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CHAPTER-I INTRODUCTION

INTRODUCTION:
Trade credit arises when a firm sells in products or services on Credit and does not receive cash immediately. It is an essential marketing tool, acting for the moment of goods through production and distribution stages to customer. Affirm grants trade credit. To protect is sales form the competitors and to attract the potential customers to by its products at favorable terms. Trade creates Accounts receivable or trade debtors that the firm is e!pected to in the near futures. The customers from whom receivable or book debits have to be collected in the future is called trade debtors or simply as debtors and represent the firms clime or asset. A credit sale has characteristics" i# It involves an element of risk that should be carefully analy$ed. Cash sales are totally risk less, but not the credit sales as the cash sales as the cash payment are yet too received. ii# It is based on economic value to the buyer, the economic value goods services passes Immediately at the time of sales while the seller e!pects on the e%uivalent value to be received later on. iii# It implies futurity the buyer will make the cash payment for goods services received by him in future period. debtors constituted a substantial portion of customer assets several firms. &or e.g."' In India, traders (ebtors after inventories are the ma)or components of current assets. They from 1*+rd of current assets in India. ,ranting credit and creating (r-s amount to the blocking of the firms founds. Thus trade debtors represent investment as substantial amount are tide'up in trade debtors it needs careful analysis and proper management.

NEED AND IMPORTANCE OF THE STUDY


Credit risk management is one of the key areas of financial decision'making. It is significant because, the management must see that an e!cessive investment in current assets should protect the company from the problems of stock'out. Current assets will also determine the li%uidity position of the firm. The goal of Credit risk management is to manage the firm current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. If the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may be even forced into bankruptcy.

SCOPE OF THE STUDY


The scope of the study is limited to collecting financial data published in the annual reports of the company every year. The scope of the study limited to collecting the data published in the reports of the company and opinions of the employees of the organi$ation with reference to the ob)ective stated above and theoretical framework of the data. /ith a view to suggest solutions to various problems relating to Credit risk management. The analysis is done to suggest the possible solutions. The study is carried out for 0 years 1.223'1+#.

OBJECTIVES OF THE STUDY:


1. To analysis the credit policies of Zuari Cement imite! .. To find out debtor turnover ratio and average collection period. +. To find out wether. It is profitable to e!tend credit period or reduce credit 4eriod. 5. To suggest measures to increase profits. 0. 6ow all areas of business are influenced by Credit 7isk 8anagement9 :. 6ow to manage information to create a volume driven business.

;. To Asses the long term re%uirements of funds and plan for application of internal resources and debt servicing. <. To Assess the effectiveness of long term investment decisions of Zuari Cement imite! 3. To offer conclusion derived from the study and give suitable suggestions for the efficient utili$ation of capital e!penditure decisions.

RESEARCH METHODO O"Y

The data used for analysis and interpretation from annual reports of the company. that is secondary forms of data. ((7, AC4 and Increase in credit period analysis are the Techni%ues used for calculation purpose. The pro)ect is presented by using tables, graphs and with their interpretations.

Primar# !ata: 4rimary data is collected from the =!ecute of the organi$ation The efficient allocation of capital is the most important financial function in the modern times. It involves decision to commit the firm-s, since they stand the long' term assets such decision are of considerable importance to the firm since they send to determine its value and si$e by influencing its growth, probability and growth. >fficers of accounts sections. =!ecutives and staff of financial and accounts department. 8eeting with concerned people. 4ersonal observation.

Se$%n!ar# !ata: ?econdary data obtained from the annual reports, books, maga$ines and websites. At each point of time a business firm has a number of proposals regarding various pro)ects in which, it can invest funds. @ut the funds available with the firm are always limited and are not possible to invest trend in the entire proposal at a time. 6ence it is very essential to select from amongst the various competing proposals, those that gives the highest benefits. The cru! of capital budgeting is the allocation of available resources to various proposals. There are many considerations, economic as well as non'economic, which influence the capital budgeting decision in the profitability of the prospective investment. Aet the right involved in the proposals cannot be ignored, profitability and risk are directly related, i.e. higher profitability the greater the risk and vice versa there are several methods for evaluating and ranking the capital investment proposals.

IMITATIONS
The study is based on only secondary data. The period of study was .223'1+ financial years only. Another limitation is that of standard ratio with which the actual ratios may be compared generally there is no such ratio, which may be treated as standard for the purpose of comparison because conditions of one concern differ significantly from those of another concern. The accuracy and correctness of ratios are totally dependent upon the reliability of the data contained in financial statements on the basis of which ratios are calculated.

CHAPTER-II INDUSTRY PROFI E & COMPANY PROFI E

Cement in!u'tr# in In!ia Intr%!u$ti%n India is the second largest producer of cement in the world. The production of cement in India has increased at a compound annual growth rate 1CA,7# of 3.; per cent to reach .;. million tonnes 18T# in the period .22:B.21+. It is e!pected to touch 52; 8T by .2.2. IndiaCs potential in infrastructure is vast. It has the capacity to become the worldCs third largest construction market by .2.0, adding 11.0 million homes a year to become a D?E 1 trillion a year market, according to a study by ,lobal Construction 4erspectives and >!ford =conomics. This opens up a tremendous window of opportunity for the country-s cement industry. Fotwithstanding its current position one of the leaders in cement production, India-s riches in the sector remain somewhat untapped. GafargeCs India business has been very successful and the country is among the top 12 markets globally for Gafarge. @ut going forward, we should rank higher because of the potential of the Indian market, says 8r 8artin Hriegner, C=> of the Indian branch of the world-s largest cement manufacturer, Gafarge. Mar(et Si)e The Indian cement sector is e!pected to witness positive growth in the coming years, with demand set to increase at a CA,7 of more than < per cent in the period &A .21+'15 to &A .210'1:, according to the latest report titled IIndian Cement Industry >utlook .21:- by market research consulting firm 7FC>?. The report further observed that India-s southern region is creating the ma!imum demand for cement, which is e!pected to increase more in future.

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The cement and gypsum products sector has attracted foreign direct investments 1&(I# worth D?E .,:0:..3 million in the period April .222BAugust .21+, according to data published by the (epartment of Industrial 4olicy and 4romotion 1(I44#. In*e'tment'

4rism Cement Gtd has become the first Indian company to get the Juality Council of IndiaCs 1JCI# certification for its ready'mi! concrete 178C# plant in Hochi, Herala. The company received the certification from Institute for Certification and Juality 8ark 1ICJ8#, a leading Italian certification body authorised to oversee JCI compliance.

DltraTech Cement, an Aditya @irla ,roup Company, has ac%uired the 5.< million tonne per annum 18T4A# ,u)arat unit of Kaypee Cement Corp for 7s +,<22 crore 1D?E 030.:1 million#.

ACC Gtd plans to invest 7s +,222 crore 1D?E 5;2... million# to e!pand its capacity by nearly 5 8T a year in three eastern region states, over the ne!t three years.

7eliance Cements Co 4vt Gtd will set up a + 8T4A grinding unit at an estimated cost of 7s :22 crore 1D?E 35.25 million#. The unit is likely to come up at 7aghunathpur in 4urulia, /est @engal.

7eliance Cement Co, a special purpose vehicle 1?4L# of 7eliance Infrastructure Gtd, is commissioning its first 0 8T4A plant in 8adhya 4radesh. The pro)ect has been implemented at a cost of appro!imately 7s +,222 crore 1D?E 5;2... million#.

Muari Cement plans to set up a cement grinding unit at Au) 1Aherwadi# and ?hingadgaon villages in ?olapur, 8aharashtra. The new unit will have a production capacity of 1 8T4A and is e!pected to be operational by the second %uarter of .210.

K?/ ?teel has ac%uired 6eidelberg Cement IndiaCs 2.: 8T4A cement grinding facility in 7aigad, 8aharashtra, for an undisclosed amount.

"%*ernment Initiati*e'
,iving impetus to the market, the Indian government plans to roll out public'private partnership 1444# pro)ects worth 7s 1 trillion 1D?E 10.:; billion# over the ne!t si! months. The 4rincipal ?ecretary in the 4rime 8inisterCs >ffice 148># will monitor these pro)ects. Also, the steering group appointed by (r 8anmohan ?ingh, 4rime 8inister of India, to accelerate infrastructure investments, has set deadlines for the awarding of pro)ects such as 8umbai rail corridor and Favi 8umbai Airport, among others. The ,oa ?tate 4ollution Control @oard 1,?4C@# has signed a memorandum of understanding 18oD# with Lasavdatta Cement, a company with its plant in Harnataka. The firm would use the plastic waste collected by the state agencies and village panchayats from ,oa as fuel for its manufacturing plant.

R%a! A+ea!
The globally'competitive cement industry in India continues to witness positive trends such as cost control, continuous technology upgradation and increased construction activities. &urthermore, ma)or cement manufacturers in India are progressively using other alternatives such as bioenergy as fuel for their kilns. This is not only helping to bring down production costs of cement companies, but is also proving effective in reducing emissions. /ith the ever'increasing industrial activities, real estate, construction and infrastructure, in addition to the various ?pecial =conomic Mones 1?=Ms# being developed across the country, there is a demand for cement.

