.94 35.06 22.69 23.70 22.35 444.75
7.42 13.22
7.46
25.36 27.79 20.46 21.00 22.67 20.53 15.97 30.95 19.60 232.43
114.28
92.22
186.69
Particulars Opening Balance Current Months Sales Total(A) Collection(B) Outstanding (A-B)
DGS&D 18.57
5.68
Table 12 :Outstanding from DGS&D as on 31.03.2010 (ER) ANALYSIS: From Table 12 it can be seen that Railways contribute about 53.07% in the total sales in
the DGS&D Sector but contributes only 30.27% in the outstanding in DGS&G Sector. This signifies a very stable collection period and regulation over the outstanding despite
444.75 19.72
4.43
87
Fig. 20 : Comparison of the Outstanding as a % of Sales in Eastern Region And Overall for the Company.
ANALYSIS: The above graph clearly depicts that the Outsatnding in DGS&G, Army, Airforce and
DGBR in the Eastern Region shows a sharp deviation from the Overall Outastanding
average.
From this it can be inferred that the Government has fixed different credit fecilities for
88 INDIANOILCORPORATIONLIMITED(IOCL)
The Average Collection Period for DGS&D can be calculated by the following formula: Average Collection Period= Total Outstanding / Daily Sales Where, Daily Sales= Current Month Sales / Number of Working Days in a Month
Considering 26 days a month the Average Collection Period for Railways for month of March is Daily Sales=125.72/26 = 4.835
Average Collection Period = 30.51/4.835 =6.31 Days Similarly, the ACP is calculated for the other customers shown in the following table.
(In Days)
Customers Month April May June July August September October November December January February March Total
DGS&D
Rly
Army
Air Force
DGBR
Total
31.37 24.88 33.66 27.68 40.82 32.58 21.15 42.21 33.58 38.04 40.85 46.87 17.11
14.57 10.83 12.77 13.68 16.23 10.16 16.13 14.03 11.87 16.05 13.18 6.31 7.19
20.51 22.33 23.18 22.08 29.83 18.40 22.14 23.47 23.33 26.08 22.33 10.92 12.11
13.55 37.94 21.49 16.66 19.55 13.66 14.89 15.21 16.27 27.57 27.93 22.96 13.83
132.49
91.41 88.42 39.50 20.22 25.50 28.81 34.42 31.79 50.59 37.08
20.68 20.31 20.34 18.74 20.47 15.38 22.63 20.28 17.84 24.44 21.73 13.16 12.75
39.13 39.60
Fig. 21: Comparison of IOCL`s ACP of DGS&D (ER) with Overall ACP for 2011-12 ANALYSIS: From Table 14 , we can see that the Average Collection Period for the DGS&D customer
is 12.75 days, i.e. 13 days approximately which is much higher than the Overall average. Fig. 21 shows the deviation of the ACP of different DGS&D customers from the Overall Avearge of 7.53. This shows that there is a huge deviation for DGBR and Airforce and other DGS&D. This has effected the liquidity of the Company and created a cash flow
problem.
For most of the DGS&D customers the negotiated credit period varies from 15, 30 to 60 days . so the ACP is high in their cases. From that perspective it can be said that the
90 INDIANOILCORPORATIONLIMITED(IOCL)
Sales and Outstanding of Non DGS&D Customers till 31 March 2011 (ER):
Customer Fertilizer Steel Plant Power House Aviation Shipping Comapny LPG Export Navy R/O Agency Others
% 1.45 1.34 1.61 1.63 2.03 1.60 1.65 1.23 1.71 0.98
4015.57 14372.75
68.51 140.65
Total 25647.37 316.02 1.23 Table 15 : Sales and Outstanding of Non DGS&D Customers till 31 March 2011 (ER) ANALYSIS: From the Table 15 it can be seen that about 56.03% of the Total Sales in the Non
DGS&D sector comes from the Other Customers but they contribute only 44.50% in the total Oustanding in the same.So the Outstanding from the Non DGS&D sector from the
Other companies is only .98% of the Sales in the same which is a good indication.
Overall it can be seen that only 1.23% of the total Sales in this sector is Outstanding amount which reduces the chances of bad dedt and indicates the efficient collection
procedure of IOCL.
91
Fig. 22 : Comparison ofAACP of Non DGS&D Customers with Overall in 2011-12 TheFig. 22 shows the Average Collection Period for IOCL and compares this ACP with the ACP of the different Non DGS&G Customers. The ACP for the Company is 7.81 in 2011-12 but the ACP for all of the Non DGS&D Customers is much less than that. The Shipping Co. has the ACP of 6.38 which is highest among the Non DGS&D Customers. So it can be said that the Eastern Region has maintained a strong regulation of the Oustanding for the Non DGS&D Customers.