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It is estimated that the country re%uires about D?E 1 trillion in the period &A .21.'1+ to &A .21:'1; to fund infrastructure such as ports, airports and highways to boost growth, which promises a good scope for the cement industry. The 5th Annual India Cement ?ector @usiness ?entiment ?urvey is nearly out and the India Construction N @uilding 8aterials Kournal provides the opportunity of an e!clusive look at the survey-s results before their sharing with the wider audiences. /e are glad to be able to present here some of the survey highlights and provide our readers with before' hand data regarding the views and e!pectations of cement industry professionals. >ptimism continues to be the name of the game for the Indian cement industry B a function of long'term trends as well as human nature. @ut on a closer look, the survey shows that the optimism only runs skin deep and that it has already been eroded by an increasing percentage of industry members who feel dissatisfied with the overall performance of the field last year. &or instance, the percentage of those who believe the industry performed well dropped from 5+ percent in .21. to .: percent in .21+, while the number of respondents who believe the industry performed poorly almost tripled from < percent last year to .. percent in .21+. 7egarding the future evolution of the industry, survey participants continue to be on the optimistic side and hope for a somewhat better or much better performance compared to the last : months. C+ina ta$(,e' -%,,uti%n an! %*er$a-a$it# .21+ has been the year that ChinaCs central planners took action against cement production overcapacity and pollution. Consolidation plans for the industry followed falling profits for cement producers in .21.. 6owever, record air pollution levels in @ei)ing in early .21+ shut the city down, raised public awareness and gave the government a strong lever to encourage further industry consolidation through environmental controls. @y the middle of year profits of ma)or producers were up but production was also up. &inally in (ecember .21+, China started to launch its emissions

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trading schemes 1=T?#, led by ,uangdong province, to create what will be the second largest carbon market in the world after the =D =T?. In!ia .a$e' a 'ti$(# /i$(et meanwhileO the worldCs second largest cement producing country has faced poor profits and growth for cement producers blamed on paltry demand, piddling prices and proliferating production costs. Compounding that, the Indian 7upee fell to a historic low relative to the D? (ollar in mid'.21+, further putting pressure on input costs. 6olcim reacted to all of this by releasing plans to simplify its presence in the country between 6olcim India, Ambu)a and ACC. Su0-Sa+aran A.ri$a !ra/' u- t+e 0att,e ,ine' Competition in sub'?aharan Africa is set to intensify when FigeriaCs (angote Cement opens its first cement plant in ?outh Africa in early .215. It is the first time AfricaCs two largest cement producers, (angote and ?outh AfricaCs 44C, will produce cement in the same country. &uture clashes will follow across the region as each producer increasingly advances toward the other. T+e 1in2!%m nee!' $ement333 an! /%r(er' ?audi Arabian infrastructure demands have created all sorts of reverberations across the 8iddle =astern cement industry and beyond as the nation pushes on to build its si! CeconomicC cities amongst other pro)ects. @ack in April .21+ Hing Abdullah bin Abdula$i$ Al ?aud of ?audi Arabia issued an edict ordering the import of 128t of cement. Then some producers started to report production line shutdowns in the autumn of .21+ as they buckled under the pressure, although they consoled themselves with solid profit rises. Fow, cement sales have fallen following a government crackdown on migrant workers that has hit the construction sector. C%m-etiti%n $%n$ern' in Eur%-e

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=urope may be slowly emerging from the economic gloom but anti'trust regulators have remained vigilant. An asset swap between Ceme! and 6olcim over units in the C$ech 7epublic, ,ermany and ?pain has received attention from the =uropean Commission. In the DH the Competition Commission has decreed that further action is re%uired for the cement sector following the creation of new player 6ope Construction 8aterials in .21.. Gafarge Tarmac may now have to sell another one of its DH cement plants to increase more competition into the market. =lsewhere in =urope, @elgium regulators took action in ?eptember .21+ and this week we report on 4olish action against cartel'like activity. D%n4t .%r2et S%ut+-Ea't A'ia5 Bra)i, %r Ru''ia6 ,rowth continues to dominate these regions and ma)or sporting tournaments are on the way in @ra$il and 7ussia, further adding to local cement demand. Lotorantim may have cancelled its D?E5.<bn initial public offering in August .21+ but it is still has the highest cement production capacity in @ra$il. &inally, Indonesia may not have had any Cmar%ueeC style story to sum up .21+ but it continues to regularly announce cement plant builds. In Kuly .21+ the Indonesian Cement Association announced that cement sales growth had fallen to C)ustC ;.0P for the first half of .21+. In the most general sense of the word, a $ement is a binder, a substance which sets and hardens independently, and can bind other materials together. The word QcementQ traces to the 7omans, who used the term Qopus caementiciumQ to describe masonry which resembled concrete and was made from crushed rock with burnt lime as binder. The volcanic ash and pulveri$ed brick additives which were added to the burnt lime to obtain a hydraulic binder were later referred to as cementum, cimentum, cRment and cement. Cements used in construction are characteri$ed as +#!rau,i$ or n%n-+#!rau,i$. The most important use of cement is the production of mortar and concreteSthe bonding of natural or artificial aggregates to form a strong building material which is durable in the face of normal environmental effects. Concrete should not be confused with cement because the term cement refers only to the dry powder substance used to bind the aggregate materials of concrete. Dpon the addition

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of water and*or additives the cement mi!ture is referred to as concrete, especially if aggregates have been added. It is uncertain where it was first discovered that a combination of hydrated non'hydraulic lime and a po$$olan produces a hydraulic mi!ture 1see also" 4o$$olanic reaction#, but concrete made from such mi!tures was first used on a large scale by 7oman engineers.They used both natural po$$olans 1trass or pumice# and artificial po$$olans 1ground brick or pottery# in these concretes. 8any e!cellent e!amples of structures made from these concretes are still standing, notably the huge monolithic dome of the 4antheon in 7ome and the massive @aths of Caracalla. The vast system of 7oman a%ueducts also made e!tensive use of hydraulic cement. The use of structural concrete disappeared in medieval =urope, although weak po$$olanic concretes continued to be used as a core fill in stone walls and columns. M%!ern $ement 8odern hydraulic cements began to be developed from the start of the Industrial 7evolution 1around 1<22#, driven by three main needs" 6ydraulic renders for finishing brick buildings in wet climates 6ydraulic mortars for masonry construction of harbor works etc, in contact with sea water. (evelopment of strong concretes. In @ritain particularly, good %uality building stone became ever more e!pensive during a period of rapid growth, and it became a common practice to construct prestige buildings from the new industrial bricks, and to finish them with a stucco to imitate stone. 6ydraulic limes were favored for this, but the need for a fast set time encouraged the development of new cements. 8ost famous was 4arkerCs Q7oman cement.Q This was developed by Kames 4arker in the 1;<2s, and finally patented in 1;3:. It was, in fact, nothing like any material used by the 7omans, but was a QFatural cementQ made by burning septaria ' nodules that are found in certain clay deposits, and that contain both clay minerals and calcium carbonate. The burnt nodules were ground to a fine powder. This product, made into a mortar with sand, set in 0B10 minutes. The success of Q7oman

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CementQ led other manufacturers to develop rival products by burning artificial mi!tures of clay and chalk. Kohn ?meaton made an important contribution to the development of cements when he was planning the construction of the third =ddystone Gighthouse 11;00'3# in the =nglish Channel. 6e needed a hydraulic mortar that would set and develop some strength in the twelve hour period between successive high tides. 6e performed an e!haustive market research on the available hydraulic limes, visiting their production sites, and noted that the QhydraulicityQ of the lime was directly related to the clay content of the limestone from which it was made. ?meaton was a civil engineer by profession, and took the idea no further. Apparently unaware of ?meatonCs work, the same principle was identified by Gouis Licat in the first decade of the nineteenth century. Licat went on to devise a method of combining chalk and clay into an intimate mi!ture, and, burning this, produced an Qartificial cementQ in 1<1;. Kames &rost,orking in @ritain, produced what he called Q@ritish cementQ in a similar manner around the same time, but did not obtain a patent until 1<... In 1<.5, Koseph Aspdin patented a similar material, which he called 4ortland cement, because the render made from it was in color similar to the prestigious 4ortland stone. All the above products could not compete with lime*po$$olan concretes because of fast' setting 1giving insufficient time for placement# and low early strengths 1re%uiring a delay of many weeks before formwork could be removed#. 6ydraulic limes, QnaturalQ cements and QartificialQ cements all rely upon their belite content for strength development. @elite develops strength slowly. @ecause they were burned at temperatures below 1.02 TC, they contained no alite, which is responsible for early strength in modern cements. The first cement to consistently contain alite was made by Koseph AspdinCs son /illiam in the early 1<52s. This was what we call today QmodernQ 4ortland cement. @ecause of the air of mystery with which /illiam Aspdin surrounded his product, others 1e.g. Licat and I C Kohnson# have claimed precedence in this invention, but recent analysis of both his concrete and raw cement have shown that /illiam AspdinCs product made at Forthfleet, Hent was a true alite'based cement. 6owever, AspdinCs methods were Qrule'of'thumbQ" Licat is responsible for establishing the chemical basis of these cements, and Kohnson established the importance of sintering the mi! in the kiln.

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/illiam AspdinCs innovation was counter'intuitive for manufacturers of Qartificial cementsQ, because they re%uired more lime in the mi! 1a problem for his father#, because they re%uired a much higher kiln temperature 1and therefore more fuel# and because the resulting clinker was very hard and rapidly wore down the millstones which were the only available grinding technology of the time. 8anufacturing costs were therefore considerably higher, but the product set reasonably slowly and developed strength %uickly, thus opening up a market for use in concrete. The use of concrete in construction grew rapidly from 1<02 onwards, and was soon the dominant use for cements. Thus 4ortland cement began its predominant role. it is made from water and sand

T#-e' %. m%!ern $ement P%rt,an! $ement Cement is made by heating limestone 1calcium carbonate#, with small %uantities of other materials 1such as clay# to 1502TC in a kiln, in a process known as calcination, whereby a molecule of carbon dio!ide is liberated from the calcium carbonate to form calcium o!ide, or lime, which is then blended with the other materials that have been included in the mi! . The resulting hard substance, called CclinkerC, is then ground with a small amount of gypsum into a powder to make C>rdinary 4ortland CementC, the most commonly used type of cement 1often referred to as >4C#. 4ortland cement is a basic ingredient of concrete, mortar and most non'speciality grout. The most common use for 4ortland cement is in the production of concrete. Concrete is a composite material consisting of aggregate 1gravel and sand#, cement, and water. As a construction material, concrete can be cast in almost any shape desired, and once hardened, can become a structural 1load bearing# element. 4ortland cement may be gray or white. 4ortland cement blends These are often available as inter'ground mi!tures from cement manufacturers, but similar formulations are often also mi!ed from the ground components at the concrete mi!ing plant.

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P%rt,an! 0,a't.urna$e $ement contains up to ;2P ground granulated blast furnace slag, with the rest 4ortland clinker and a little gypsum. All compositions produce high ultimate strength, but as slag content is increased, early strength is reduced, while sulfate resistance increases and heat evolution diminishes. Dsed as an economic alternative to 4ortland sulfate'resisting and low'heat cements. P%rt,an! .,#a'+ $ement contains up to +2P fly ash. The fly ash is po$$olanic, so that ultimate strength is maintained. @ecause fly ash addition allows a lower concrete water content, early strength can also be maintained. /here good %uality cheap fly ash is available, this can be an economic alternative to ordinary 4ortland cement. P%rt,an! -%))%,an $ement includes fly ash cement, since fly ash is a po$$olan, but also includes cements made from other natural or artificial po$$olans. In countries where volcanic ashes are available 1e.g. Italy, Chile, 8e!ico, the 4hilippines# these cements are often the most common form in use. P%rt,an! 'i,i$a .ume $ement. Addition of silica fume can yield e!ceptionally high strengths, and cements containing 0'.2P silica fume are occasionally produced. 6owever, silica fume is more usually added to 4ortland cement at the concrete mi!er. Ma'%nr# $ement' are used for preparing bricklaying mortars and stuccos, and must not be used in concrete. They are usually comple! proprietary formulations containing 4ortland clinker and a number of other ingredients that may include limestone, hydrated lime, air entrainers, retarders, waterproofers and coloring agents. They are formulated to yield workable mortars that allow rapid and consistent masonry work. ?ubtle variations of 8asonry cement in the D? are 4lastic Cements and ?tucco Cements. These are designed to produce controlled bond with masonry blocks. E7-an'i*e $ement' contain, in addition to 4ortland clinker, e!pansive clinkers 1usually sulfoaluminate clinkers#, and are designed to offset the effects of drying shrinkage that is normally encountered with hydraulic cements. This allows large floor slabs 1up to :2 m s%uare# to be prepared without contraction )oints. 8+ite 0,en!e! $ement' may be made using white clinker and white supplementary materials such as high'purity metakaolin. C%,%re! $ement' are used for decorative purposes. In some standards, the addition of pigments to produce Qcolored 4ortland cementQ is allowed. In other standards 1e.g.

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A?T8#, pigments are not allowed constituents of 4ortland cement, and colored cements are sold as Qblended hydraulic cementsQ. Ver# .ine,# 2r%un! $ement' are made from mi!tures of cement with sand or with slag or other po$$olan type minerals which are e!tremely finely ground together. ?uch cements can have the same physical characteristics as normal cement but with 02P less cement particularly due to their increased surface area for the chemical reaction. =ven with intensive grinding they can use up to 02P less energy to fabricate than ordinary 4ortland cements. Fon'4ortland hydraulic cements P%))%,an-,ime $ement'3 8i!tures of ground po$$olan and lime are the cements used by the 7omans, and are to be found in 7oman structures still standing 1e.g. the 4antheon in 7ome#. They develop strength slowly, but their ultimate strength can be very high. The hydration products that produce strength are essentially the same as those produced by 4ortland cement. S,a2-,ime $ement'3 ,round granulated blast furnace slag is not hydraulic on its own, but is QactivatedQ by addition of alkalis, most economically using lime. They are similar to po$$olan lime cements in their properties. >nly granulated slag 1i.e. water'%uenched, glassy slag# is effective as a cement component. Su-er'u,.ate! $ement'3 These contain about <2P ground granulated blast furnace slag, 10P gypsum or anhydrite and a little 4ortland clinker or lime as an activator. They produce strength by formation of ettringite, with strength growth similar to a slow 4ortland cement. They e!hibit good resistance to aggressive agents, including sulfate. Ca,$ium a,uminate $ement' are hydraulic cements made primarily from limestone and bau!ite. The active ingredients are monocalcium aluminate CaAl.>5 1Ca> U Al.>+ or CA in Cement chemist notation, CCF# and mayenite Ca1.Al15>++ 11. Ca> U ; Al.>+ , or C1.A; in CCF#. ?trength forms by hydration to calcium aluminate hydrates. They are well' adapted for use in refractory 1high'temperature resistant# concretes, e.g. for furnace linings. Ca,$ium 'u,.%a,uminate $ement' are made from clinkers that include yeCelimite 1Ca51Al>.#:?>5 or C5A+ in Cement chemistCs notation# as a primary phase. They are

used in e!pansive cements, in ultra'high early strength cements, and in Qlow'energyQ

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cements. 6ydration produces ettringite, and speciali$ed physical properties 1such as e!pansion or rapid reaction# are obtained by ad)ustment of the availability of calcium and sulfate ions. Their use as a low'energy alternative to 4ortland cement has been pioneered in China, where several million tonnes per year are produced. =nergy re%uirements are lower because of the lower kiln temperatures re%uired for reaction, and the lower amount of limestone 1which must be endothermically decarbonated# in the mi!. In addition, the lower limestone content and lower fuel consumption leads to a C> . emission around half that associated with 4ortland clinker. 6owever, ?>. emissions are usually significantly higher. 9Natura,9 Cement' correspond to certain cements of the pre'4ortland era, produced by burning argillaceous limestones at moderate temperatures. The level of clay components in the limestone 1around +2'+0P# is such that large amounts of belite 1the low'early strength, high'late strength mineral in 4ortland cement# are formed without the formation of e!cessive amounts of free lime. As with any natural material, such cements have highly variable properties. "e%-%,#mer $ement' are made from mi!tures of water'soluble alkali metal silicates and aluminosilicate mineral powders such as fly ash and metakaolin.

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COMPANY PROFI E

Italcementi ,roup 6istory &ounded in 1<:5, Italcementi was %uoted for the first time on the stock markets, at the 8ilan ?tock =!change, in 13.0, under the name of ?ocietV @ergamasca per la &abbrica$ione del Cemento e della Calce Idraulica and has been operating since 13.; under the name of Italcementi ?pa. Muari Cement is part of the Italcementi ,roup, the fifth largest cement producer in the world and the biggest in the 8editerranean region. /ith net sales over : billion =uros in .223 and a capacity of ;2 million tonnes. Italcementi ,roup combines the e!pertise, know'how and culture of a number of companies from more than .. countries in 5 continents. This includes an industrial network of :+ cement plants, 10 grinding centres, 0 terminals, 1+5 aggregates %uarries and :1+ concrete batching units. In India, with its inherent strengths, Italcementi ,roupCs Muari Cement is committed to give the building industry a cement that is truly international.

A commitment to customer satisfaction has seen Muari Cement grow from a modest 2.0 million tonne capacity in 1330 to +.0 million tonne today. Muari Cement is in the process of increasing this capacity to : million tonne by .223 through setting up of a new 0022 tonne per day clinker line at Aerraguntla and a grinding center at Chennai. A captive power plant with a capacity of 5+ 8/ has already been set up at the CompanyCs cement manufacturing facility at ?itapuram. /ith a :P market share in the south Indian cement market and sales of about =uro 1<< million in .223, Muari Cement has chalked out ambitious plans for the future. This includes strengthening its presence in the 8aharashtra, >rissa and /est @engal markets. .2

/hile technology is )ust one of its strengths, there are many other factors that contribute e%ually to MuariCs success. These include a high'level organisation and decentralised %uality assurance teams to guarantee the full compliance with the customersC e!pectations. Our Hi't%r# ?trong foundations for a company of strength. Muari entered the Cement business in 1335 to operate the Te!maco Cement 4lant. In 1330, Te!maco-s 4lant at Aerraguntla was taken over by Muari and a Cement (ivision was formed. The fledging unit came into its own in the year .221 when Muari Industries entered into a Koint Lenture with the Italcementi ,roup, the 0th largest producer of Cement in the world , Muari Cement Gimited was born. Muari Cement took over ?ri Lishnu Cement Gimited in .22.. Today, the Company is amongst the topmost cement produces in ?outh India. Zuari an! Ita,$ementi3 T+e 'tren2t+ %. t/% Muari Cement is one of the leading cement producers in ?outh India.A fully owned subsidiary of the =uro : billion Italcementi ,roup, Commitment to customer satisfaction has seen Muari Cement grow from a modest 2.0 million tonne capacity in 1330 to +.0 million tones today.And earned a place among the most reliable cement producers in the country. Thanks to a careful plan of investments and take'overs of other cement producers, the company e!panded, %uickly reaching a strong position on the market and becoming the leading cement manufacturer in Italy. After several ac%uisitions abroad, in 133. Italcementi achieved important international status with its take'over of Ciments &ranWais, one of the main global cement producer. In 133; Italcementi consolidated its verticalisation strategy with the ac%uisition of Calcestru$$i, thus becoming Italian leader in the ready'mi!ed concrete sector. .1

In 8arch 133;, all the international companies of the ,roup gathered under one single corporate identity.

?ince 133< Italcementi ,roup has been pursuing its internationalisation strategy by ac%uiring new cement works in @ulgaria, Ha$akhstan, Thailand, 8orocco, India, =gypt and the Dnited ?tates. Our Mana2ement: /hile professional management and %uality workforce ensure superior results, the role played by the core management should not be discounted. /ith their vision and e!perience, they make sure that Muari Cement moves in the right direction. Towards becoming one among the leading cement producers in India. Mauri)i% Cane--e,e 8anaging (irector Rame'+ Sur#a Nara#ana (irector Technical Emi,i#an An!ree* Chief &inancial >fficer S3SURESH Lice 4resident 67 N I7 Appotiment of (irector Muari Industries Gtd has informed @?= that the @oard of (irectors at its meeting held on Kanuary .1, .211 have appointed 8r. ?uresh Hrishnan, as Additional (irector of the Company.

..