92 INDIANOILCORPORATIONLIMITED(IOCL)
36.63
9.96
48.46
7.53
IOCL
60.70
6.01
51.96
7.03
HPCL
64.71
70.75
75.65
101.98 3.58
78.27 4.80
Average Collection Period(Days) 5.64 5.16 4.83 Table 17: Comparison DTR and ACP of IOCL with HPCL and BPCL
BPCL
ANALYSIS:
Fig. 23: Comparison DTR and ACP of IOCL with HPCL and BPCL
44
The Average Collection Period has continuously decreased for IOCL and BPCL over the
period of 2007-08 to 2010-11 whereas it has incresed for HPCL in the year 2010-11 after
IOCL has a better collection procedure and credit policies than its competitors.
The situation is a little alarming for HPCL because the ACP has increased 17% in the
to decrease over the years with the present collection procedure which IOCL is following.
2009-10 2010-11 Average 2.73 1.65 2.06 1.92 2.88 1.79 1.32
BPCL 1.55 1.41 1.32 0.98 Table18 : Debtors as a percentage of Gross Sales for IOCL, HPCL and BPCL
Average Sales of the 3 Companies from 2006 to 2011:(Rs in Crores) IOCL 2,35,373.62 HPCL 96,439.40 BPCL 1,14,919.51
The Debtors as a percentage of Gross Sales is seen in the above table which shows that
IOCL is definitely on the higher side in comparison to HPCL and BPCL. But the sales of IOCL is almost double than the that of both the companies. So considering the size of the business it is obvious that the inventory and the Debtors will be on the higher side. But
the positive side of it is that it is constantly coming down. Even in the year 2009-10 which was a year a great turmoil they maintained a low debtor percentage of 2.73.
45 INDIANOILCORPORATIONLIMITED(IOCL)
LIQUIDITY ANALYSIS:
Company Ratios Current Ratio IOCL Quick Ratio Cash Ratio Current Ratio HPCL Quick Ratio Cash Ratio Current Ratio Quick Ratio
2008-09 2009-10 2010-11 Average 1.31 0.48 0.03 1.13 0.33 0.01 1.21 0.44 1.50 0.60 0.02 1.55 0.38 0.02 1.35 0.62 1.25 0.55 0.02 1.36 0.45 0.05 1.19 0.66 1.37 0.53 0.02 1.36 0.39 0.02 1.29 0.54 0.06
BPCL
Cash Ratio 0.05 0.08 0.07 0.03 Table19 :Comparison of Liquidity Analysis of IOCL with HPCL and BPCL
ANALYSIS:
Fig.24 :Line graph comparing Current Ratio and Quick Ratios of IOCL, HPCL and BPCL
46
The Current Ratio and the Quick(Acid Test) Ratio for all the 3 Companies is showing a fluctuating trend over the years.
The year 2008-09 had shown a decrease in the Current Ratios for all the companies whereas the year 2009-10 showed a sharp increase in the same. But for
resulted in larger inventory for all the companies specially for IOCL.
For IOCL, though the Current Ratio increased sharply in the year 2009-10, the Quick ratio rise was less. This indicates that the inventory has increased drastically in this year. From the balance sheet it can be seen that the inventory has increased by 25.25% in this year. Parallaly the loans and advances had also increased by 129.1% in the same year. This abrupt rise is because IOCL received
behind it is the rise in the grant of loans to other companies which was considered
as good.The Cash Ratio is more or less constant for the chosen companies and
among the 3 BPCL maintains a higher cash and bank balances which is a good
sign of liquidity of the company. So in conclusion it can be said that though IOCL has highest value of for the
Current Ratio 1.37 but it is below 1.5 which is considered as good. The Quick
Ratio is also on the higher side. But in comparison with size of Sales of IOCL it has maintained a stable ratio. But there is a chance of improvement in controlling the Inventory and the Debtors for IOCL which can improve their liquidity
position more.