/ith an annual -r%!u$ti%n $a-a$it# of appro!imately ;2 million tons of cement, Italcementi ,roup is the world-s fifth largest cement producer. The 4arent Company, Italcementi ?.p.A., is one of Italy-s 12 largest industrial companies and is included in ?N4*8I@ Inde! of the Italian ?tock =!change. Italcementi ,roup-s companies combine the e!pertise, knowhow and cultures of :: $%untrie' in 5 Continents boasting an industrial network of ;< $ement -,ant', =< 2rin!in2 $entre', > termina,', =:> a22re2ate' ?uarrie' and ;=@ $%n$rete 0at$+in2 unit'. In .223 the ,roup had 'a,e' amounting to almost : billion =uro. Italcementi, founded in 1<:5, achieved important international status with the take'over of Ciments &ranWais in 133.. &ollowing a period of re'organi$ation and integration that culminates in the adoption of a single corporate identity for all ,roup subsidiaries, the newly'born Italcementi ,roup began to diversify geographically through a series of ac%uisitions in emerging countries such as @ulgaria, 8orocco, Ha$akhstan, Thailand and India, as well as operating in Forth America. As part of the plan to further enhance its presence in the 8editerranean area, in .220 the ,roup boosted its investments in =gypt becoming the market leader. In .22; Italcementi ac%uired full control of the activities in India and signed an agreement to strengthen its position in Ha$akhstan while, in .22<, it further strengthened its presence in Asia and the 8iddle =ast through the operations in China, Huwait, ?audi Arabia. In .223 the ,roup signed a )oint venture in Gibya to build a 5 million tons*year cement plant. As a member of the /orld @usiness Council for Su'taina0,e De*e,%-ment 1/@C?(# Italcementi ,roup has signed the Cement ?ustainability Initiative-s Agenda for Action, the first formal commitment that binds a number of world cement industry leaders to an action plan that aims at satisfying present'day needs at the same time as safeguarding the re%uirements of future generations.

.+

To further confirm its commitment on these issues, the ,roup has taken over the co' Chairmanship of the Cement ?ustainability Initiative for the period .22;'.22<.

>ur 4roducts Cement for every kind of task Muari Cement manufactures and distributes its own main product lines of cement ./e aim to optimi$e production across all of our markets, providing a complete solution for customerCs needs at the lowest possible cost, an approach we call strategic integration of activities. Cement is made from a mi!ture of <2 percent limestone and .2 percent additives. These are crushed and ground to provide the Qraw meal , a pale, flour'like powder. 6eated to around 1502T C 1.:5.T &# in rotating kilns, the meal undergoes comple! chemical changes and is transformed into clinker. &ine'grinding the clinker together with a small %uantity of gypsum produces cement. Adding other constituents at this stage produces cements for speciali$ed uses. @lended Cements Zuari B,en!e! Cement t+e e$%-.rien!,#5 u'er-.rien!,# $ement Muari @lended Cement has been developed in response to today-s need for environment' friendly products that are cost'effective, durable and have minimal by'products. (urability is a very important property in concrete. And durability here means concrete that ensures the long life span of structures like homes and residences that are lifetime investments. ?ince distress of concrete and early failure of structures is a common phenomenon, research over a period of time helped develop various remedial measures that improved durability and cost economics. >ne of them being blended 4ortland Cement, with complementary po$$olanic and cementitious materials like fly ash, blast furnace slag, etc. And Muari @lended Cement is a fine e!ample of it.

.5

>ur 4roducts 4ortland Cement Muari >4C is a high %uality cement prepared from the finest raw material. >wing to optimum water demand, it contributes to a very low co'efficient of permeability of the concrete prepared. This improves the density of the concrete matri! and increases the durability of the concrete. Muari >4C is a high performance cement far e!ceeding the codal re%uirement of @I?. It is this very durability that translates into long ' lasting residential and commercial constructions of a wide variety. ZuariA' e!2e /ith these uni%ue advantages, Muari Cement comes to you in two grades ' 5+ ,rade >4C and 0+ ,rade >4C. Muari >4C is a high %uality cement prepared from the finest raw material. >wing to optimum water demand, it contributes to a very low co'efficient of permeability of the concrete prepared. This improves the density of the concrete matri! and increases the durability of the concrete. Muari >4C is a high performance cement far e!ceeding the codal re%uirement of @I?. It is this very durability that translates into long ' lasting residential and commercial constructions of a wide variety. Zuari @< & >< "ra!e Or!inar# P%rt,an! Cement BOPCC - Str%n2 $ement' .%r ,%n2,a'tin2 $%n'tru$ti%n'3

6igher compressive strength @etter soundness Gesser consumption of cement for 8'.2 grade concrete and above &aster deshuttering of form work 7educed construction time .0

4rimo Concrete Cement ' Concrete 7edefined

Prim% - T+e 'u$$e'' 't%r# In .22< Muari Cement launched its high'strength cement under the brand name 4Prim% C%n$rete Cement4 in @angalore City. 4Prim%4 improves the density of the concrete matri! and increases the durability of the concrete, making it an immediate hit among construction and infrastructure pro)ects undertaken in and around @angalore. 7ecently 4rimo was also launched in Hochi and Chennai. An e!tensive marketing and distribution network across south India concretes Muari CementCs success story. Few products, on the line of the e!tremely successful 4Prim%4 launch, will play a significant role in key markets. Prim% C%n$rete Cement - C%n$rete Re!e.ine! 4rimo concrete cement is a high %uality cement prepared from the finest raw material. >wing to optimum water demand, it contributes to a very low co'efficient of permeability of the concrete prepared. This improves the density of the concrete matri! and increases the durability of the concrete. 4rimo is a high performance cement far e!ceeding the codal re%uirement of I? 1..:3'13<;. It is this very durability that translates into long' lasting residential and commercial constructions of a wide variety, such as dams,canals, highways, roads and flyovers.

6igher compressive strength @etter soundness Gesser consumption of cement for 8'.2 Concrete grade and above &aster deshuttering of form work 7educed construction time

.:

Gocations C>74>7AT= >&&IC= Fo. 1, 12th 8ain, Keevanbhima Fagar, @angalore ' 0:2 2;0 Tel" 2<2 ' 5113552< &a!" 2<2 ' 52+2.<55* 52+2.<<< ='mail" $clmktX$cltd.com,$clhoX$cltd.com

/orks" ?itapuram 4.>.(ondapadu Falgonda ' 02< .5: Andhra 4radesh Tel" 2<:<+ ' .+012; &a!" 2<:<+ ' .+0..3 ='mail" svclspmX$cltd.com

/orks" Hrishna Fagar 4.>. Aerraguntla Hadapa ' 01: +11 Andhra 4radesh Tel" 2<0:+ ' .;0125 * .;0+21 &a!" 2<0:+ ' .;01:5 ='mail" $clyglX$cltd.com

.;

Ita,$ementi "r%uItalcementi ,roup at a glance /ith an annual production capacity of appro!imately ;2 million tons of cement, Italcementi ,roup is the world-s fifth largest cement producer. The 4arent Company, Italcementi ?.p.A., is one of Italy-s 12 largest industrial companies and is included in &T?=*8I@ Inde! of the Italian ?tock =!change. Italcementi ,roup-s companies combine the e!pertise, know how and cultures of .. countries in 5 Continents boasting an industrial network of 03 cement plants, 10 grinding centres, 0 terminals, +;+ concrete batching units and 3. aggregates %uarries. In .223 the ,roup had sales amounting to over 0 billion =uro. Italcementi, founded in 1<:5, achieved important international status with the take'over of Ciments &ranWais in 133. . &ollowing a period of re'organi$ation and integration that culminates in the adoption of a single corporate identity for all ,roup subsidiaries, the newly'born Italcementi ,roup began to diversify geographically through a series of ac%uisitions in emerging countries such as @ulgaria, 8orocco, Ha$akhstan, Thailand and India, as well as operating in Forth America. As part of the plan to further enhance its presence in the 8editerranean area, in .220 the ,roup boosted its investments in =gypt becoming the market leader In .22: Italcementi ac%uired full control of the activities in India and signed an agreement to strengthen its position in Ha$akhstan while, in .22;, it further strengthened its presence in Asia and the 8iddle =ast through the operations in China, Huwait, ?audi Arabia. As a member of the /orld @usiness Council for ?ustainable (evelopment 1/@C?(# Italcementi ,roup has signed the Cement ?ustainability Initiative-s Agenda for Action, the first formal commitment that binds a number of world cement industry leaders to an

.<

action plan that aims at satisfying present'day needs at the same time as safeguarding the re%uirements of future generations. To further confirm its commitment on these issues, the ,roup has taken over the co' Chairmanship of the Cement ?ustainability Initiative for the period .211'.21.. 8oreover, Italcementi has been included in The ?ustainability Aearbook .21. the most comprehensive publication on corporate sustainability released yearly by ?A8 1?ustainable Asset 8anagement#.

.3

CHAPTER-III REVIE8 OF ITERATURE

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8+# Mana2e Ri'(D ,ood risk management at a strategic level helps protect an organi$ation-s reputation, safeguard against financial loss, minimi$e disruption to services and increase the likelihood of achieving business ob)ectives successfully. This also gives assurance on how an organi$ation-s business is managed and at the same time will satisfy any compliance re%uirements of the organi$ation, where an internal control mechanism is established. Internal control includes"

The establishment of clear business ob)ectives, standards, processes and procedures Clear definition of responsibilities 8easurement of inputs, outputs and performance outcomes in relation to ob)ectives 4erformance 8anagement &inancial controls over e!penditure and budget.

8+at !%e' it re?uireD


The establishment and understanding of a risk management policy and framework The identification, assessment and )udgement of threats to the achievement of clear business ob)ectives =ffecting the right action to anticipate and mitigate against risk ' this includes establishing effective internal controls to counter key risks /here necessary, to take reasonable and calculated risks based on well informed management decisions @alancing risks by design control to give reasonable assurance to contain risks and offer value for money 8onitoring risks and reviewing progress Juantifying risks by assessing any potential costs or benefits arising from possible impact 7eporting on the above. +1

H%/ t% i!enti.# ri'('D Ste- = - C,arit# %. O0Ee$ti*e' @e clear first of all about the overall ob)ectives of the organisation and understand how departmental ob)ectives are aligned to the delivery of same. Think about"

/hat needs to be done @y when /ho is accountable for delivery.

Ste- : - I!enti.# Ri'(' /ith your ob)ectives in mind, ask the following %uestions" 1. /hat can go wrong9 .. 6ow and why can it happen9 +. /hat do we depend on for continued success9 5. /hat could happen9 Consult with staff and others as appropriate and consider a range of possible scenarios including the best and worst cases. @e as creative with this process as possible. Consider the Ccause and effectC and scope of the risk and state as clearly as possible to avoid misunderstanding and misinterpretation. Try to %uantify where possible based on what the effect might be. ,o back to ?tep 1 above and do the same for e!ternal risks by considering the relationship between the organisation and its wider environment and follow the steps above. Consider potential e!ternal cause of business disruption, issues affecting relationship with partners, suppliers and any possible changes in government policy and legislation.

+.

Ste- < - A''e'' Ri'('


Identify e!isting controls and their effectiveness Assess what other controls may be necessary (etermine likelihood * impact ' use a bespoke template"
o

i(e,i+%%! of risk occurring is used as a %ualitative description of probability or fre%uency Im-a$t is the outcome of the risk impacting and is e!pressed %ualitatively or %uantitatively, i.e. being a loss, in)ury, disadvantage or gain. F@ ' there may be a range of possible outcomes.

?et out a realistic timeframe for managing * mitigating risk.

Ste- @ - A!!re'' Ri'(' This involves practical steps to managing and controlling risks. Think about"

what actions or responses are re%uired to control risks what are the associated cost of these actions are the costs proportionate to the risk that it is controlling /hat information is needed to make an informed decision to accept, manage, avoid, transfer or reduce the risks Is it better to work to eliminate or innovate through taking reasonable calculated risks.

Ste- > - Re*ie/5 Fuanti.# an! re-%rt Ri'(' Although policy may dictate a review and half yearly update should be enacted, risk owners need to regularly review to ensure there is ongoing relevant management of risks Advice should be sought where %uantification * confirmation is needed, i.e. &inance or Audit (epartment

++

@uild into the current reporting structure via the business planning round. /here key risks need to be considered, ensure it is given priority within the agreed framework. Ri'( De.ine! Ri'(: is the actual e!posure of something of human value to a ha$ard and is often regarded as the product of probability and loss ' Source: Smith K 2001; Environmental Hazards Assessing Risk and Reducing Disaster: ondon: Routledge: ! "#$ Ri'( A''e''ment: The evaluation of a risk to determine its significance, either %uantitatively or %ualitatively. Ri'( Mana2ement: (etermines the levels at which risk acceptability is set and methods of risk reduction are evaluated and applied. Re'i,ien$e: The ability at every relevant level to detect, prevent and, if necessary handle disruptive challenges. Source: %%S Resilience Bu'ine'' C%ntinuit#: A proactive process which identifies the key functions of an organisation and the likely threats to those functionsO from this information plans and procedures which ensure that key functions can continue, whatever the circumstances, can be developed.

CREDIT PO ICIES " The first decision area is credit policiesO' The credit policy of a firm provides the frame work to determine B a# whether or not to e!tend credit to a customer and b# 6ow much credit to e!tend. The credit policy decision of firm has two broad dimensions areO 1# credit standards and

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CREDIT PO ICY VARIAB ES: In establishing an optimum credit policy. The financial manager must consider the important decisions variables which influence the level of receivables. The ma)or controllable decision variable include the following B Credit standards Credit analysis Credit terms Collection policies and procedures

CREDIT STANDARDS The term credit standards represent the basic criteria for the e!tension of credit to customers. The %uantitative basic of establishing credit standards or factors such as credit rating, credit reference, average payment period and certain financial ratio-s since we are interested in illustrating the trade B off between benefit and cost to the firm as a whole. /e do not consider here these individual components of credit standards. To illustrate the effect,

/e have divided the overall standards into B a# Tight or restrictive and b# Giberal or non' restrictive i.e., to say our aim is to show what happens to the trade'off when standards are rela!ed or alternatively, tighten. The trade B off with reference to credit standards covers B i# ii# The collection cost The average collection period or investment in receivables +0

iii# iv#

Gevels of bad debts losses and Gevel of sales. These factors should be considered while deciding whether to rela! credit standards

or not. If standards are rela!ed, it means more credit will be e!tended while. If credit

standards are tightened. Gess credit will be e!tended. The implication of four factors are elaborated below B

CO

ECTION COST "

The implication of rela!ed credit standards are B i# ii# iii# more credit A large credit department to service accounts receivables and related matters Increase in collection cost

The effect of tightening of credit standards will be e!actly the opposite. These costs

+:

are likely to be semi'variable. This is because up to a certain point the e!isting staff will be able to carry on the Increased workload but beyond that, additional staff would be re%uired these are assumed to be included in the variable cost per unit and need not be separately identified. INVESTMENT IN RECEIVAB E OR AVERA"E CO ECTION PERIOD

The investment in accounts receivable involves a capital cost as funds have to be arranged by the firm to finance them till customers make payment. 8oreover, the higher the average accounts receivablesO the higher is the capital or carrying cost. a change in the credit standards B rela!ation or tightening leads to a change in the level of accounts receivables either B a# Through a change in sale, b# Through a change in collection. A rela!ation in credit standards as already stated, implies an increase in sales which in turn would lead to higher average accounts receivables9 further rela!ed standards would mean that credit is e!tended liberally so, that it is available to even less credit worthy. Customers who will take a longer period to pay over dues. The e!tension of trade credit to slow paying customers would result in a higher level of accounts receivables. A tightening of credit standards would signify B i# ii# A decrease in sales and lower average accounts receivables * AC4 and an e!tension of credit limited to more credit worthy customers who can

+;

promptly pay their bills and thus, a lower average level of accounts receivables. Thus a change in sales and change in collection period together with a rela!ation in ?tandards would produce a higher carrying cost, while changes in sales and collection period result in lower costs when credit standards are tightened. These basic reactions also occur when changes in credit terms or collection procedures are made. BAD DEBTS EGPENSES Another factor which is e!pected to be affected by changes in the credit standards is bad debts 1default# e!penses. They can be e!pected to increase with rela!ation in credit standards and decreases if credit standards become more restrictive.

SA ES VO UMEHChanging credit standards can also be e!pected to be change the volume of sales. As standards are rela!ed, sales are e!pected to increaseO conversely a tightening is e!pected to cause a decline in sales. The basic changes and effects on profits arising from a rela!ation of credit standards are summari$ed in e!hibit B If the credit standards are tightening, the opposite effects, as shown in the brackets would follow' =&&=CT >& ?TAF(A7(? (irection of change 1Increase Y I (ecrease Y (# I 1(# I 1(# I 1(# =ffect on profits 1positive Z Fegative ' # Z 1'# ' 1Z# ' 1Z#

IT=8 1 ?AG=? L>GD8= . AL, C>GG=CTI>F 4=7I>( + @A( (=@T?

+<

Item @A( (A@T? AC4 ?AG=? L>GD8= C>GG=CTI>F =[4=F(ITD7=

(irection of change 1I Y increase ( Y decrease# ( ( ( I

=ffect on profits 1 positive Z or Fegative ' # Z Z ' '

CREDIT ANA YSIS Credit standards influence the %uality of the firm-s customers. There are two aspects of the %uality of customers B i# ii# The time taken by customers to repay credit obligations, The default rate. The AC4 determines the speed of payment by customers. It measures the number of days for which credit sales remains outstanding. The longer the AC4, the higher the firm-s investment in accounts receivables. (=&ADGT 7AT= ' Can be measured in terms of bad debts losses ratio-s B the proportion of uncollected receivable. @ad debts losses ratio indicates default risk. (=&ADGT 7I?H ' Is the likelihood that a customer will fail to repay the credit obligation. >n the basis of past practice and e!perience, the financial or credit manager should be able to form a reasonable )udgment regarding the chance of default. To estimate the probability of default, the financial or credit manager should consider + c-s B

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a# Character

b# capacity

and

c# Conditions

CHARACTER "' 7efers to the customers willingness to pay the financial or credit manager should Kudge whether the customer will make honest efforts to honor their credit obligation. the moral factor is considerable importance in credit evaluation in practice.

CAPACITY " ' 7efers to the customers ability to pay can be )udged by assessing the customers capital and assets which he may offer as security capacity is evaluated by the financial position of the firm-s as indicated by analysis of ratio-s and trends in firm-s cash and working Capital position. The financial position or credit manager should determine the real worth of assets offered as collateral 1security #.

CONDITIONS "'
7efers to the prevailing economy and other conditions which may effects the customers ability to pay. Adverse economic conditions can affect the ability or willingness of a customer to pay. An e!perienced financial or credit manager will be able to )udge the e!tent and genies ness to which the customer-s ability to pay is effected by the economic conditions. Information on these variables may be collected from the customers themselves, their published financial statement and outside agencies which may keeping credit information about customers. A firm should use this information in preparing categories

52

of customers according to their credit worthiness and default risk. This would be an important input for the financial or credit manager in formulating its credit standards. The firm may categori$ed its customers at least, in the following + B categories" ,>>( ACC>DFT? " that is financially strong customers. @A( ACC>DFT? " that is financially very weak, high risk customers.

8A7,IFAG ACC>DFT? " that is customers with moderate financial health and risk 1falling between good and bad accounts #. The firm will have no difficulty in %uickly deciding about the e!tension of credit to ,ood accounts and

7e)ecting the credit re%uest of bad accounts. 8ost of the firm-s time will be taken in evaluating marginal accounts. i.e., customers who are not financially very strong but are also not so bad to be rightly re)ected. A firm can e!pand its sales by e!tending credit to marginal account-s but the firms cost and bad debts losses may also increases. Therefore credit standards should be rela!ed upon the point where incremental return e%uals incremental cost 1 I7 Y IC #.