47
PROFITABILITY RATIO:
97
Company Ratios
IOCL
HPCL
2.35
1.17
1.15
20.49 17.81
10.50
9.51
10.22
9.45
BPCL
4.27
3.92
3.29
25.79
22.24 12.41
15.19
8.89
ANALYSIS:
Fig. 26: Area graph showing Profitability Ratios of IOCL, HPCL and BPCL Fig.27: Line Graph showing Return on Capital Employedand Return on Fixed Assets
98 INDIANOILCORPORATIONLIMITED(IOCL)
From the above graph we can see that after the year 2008-09 which showed a huge rise in
the Gross Profit for all the companies, there has been a downward trend for the profit of all the companies. For IOCL it can be said that there had been a huge fall in the profitability and hence the Gross Profit Ratio. This is mainly due to a huge rise in the
Manufacturing, Administration, Selling and Other Expenses. This expense shot up to Rs. 160352.58 Crores in 2010-11 from Rs. 115163.07 Crores in 2009-10. The Raw Material consumption increased in this year which was due to the increase in the purchase by 24.59% which decreased the Gross Profit of the Company. The Return on Capital Employed is on the very higher side for all the 3 Companies. This is because all these companies being PSU s a very small portion of the Capital is through Equity Shares. The Return on Fixed Assets has been on a comparatively higher position for IOCL than HPCL & BPCL. The main difference in the Fixed Assets of the other two Companies is with IOCL is in the Plant & Machinery. The Plant & Machinery for IOCL is almost 3 times that of the other 2 Companies. This is due to the huge Refineries and Bottling Plants which IOCL pocess. So in conclusion it can be said that IOCL has maintained the highest average of Gross Profit Ratio among the 3 Companies. Though there was a sharp decrease in the Profitabilty in the Year 2010-11 the situation has completely changed in 2011-12 where the company has registered a gross profit of 10000 Crores. So in terms of profitability also IOCL is in a better situation than its PSU Competitors.
99
ANALYSIS OF DEBTORS UNDER RSO Monitering and Control on Beyond Credit Outstanding:
Guidelines are issued from time to time underlining the need to moniter the outstanding and
control the incidents of beyond credit outstandings. Guidelines are also issued on the checks and control to be exercised at supply locations to obviate the possibility of releasing supply beyond
commening credit supply to any customer. The credit approval, apart from other things must specifically contain the following: Product to be supplied on credit
Monetary limit of credit. Where the product is to be supplied from more than one
location monetary limit for each of the supply location. Number of days credit and Validity Period
Based on above, location/finance in-charge of location shall feed the required details/limit in the Credit Master immidiately. Supply shall not be released beyond the
approved limits. Following is ensured in TDM: Password security to be maintained and password to be changed periodically.
TDM terminal to be installed in the rooms of the Location in-charge/finance incharge for authorizing exceptional cases instantly and over viewing of
functioning of S&D.
Only Finance in-charge/location in-charge to exersise financial authorization as
per TDM option. Daily review of exceptional listing by Location in-charge/finance in-charge.
Review of one line PAD on Daily/ monthly basis by Location in-charge/finance
in-charge. In case of Cash and Carry Customers, product to be supplied only against: DDs or Pay Orders for the value of product or Cheque, if cheque fecility have been approved for the party or Fund Transfer Credit(FTC) covering the value of suply or Adequete credit balance in the PAD
100 INDIANOILCORPORATIONLIMITED(IOCL)
Table 23:Customerwise Tabulation of Outstanding and Beyond Credit Outstanding under RSO ANALYSIS:
Fig.28: Bar chart showing Outstanding and Beyond Credit Outstanding under RSO
101
The Outstanding for the 6 Months from January to June in RSO is analysed in this
Section. It can be seen that the Outstanding in the month February is highest among the
The beyond credit oustanding for the first 3 months is also showing a downward trend
reaching the least in the month of March. This is because of the closing in the month of March when the Debtors are pushed to make their due payments. All the lagging outstandings are tried to be cleared in this month. The Private companies are focussed in this month March and their Outstanding decreased drastically in this month by 42.63%
along with a more or less decrease from all other both Private and Goverment.
But what is alarming in this figures is that the beyond credit outstanding has jumped in
the Month of April to 6.19% from 4.56% in the previous month though the oustanding has increased minimally by about 19.81%. This may be due to the negligence from the administration in this month to collect the previous month`s outstanding which was
The situation normalized after April in the months of May and June when the outstanding
increased by 13.87% in May but decresed by 5.46% in the month of June, but for both the
months the beyond credit outstanding decreased to 5.32% and 5.12% repectively.
So in conclusion it can be said that Indian Oil RSO has a highly fluctuating trend of
Outstanding from debtors as well as the Beyond Credit Oustanding which can result into
Table24: Productwise Tabulation of Outstanding and Beyond Credit Outstanding under RSO ANALYSIS:
From Fig. 30 it can be seen that among all the products, Naphtha and FO is showing the
highest Credit Outstanding. This due to the credit policy for this two products where the Company allows 30 days of credit to the Customers. But the Beyond Credit Outstanding for this two Products is almost nil for the considered 6 Months. This is a highly positive sign becuase most of the Naphtha and FO customers belongs from Private-Others
Category.