51

CREDIT TERMS"' The .nd decision area in accounts receivable management is the credit terms. After the credit standards have been established and the worthiness of the customers has been assessed the management of a firm must determine the terms and conditions on which trade credit terms. These relate to the repayment of the amount under the credit sale. Credit term is the stipulation under which the firm sells on credit to customers are called credit terms. These stipulations includeO' A# the credit period C# Cash discount period @# Cash discount

5.

A# CREDIT PERIODO' The length of time which credit is to customers is called the credit period. It is generally stated in net terms of a net date. A firms credit period may governed by the industry norms. @ut depending on its ob)ective the firm can lengthen the credit period. >n the other hand, the firm may lengthen its credit period if customers are defaulting to fre%uently and bad debts losses are building up. A firm lengthens to credit period to increases its operating profit through e!panding sales however, there will be net increases in operating profit when the cost of e!tended credit period is less than the incremental operating profit. /ith increased sales and e!tended credit period receivable would increases. a# incremental sales result in incremental receivables and b# e!cising customer will take more time to repay credit obligations i.e. the average c# Collection period will increase. The .nd component of credit terms is the credit period. The e!pected effect of an increase in the credit period is summari$ed in table bellow. =&&=CT >& IFC7=?= IF C7=(IT 4=7I>(

Item ?ales volume AC4 @ad debts e!penses

(irection of change IYincreases (Ydecreases 1 1 1

=ffect on profit Zvet or B vet Z ' '

A reduction in the credit period is likely to have an opposite effect. The above table indicates the credit period decision.

5+

@# CASH DISCOUNTO' A cash discount is a payment offered to customers to induce them to repay credit obligations with in a specified period of time which is less than the normal credit period. It is usually e!pressed as a percentage of sales cash discount terms indicate the rate of discount and the period for which it is available. It the customer does not avail the offer, he must make payment with in the normal credit period. Credit term would include. 7ate of cash discount The cash discount period. The net credit period

A firm uses cash discount as a tool to increases sales N accelerates collections form customers. Thus the level of receivable N associated costs may be reduced the cost involved in the discounts taken by customers. The effects of increasing the cash discounts are summari$ed in below table. The effect of decreasing cash discount will be e!actly opposite. =&&=CT? >& IFC7=A?= IF CA?6 (I?C>DFT IT=8 ?AG=? L>GD8= AC4 @A( (=@T? =[4=F?=? 47>&IT 4=7 DFIT (irection of change =ffect on profits 1 I Y increase, ( Y decrease# 1 Z value, ' value# I ( ( ( Z Z Z '

55

The above table indicates cash discount decision CASH DISCOUNT PERIOD " /hich refers to the duration during which the discount can be availed of these terms are usually written in abbreviation for instance .*12 net +2 i.e. .P 12 days 1time available# +2 days 1ma!i# CO ECTION PO ICY & PROCEDURES"

A collection policy is needed because all customers do not pay the firm-s bill in time, some customers are slow payers while some are non payers. The collection effort should, therefore aim at accelerating collections from slow payers and reducing bad debts losses. A collection policy should ensure prompt and regular collection. 4rompt collection is needed for fast turn over or working capital keeping collection costs N bad debts within limits N maintaining collection efficiency-s. 7egularity in collection keeps dr-s alert N they tend to pay their dues promptly. The collection policy should lay down clear cut collection procedures. The collection procedures for past dues or delin%uent accounts should also be establish in unambiguous terms. The slow paying customers should be handled very tactfully, some of them maybe permanent customers the collection process initiated %uickly. /ith out giving any chance to them may antagoni$e them, and the firm may loss them to competitors. The accounting dept maintains the credit records and information it is responsible for collection, it should consult the sales dept before initiating an action against non paying customers similarly the sales dept must obtain past information about customers from the Accounting dept before granting credit to him. Through collection procedure should be firmly established, individual cases should be

50

dept with on their merits. ?ome customers may be temporarily in tight financial position and in spite of their best intention may not be able to pay on due date this may be due to recessionary Bconditions, or other factors beyond the contract of the customers, such cases need special consideration. The collection procedure against them should be initiated only after they have over come their financial difficulties and do not intend to pay promptly.

CREDIT "RANTIN" DECISIONO' >nce a firm has assessed the credit worthiness of a customer, it has to decide whether or not. Credit should be granted. The firm should use the F4L 1net present value# rule to make the decision, if the F4L is positive, credit should be granted. If the firm chooses not to grant any credit, the firm avoids the possibility of any losses

5:

but losses the opportunity of increasing its profitability. >n the other hand if it grants credit then it will benefit if the customer pay-s. There is some profitability that a customer will default, and then the firm may lose its investment. The e!pected net pay'off of the firm is the differences between the present values of net benefit and present value of the e!pected loss.

CREDIT "RANTIN" DECISIONS

CREDIT IMIT"' A credit limit is a ma!imum amt of credit which the firm will e!tend at a point of time it indicates the e!tent of risk taken by the firm by supplying goods on credit to a customer. >nce the firm has taken a decision to e!tend credit to the applicant, the amount and duration of the credit has to be decided. The decision on the magnitude of credit will depend upon the amount of contemplated scale and the customer-s financial strength in case of customers who are fre%uent buyers of the firm-s goods, a credit limit can be establish. This would avoid the need to investigate each order from the customers. (epending on the regularity of payment, the line of credit for a customer can be fi!ed

5;

on the basis of his normal buying pattern... The credit limit must be reviewed periodically. If tendencies of slow paying are found. the credit can be revised downward.

8HY DO COMPANIES "RANT IN INDIAO'


Companies in practice feel the necessity of granting credit reasonO' CMPETITION O'

,enerally the higher the degree of competition, the more the credit granted by a firm however, there are e!ceptions such as firms in the electronics industry in India. COMPANIES BAR"AININ" PO8ER O'

If A Company has higher bargaining power vis'V'vis its buyers, no or less credit. The company will have a string bargaining power if it has a strong product, monopoly, and brand image, large si$e or strong financial position. BUYER REFUIREMENT O'

In a number of business sectors buyers or dealers are not able to operate with e!tend credit this is particularly so, in the case of industrial products. BUYERS STATUS O'

Garge buyers demand easy credit terms because bulk purchasers and higher bargaining power some companies fallow a policy of not giving much credit to small retailers since it is %uite difficult to collect dues from them. RE ATIONSHIP 8ITH DEA ERS O'

Companies some times e!tend credit to dealers to build long Bterm relationship with or to reward them for their loyalty.

5<

MAR1ETIN" TOO O' Credit is used as a marketing tool, particularly when a new product is launched or

when a new company wants to push its week products.

INDURSTRY PRACTICE O' ?mall companies have been found guided by industry practice or norm more

than the large companies. ?ome times companies continue givining credit because of past practice rather than industry practice. TRYNIST DE AY O'

This is a forced reason for e!tended credit in the case of a number of companies in India most companies evolved systems to minimi$e the impact of such delays some of them take the help of banks to control cash flows in such situations. The graph represents the optimum level of receivables "

53

>ptimum level of receivables

NATURE OF CREDIT PO ICY"'


A firm-s investment in accounts receivable depends on B a# The volume of credit sales, and b# The collection period &or e!ampleO if a firm-s credit sales are 7s. +2, 22,222 per day and customers, on an average, take 50 days to make payment then the firm-s average investment in accounts receivable is" (aily credit sales ! AC4 +2, 22,222 ! 50 Y 1, +02, 22,222 The investment in receivables may be e!pressed in terms of cost of sales instead of sales value. The volume of credit sales is a function of the firm-s total sales and the P of credit sales to total sales. Total sales depends on market si$e, firm-s share, product %uality, intensity of competition, economic condition etc. The financial manager hardly has any control over these variables. The P of credit sales to total sales are mostly influence by the nature of the business and industry norms. &or e!ample" Car manufacture in India, until recently, was not selling cars on credit. They re%uired the customers to make payments at the time of delivery. ?ome of them even asked for the payment to be made in advance this were so, because of the absence of genuine competition and a wide gap between demands for and supply of cars in India.

02

This position changed after economic liberali$ation which led to intense competition. In contrast, the te!tile manufacture sold .*+ rd of their total sales on credit to the wholesale dealers. The te!tile industry is still going through a difficult phase.

"OA S OF CREDIT PO ICY"'


A firm may follow a Genient or a stringent credit policy. The firm follow a lenient credit policy tend to sell on credit to customers on very liberal terms and standards, credits are granted for longer period even to those customers whose credit worthiness is not fully known or whose financial position is doubtful. A firm follow a stringent credit policy sells on credit on a highly selective basis only to those customers who have proven credit worthiness and who are financially strong. In practice firms follow credit policies ranging between stringent to lenient. This graph indicates cost of credit policy "

01

C>?T >& C7=(IT 4>GICA 1# If the credit policy is loose, bad debts are more. .# If the credit policy is tight, bad debts are less. +# If the credit policy is tight, opportunity cost is more. 5# If the credit policy is loose, opportunity cost is less'optimum credit policy.

RESEARCH ON CREDIT MANA"EMENT


@usiness have receivables i.e. dues from credit customers. To increase sales, to earn more, to meet the competitors, to achieve break even volumes, to gain a foot hold in the market, to help the customers on whom the business fortune is intimately in ne!us and to develop a strong brand, receivables, i.e. credit sales, are vital. 8aintaining accounts receivables involves cost. Administration cost, capital cost, collection cost, and bad'debt cost etc. are diverse costs involved. As in any financial decision matching costs with benefits is needed here too. And what is the optimum level of accounts receivables is to be decided. Too little of accounts receivable, that is very limited credit ales reduced sales, loss of customer to the competitor-s camp, reduced profit and so on. >f course no bad debt, less capital locked up in accounts receivables resulting lower capital cost etc., are benefits. @ut , a little more risk can be taken and profits can be inflated. Too much of accounts receivables lead to scale advantage and hence more profit can be inflated. Too much of accounts receivables lead to scale advantage and hence mire profit, but costs of

0.

added bad debts, capital cost etc. are involved. 4erhaps by reducing accounts receivables costs can be steeply reduced, while benefits are not similarly decreasing. Therefore optimum investment in accounts receivable has to be planned and achieved.

CREDIT PO ICY policy is a guideline to action. policy establishes guideposts or limits for actions. Credit policy, therefore, refers to guide lines regarding credit sales, si$e of accounts receivables etc. Credit policy has a few variables. Credit standard, Credit period, Credit terms and collection policies are the policy variables. Credit standards refers to classification of customers on the basis of their Credit standards and stipulation of Credit eligibility of different classes of customers. The high rated customers may be e!tended unlimited Credit, the moderate Credit standards class may be e!tended a limited credit facility and the rest may not be given any Credit facility .credit period refers to how long credit is allowed. Gonger credit period might help drawing

0+

more customers and vice'versa. Credit terms refers to discount incentive for prompt payments by offering cash discount can be ensured. .*+2,net 50 means..P cash discount for payment with in +2 days ,failing which full payment by the 50th day of truncation. Collection policy refers the seriousness or otherwise with which collection is dealt with, especially the delin%uent customers. It may be harsh or warm. Credit policy can be liberal or stringent. Giberal credit policy adopts a lenient credit ?tandards ,i.e. almost all are e!tended creditO longer Credit period, higher cash discount for a longer entitlement period and informal and accommodative collection procedure. ?tringent credit policy does the opposite. @oth policies have advantages and accompanying costs .hence, choice must be e!ercised by individual firms after assessing the net effect of liberali$ing or tightening up the Credit policy.

ENINET VS STRIN"ENT CREDIT PO ICY An analysis of effects of lenient credit policies is depicted below in a table form" &actors ?ales Capital locked up Customer base Competitive edge 4rofit Customer goodwill Capital cost @ad debt loss Administrative cost Collection cost (iscount allowed Genient policy 8ore 8ore 8ore 8ore 8ore 8ore 8ore 8ore 8ore 8ore 8ore ?tringent policy less less less less less less less less less less less

Genient credit policy enhances benefits as well as costs. ?tringent policy reduces both benefits and costs. 6ence the problem of choice. 6ence the need for detailed evaluation 05

for decision'making. =valuation needs to be done in respect of each and every credit policy variable.

CONTRO ON CREDIT MANA"EMENT The investment in accounts should be with in accepted level. To achieve this, control measures are needed so that when actual fall outside the prescribed range, corrective actions can be taken. In controlling accounts receivables certain techni%ues are adopted. Three such techni%ues are described below. These are (ebtor-s turnover ratio1(T7# (ebtors turn over ratio refers to ratio of sales to accounts receivable1sundry debtors plus bills receivables#. The accounts receivables may be closing figure, or average of year

00

beginning and year'end figures or average of monthly opening and closing figures. An acceptable range for the ratio is within this band, is all right. if the actual (T7 is less than 0,it means more money is locked up in accounts receivables. =ither sales have slumped relative to si$e of debtors, or debtors have risen to sales. If the ratio e!ceeds the upper hand, it means customers promptly pay willingly or buy over force. It is good. (ebtor-s velocity " (ebtors velocity refers to how much many days sales are outstanding with the customers. This is given by" accounts receivables* per day credit sales. If fact, debtors velocity indicates the average collection period allowed, every thing is fine. If it e!ceeds the credit period allowed, which should be corrected. If AC4 is less than credit allowed, it can be considered as good, debtors velocity can be computed ,this vary also, that" number of working days in the year*(T7. Age of debtors " Age of debtors refers how long debts are outstanding. ?ay 12P of accounts receivables is : months old,10P is 0 months old,.0P is 5 months old,.0P is +P months old,10P is . months i.e., 10P is . months old and 12P is 1 month old. The average age of debtors comes to" :Z;0Z122Z;0Z+Z1Y+.0 months. An ideal break up of accounts receivables can be establishes and actual position is monitored accordingly. The idle average age and actual average age of accounts receivables can be compared and control is e!ercised on accounts receivables.

0:

RESEARCH ON CREDIT MANA"EMENT

The ob)ectives of research non credit management could be" To study the credit policies adopted across firms* industries or in a firm* industry. To study the e!tent of impact of lenient and stringent credit policies on sales, capital cost, profit, bad debts ,etc. To study the influence of different factors like Bcredit allowed by suppliers, credit allowed by companies, etc. on credit policy.

Credit 8anagement is a branch of accountancy, and is a function that falls under the label of QCredit and CollectionC or CAccounts 7eceivableC as a department in many companies and institutions. They will usually deal with the credit vetting of customers, the resolution of any invoice %ueries or disputes, allocations of payments or cash application, internal fund movements, reconciliations and also maintaining positive working relationships with customer during the debt collection or credit review and approval process. A key re%uirement for effective revenue and receivables management is the ability to intelligently and efficiently manage customer credit lines or credit limits. In order to minimi$e e!posure to bad debt, over'reserving, and bankruptcies, companies must have greater insight into customer financial strength, credit score history and changing 0;

payment patterns. Gikewise, the ability to penetrate new markets and customers hinges on the ability of a company to %uickly make well informed credit decisions and set appropriate lines of credit. Credit 8anagement has evolved now from being a pure accounting function into a front' end customer facing function. It involves screening of customers and only those who are credit worthy are allowed to do business. A sound review of the financial position of the customer, and understanding of their business model is the first step in ensuring that the company does not end up selling to a customer who ends up seriously delin%uent or in default. 6ence, before the sales function commences its business with the particular customer, the credit management role begins. Gater as the customer starts dealing with the company, the accounts receivable function is used to ensure recovery as per agreed terms of credit is followed.

CREDIT ANA YSIS


is the method by which one calculates the creditworthiness of a business or organi$ation. The audited financial statements of a large company might be analy$ed when it issues or has issued bonds. >r, a bank may analy$e the financial statements of a small business before making or renewing a commercial loan. The term refers to either case, whether the business is large or small. Credit analysis involves a wide variety of financial analysis techni%ues, including ratio and trend analysis as well as the creation of pro)ections and a detailed analysis of cash flows. Credit analysis also includes an e!amination of collateral and other sources of repayment as well as credit history and management ability.

0<

@efore approving a commercial loan, a bank will look at all of these factors with the primary emphasis being the cash flow of the borrower. A typical measurement of repayment ability is the debt service coverage ratio. A credit analyst at a bank will measure the cash generated by a business 1before interest e!pense and e!cluding depreciation and any other non'cash or e!traordinary e!penses#. The debt service coverage ratio divides this cash flow amount by the debt service 1both principal and interest payments on all loans# that will be re%uired to be met. @ankers like to see debt service coverage of at least 1.2 percent. In other words, the debt service coverage ratio should be 1.. or higher to show that an e!tra cushion e!ists and that the business can afford its debt re%uirements. CREDIT CONTRO " 4olicies aimed at serving the dual purpose of 11# increasing sales revenue by e!tending credit to customers who are deemed a good credit risk, and 1.# minimi$ing risk of loss from bad debts by restricting or denying credit to customers who are not a good credit risk. =ffectiveness of credit control lies in procedures employed for )udging a prospectCs creditworthiness, rather than in procedures used in e!tracting the owed money. Also called credit management. 4eople have become increasingly dependent on credit. Therefore, itCs crucial that you understand personal credit reports and your credit rating 1or score#. 6ere weCll e!plore what a credit score is, how it is determined, why it is important and, finally, some tips to ac%uire and maintain good credit. /hat is a Credit 7ating9 /hen you use credit, you are borrowing money that you promise to pay back within a specified period of time. A credit score is a statistical method to determine the

03

likelihood of an individual paying back the money he or she has borrowed. The credit bureaus that issue these scores have different evaluation systems, each based on different factors. ?ome may take into consideration only the information contained in your credit report, which we look at below. The primary factors used to calculate an individual-s credit score are his or her credit payment history, current debts, time length of credit history, credit type mi! and fre%uency of applications for new credit. @ecause the scoring systems are based on different criteria which are weighted differently, the three ma)or credit bureaus in the D.?. 1=%uifa!, TransDnion, and =!perian# may issue differing scores for an individual, even though the scores are based on the same credit report information. Aou may hear the term &IC> score in reference to your credit score ' the terms are essentially synonymous. &IC> is an acronym for the &air Isaacs Corporation, the creator of the software used to calculate credit scores.

/hat About a Credit 7ating9 In addition to using credit 1&IC># scores, most countries 1including the D.?. and Canada# use a scale of 2'3 to rate your personal credit. >n this scale, each number is preceded by one of two letters" QIQ signifies installment credit 1like home or auto financing#, and Q7Q stands for revolving credit 1such as a credit card#. =ach creditor will issue its own rating for individuals. &or e!ample, you may have an 71 rating with Lisa 1the highest level of credit rating#, but you might simultaneously have an 70 from 8asterCard if youCve neglected to pay your 8asterCard bill for many months. Although the Q7Q and QIQ systems are still in use, the prevailing trend is to move away from this multiple rating scale toward the single digit &IC> score. Fevertheless, here is how the scale breaks down"

6ow to manage Credit 9

:2

/hen you borrow money, your lender sends information to a credit bureau which details, in the form of a credit report, how well you handled your debt. &rom the information in the credit report, the bureau determines a credit score based on five ma)or factors" 1# previous credit performance, .# current level of indebtedness, +# time credit has been in use, 5# types of credit available, and 0# pursuit of new credit. Although all these factors are included in credit score calculations, they are not given e%ual weighting. 6ere is how the weighting breaks down"

As you can see by the pie graph, your credit rating is most affected by your historical propensity for paying off your debt. The factor that can boost your credit rating the most is having a past that shows you pay off your debts fairly %uickly. Additionally, maintaining low levels of indebtedness 1or not keeping huge balances on your credit cards or other lines of credit#, having a long credit history, and refraining from constantly applying for additional credit will all help your credit score. Although we would love to e!plain the e!act formula for calculating the credit score, the &ederal Trade Commission has a secretive approach to this formula. Credit is a &ragile Thing being aware of your credit and your credit score is very important, especially since you can harm your credit without even being aware of it. 6ereCs a true story of what can