Almost 99% beyond credit outstanding comes from the Lubes and MS/HSD but relatively the outstanding figures for these two products are almost half that of FO and one-third that of Naphtha. The Credit Period for the Lubes is 60 Days for Government
Government Bodies. So the debts are secured in that sense. But this extra fecility should not be given to the Government Companies because they are already enjoying an extra 30 days fecility over the Private Companies.
104 INDIANOILCORPORATIONLIMITED(IOCL)
Row Labels
POWER HOUSEGOVT LDO LUBES STEEL PLANTSGOVT BITUMEN LUBES MS/HSD P&S OTHERS GOVT-OTHERS BITUMEN FO LDO LPG LUBES MS/HSD P&S OTHERS LPG-PVT LPG STEEL PLANTS-PVT LUBES POWER HOUSE-PVT LUBES PRIVATE-OTHERS BITUMEN FO LUBES MS/HSD NAPHTHA P&S OTHERS RO/AGENCIES LPG LUBES MS/HSD
%
9.29 0.00 24.00
362.65
50.23
174.37
0.00
48.08
0.00
153.38 140.15
18.89
137.43
36.94 0.00
89.60 26.36
0.00
1,083.42 133.58
4.27
147.37
0.00 0.00 0.00 0.00
13.60
0.00 0.00 0.00 0.00
564.95
18.37
312.08
43.15 7.02 1.47 1.47 13.08 13.08 2.80 2.80
147.37
0.00 0.00 0.04 0.04 0.00 0.00 0.00 0.00
47.22
0.00 0.00 2.73 2.73 0.00 0.00 0.00 0.00 1.48 0.23 0.00
8,109.72
23.63
119.68
0.05 0.00 79.21 40.42 0.00 0.00 74.29 0.00 0.00 74.29
37.19
8.79 0.00 0.00
41.37
0.00 0.00
159.34
46.62
Grand Total 9,825.36 522.50 5.32 Table 25 :Pivot Table showing the outstanding status Customerwise and Productwise
105
CASE STUDY
48
INDIANOILCORPORATIONLIMITED(IOCL)
passed.
1. M/s Rifle Factory, Ishapore is IOCL`s major Customer under defence category in RSO. IOCL has All India Rate Contract with Ordnance Factory Board for the supply of various grades of Lubricants for their 39 Factories. M/s Rifle Factory, Ishapore is one such Unit. 2. IOCL had lodged a claim against their outstanding and M/s Rifle Factory have replied back that they have no outstanding to IOCL for all the factories. 3. After detailed investigation of all the invoices IOCL have identified the following. 4. M/s Rifle Factory have placed various supply orders on IOCL according to the rate in the Rate Contract and have made supplies accordingly. However there are certain cases in which higher rates have been charged and hence those cases have resulted in generation of non-claimable outstanding in their PAD with IOCL. 5. No Credit Note has been Issued till date for the cases mentioned in the Note.
(in Rs.)
Applicable LAV 30.94 34.66 27.71 37.95 56.96 55.82 56.96 57.37 53.40 38.55 38.55 40.15 44.35
Invoice Value(actual) 511009 61425 46398 251612 746923 732825 746923 751993 243148 520056 24189 290264 565720
Correct Invoice 348790 38099 30460 156433 704383 690285 704383 709453 234794 456159 21217 265167 479543
620557593
622284222
624393300 TOTAL Table 26: Invoice Details of M/s Rifle Factory, Ishapore
9450 840 840 3150 9450 9450 9450 9450 3360 9030 420 5040 8400
49
Diff.
Sales Tax(12.5%) Charged App Diff. 19,654 6,825 5,155 13,415 4,233 3,384 6,239 2,592 1,771
5,673
113
11.3.2005
612522446
251,612
156,433
95,179
30,764 615
19,127 11,637 383 86,124 1,722 84,400 1,688 86,124 1,722 86,743 1,735 28,708 574 55,697 1,671 2,591 78 32,377 971 52,156 233 5,201 104 5,201 104 5,201 104 5,201 104 1,021 20 7,802 234 363 11 3,064 92 9,373
27,957
17,381 10,575
9.6.2005
615999647
746,923
704,383
42,540
82,991
78,265
4,727
29.11.2005
616000145
732,825
690,285
42,540
81,425
76,698
4,727
21.2.2006
616000377
746,923
704,383
42,540
91,325 1,827
82,991
78,265
4,727
13.8.2006
616015743
751,993
709,453
42,540
91,945 1,839
83,555
78,828
4,727
21.5.2007
616159880
243,148
234,794
8,354
29,729 595
27,016
26,088
928
16.8.2007
619510331
520,056
456,159
63,897
63,499 1,905
2,953
57,784
50,684
7,100
19.1.2008
620557593
24,189
21,217
2,972
2,688
2,357
330
89
30.8.2011 622284222
290,264
265,167
25,097
35,441 1,063
32,252
29,463
2,789
15.2.2011 TOTAL
624393300
565,720 5,492,485
479,543 4,839,166
86,177 653,319
62,858 573,152
53,283
9,575
512,346 60,806
Table27:Breakup of the invoice of M/s Rifle Factory in ED, Sales Tax and Cess
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ANALYSIS SUGGESTION: The difference in charged NTV and applicable LAV per invoice is having difference on account
of exise (Rs. 82134) and on account of Sales Tax (Rs.60806) ie. Total amount Rs.142940. The same had been calculated on the basis of the breakup of the pricing. The charged NTV had been checked with the SAP and found correct. The Applicable LAV had been checked with the
pricing agreement as per attached annexures and found to be correct. FINAL DECISION:
ED , RSO approved the issuance of credit note for differential amount of price for mentioned invoices except for ED and Cess differential. A Credit Note of Rs.571185 was issued for Rifle
Factory.
RATE CONTRACT FOR SUPPLY OF DIFFERENT TYPES OF LUBRICANTS BY GOVERNMENT OF INDIA, MINISTRY OF DEFENCE, ORDANANCE FACTORY
BOARD
With refence to IOCL`s rate, a Rate Contract was placed on IOCL on behalf of President
of India for supply of 55 Items in various places of India. The period of contract was for 12 months
The prices towards the supply of various grades of lubricants and greases was according
Duty. Sales Tax and other Statutory Levels was paid applicable on the Date of Supply.
The Ordanance Factory was also entitled for an additional Discount of Rs.500 per Kl
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Conclusion :
The Debtors of IOCL are more or less well managed because though the Sales is
increasing every year the Sundry Debtors are decreasing. So is the Average Collection
can also be reduced which will also help in reducing the CCC of the Company.
In comparison to the competitors like HPCL(6.55 days) and BPCL (4.80 days), IOCL gas a much higher Average Collection Period of 10.5 days which can be brought down if the Credit period in the DGS&D in decreased as the ACP of Non DGS&D is well below the
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Recomendations:
1. Strict collection procedure should be implemented for the Beyond Credit outstanding
Customers for IOCL. In severe cases Debt Collection Agencies can be implemented to
longer policy
3. Just in Time Inventory mechanism should be followed by IOCL to reduced the Inventory Holding Period and there-by the CCC of the Company can be decreased
market with Private players like Reliance and Essar Oil entering the scenerio. 5. For better receivable Management, IOCL has to take some Steps:
a. Prices and Discounts should be updated in SAP regularly,so that correct
regulation
6. IOCL buys product at International Prices and it is forced to sell the products to ratailers and customers at Goverment regulated prices, which is sometimes less than the purchase prices. All this leads to huge loss to IOCL.Therefore IOCL has to take some
policies: a. Government should consider the better Pricing Policies to prevent losses.
b. To allow IOCL to control the prices of the Premium Brands. Rates of
the same product. Eg. High rate of LPG cylinders to high income groups and subsidized rate to low income groups.
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Limitations:
1. Time is definitely the main Constraint. Time was not sufficient enough to assess all processes and policies of an organization of the stature of IOCL.
2. Inadequecy of required data is another constraint. In such situations data is taken with
certain assumptions.
3. Even if the actual data can be gathered, it is often against the company policy to
References:
Books: Khan M.Y. and Jain P.K. (2007), Financial Management, The McGraw-Hill Companies Pandey I.M.(2008), Financial Management Weblinks: http://www.iocl.com http://www.hpcl.com http://www.bpcl.com http://myiris.com/shares/research/motilal/INDOILCO_20100129.pdf http://www.dart-creations.com/article-tree/dbt/Debt_Collections_Law.html http://www.profitera.com/pdfs/A%20Formula%20for%20Success_Karl%20Boone_Ian%20Robe rts.pdf http://www.articlesbase.com/finance-articles/debt-collection-techniques-420145.html http://www.feefunding.com.au http://www.sooperarticles.com/business-articles/things-do-before-selecting-debt-consolidationcompany-60339.html http://www.magfinancial.com/account-receivable-management.cfm http://www.indiastudychannel.com/projects/1583-working-capital-management.aspx http://www.ferret.com.au/c/Business-Diagnostics-and-Solutions/Debtor-Control-n667421 http://www.business.qld.gov.au/dsdweb/v4/apps/web/content.cfm?id=7415
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