:1

happen" 4aul applied for a travel reward miles card, but never received any response from the credit card company. ?ince it was a high'limit travel card, 4aul )ust assumed that heCd been declined and never thought about it again. 8ore than a year later, 4aul goes to the bank to in%uire about a mortgage. The people at the bank pull up 4aulCs credit report and find a bad debt from the credit card company. According to the credit report, the company tried to collect for a year but recently wrote it off as a bad debt, reporting it as an 73, the worst score you can get. >f course, all this is news to 4aul. /ell, it turns out there was a clerical error, and 4aulCs apartment suite number was missing from the address the credit card company had on file. 4aul had been approved for the card but never actually received it, and any subse%uent correspondence didnCt get through either. ?o the credit card company still charged 4aul the annual fee, which he didnCt pay, because he didnCt know the debt e!isted. The annual fee collected interest for a year until the credit card company wrote it off. In the end, after )umping though several fiery hoops, 4aul was able to get the problem rectified, and the card company admitted fault and notified the credit'reporting agency. The point is, even though it was a small balance due 1about E102#, the administration error almost got in the way of 4aul getting a mortgage. Fowadays, since all data goes through computers, incorrect information can easily get onto your credit report. Tips to Improve or 8aintain a 6igh Credit ?core" 8ake loan payments on time and for the correct amount. Avoid overe!tending your credit. Dnsolicited credit cards that arrive by mail may

:.

be tempting to use, but they wonCt help your credit score.

Fever ignore overdue bills. If you encounter any problems repaying your debt, call your creditor to make repayment arrangements. If you tell them you are having difficulty, they may be fle!ible.

@e aware of what type of credit you have. Credit from financing companies can negatively affect your score.

Heep your outstanding debt as low as you can. Continually e!tending your credit close to your limit is viewed poorly.

Gimit your number of credit applications. /hen your credit report is looked at, or Qhit,Q it is viewed as a bad thing. Fot all hits are viewed negatively 1such as those for monitoring of accounts, or prescreens#, but most are.

Credit is not built overnight. ItCs better to provide creditors with a longer historical time frame to review" a longer history of good credit is favored over a shorter period of good history.

CREDIT PO ICIES"'
Credit policies are decided by $onal manager and credit will be given to dealers based Dp on track record, history and credit worthiness of the distributors. It is depends on the management and under control of the credit controller 1$onal 8anager and one of the directors#.

CREDIT STANDARDS"'
(epends on the credit market position if the position is down. The $onal manager or Credit controller is looking 1i.e., to e!tend the credit period or limit#. :+

Credit standards are determined based on the economic conditions. If the economy is in the recession more credit will be e!tended and if the economy is in boom less credit will be e!tended. CREDIT PERIOD"' The length of time for which credit is e!tended to customers. Credit period Y 32 days CASH DISCOUNT PERIOD "' A cash period is a reduction in payment offered to customers to induce them to repay credit obligation within a specified period of time, which will be less than the normal credit period. Cash discount period Y +2 days Cash discount Y +P Credit discount Y 52P on 874

CREDIT IMIT"'
Credit limit is a ma!imum amount of credit which the firm will e!tend at a point of time. Credit limit is depending on the dealers deposit amount.

for e!ample" if he deposit Y 022,222 The credit limit Y .0, 22,222 will be given.

:5

E I"IBI ITY FOR TA1IN" DEA ERSHIP"'


0 years @ank statement . che%ues for security 1 (( for the dealer deposit amount 6e should have the Tin number 1 wholesaler, retailer #

THREE TYPES OF CUSTOMERS"' 1# @uilders of contractors'sales"' Company is giving discount depends on the volume of goods taking by the builders. .# Institutions'sales "' Dp to :P giving. +# ordinary dealers "' Company standards discount. 4ayment terms +2 days for every sale.

Cre!it Ri'( Mana2ement


T+e 0a'i$ '#'tem allows us to look at e!pected return and particularly e!pected losses only, without regard to the variability of the losses over time 1the volatility#. A good basic system assumes" A well functioning classification 1grading# system with preferably around

:0

12 classes. The classification should be based on controllable %uantitative and %ualitative factors. (ifferent classes should indicate different probabilities of default only. The typical probability of default should be estimated for each class. &or each customer the estimated loss in case of default should be calculated. Formally the most important factor in this calculation would be the estimated value of possible collateral in a default situation. These two factors will give a satisfactory basis for the calculation of e!pected loss for the total credit portfolio. The e!pected loss represents a fairly good guidance for pricing, and for assessing the %uality of the total portfolio. 6owever, it does not give any indication of concentrations of risks in the portfolio. Are the losses likely to be nicely spread over time, or do we risk huge losses during a limited period of time 1which means high volatility#9 T+e a!*an$e! '#'tem builds on the same basic factors, but should include at least two additional factors" The correlation of groups of credits 1such as different industries# and also of individual credits with the total credit portfolio of the enterprise is important in assessing the volatility of losses. 4referably the correlation with other activities of the enterprise should also be considered. @ig individual credit e!posures often contribute a lot to the volatility of the losses of the portfolio, especially if these credits are also somewhat weak. The latter approach gives a better basis for internal allocation of e%uity capital, for pricing, for calculating the ma!imum loss that can be e!pected and the need for general*unspecific loan loss reserves. Important elements of Credit 7isk 8anagement are illustrated below. The upper three bo!es represent the basic system.

::

:;

CHAPTER-IV DATA ANA YSES AND INTERPRETATION

DATA ANA YSIS"'


The calculations using in (ata analysis are B

:<

1# (T7 1 (ebtor-s turnover ratio # .# AC4 1 Average collection period # Calculation of (T7 "' This measures a relationship between debtor-s and sales. (T71Crs# Y credit sales 1or# sales (ebtors Calculation for" .21+"' (T7 Y .15;<.:0 <.1.05 Calculation for" .21."' (T7 Y 1<.;2.:3 ;:0.3: Calculation for" .211"' (T7 Y 1+.20.:5 :2...3 Calculation for" .212"' (T7 Y ;25..<. .10.<+ Y +..:+ Y .1.3. Y .+.<0 Y .:.15

Calculation for" .223"' (T7 Y :+<0.02 1<:.1< Y +5..3

DTR .r%m :IIJ t% :I=< are "'

:3

Aear .223 .212 .211 .21. .21+

(T7 +5..3 +..:+ .1.3. .+.<0 .:.15

Inter-retati%n: The (ebtors turnover ratio of Zuari Cement' is in the fluctuation stage because the increase and decreased in debtors to the total sales. In the current year i.e. .21+ the ratio is .:.15.

Ca,$u,ati%n %. ACP"' The AC4 calculation is compared with the firm-s stated credit period to )udge The collection efficiency. The AC4 measures the %uantity of receivables. ;2

?ince, it indicates the speed of their collect ability. AC41Crs# Y (ebtors Credit sales ! +:2 1or# +:2 (T7

Calculation for" .21+"' AC4 Y +:2 .:.15 Calculation for" .21."' AC4 Y +:2 .+.<0 Calculation for" .211"' AC4 Y +:2 .1.3. Calculation for" .212"' AC4 Y +:2 +..:+ Y 11.2+ Y 1:.51 Y 10.23 Y 1+.;;

Calculation for" .223"' AC4 Y +:2 +5..3 Y 12.53

ACP .r%m :IIJ t% :I=< are "' Aear .223 .212 AC4 12.53 11.2+

;1

.211 .21. .21+

1:.51 10.23 1+.;;

Inter-retati%n: The Average collection period of Muari Cements in the year .211 was very high as compared with all the years. As compared with the credit sales to the ratio in the year .21+ was 1+.;;.

A SCENARIO ANA YSIS" ' ?uppose credit period is e!tended to 122 days. Then sales may increase by 10P. If credit period is decreased to <2 days. Then sales decreases by 12P. The cost of financing is 11P.

;.

CA CU ATION OF INCREASE IN CREDIT PERIOD" ' Calculations for .223"' Statement %. in$rea'e in $re!it -eri%!

4A7TICDGA7? A# Credit period @# Annual sales

=[I?TIF, 32 50.;<3555.<:

(AA? 1Z 10 P # 122 0.2,;2;,<:1.0<3 155,:51,2;..::+

(AA? 1'12 P# <2 52;,012,022.+;0 32,00;,<<<.3;13

C# Gevel of receivables 1at sales value# 1A!@*+:2# (# Incremental investment in receivables 1C' 11+,13;,+:1..10# =# Assume incremental profit X .2P 12..2 ! (#

11+,13;,+:1..10

' '

+1,55+,;11.55< :,.<<,;5...<3:

1..,:+3,5;...55# 15,0.;,<35.55<<#

8OR1IN" NOTES"' 1# Annual sales "' 32 days Y 50.;<3555.<: 122 days Y 50.;<3555.<: Y Z 150.;<3555.<: ! 10P#

0.2,;2;,<:1.0<3 150.;<3555.<: ! 12P#

<2 days Y 50.;<3555.<: ' Y

52;,012,022.+;5

.# Gevel of receivables 1 at sales value # "' A! * +:2 32 days Y 32 ! 50.;<3555.<: +:2 Y 11+,13;,+:1..10

;+

122 days Y 122 ! 0.2,;2;,<:1.0<3 +:2 <2 days Y <2 ! 52;,012,022.+;5 +:2

Y 155,:51,2;..::+ Y 32,00;,<<<.3;13

+# Incremental investment in receivables "' 1 C ' 11+,13;,+:1..10# 32 days Y 2 Y +1,55+,;11.55< 1..,:+3,5;...55#

122 days Y 155:512;..::+ ' 11+13;+:1..10 <2 days Y 3200;<<<.3;13 '

11+13;+:1..10 Y

5# Assume incremental profit X .2P 12..2! (# "' 32 days 122 days <2 days Y2 Y +155+;11.55< ! .2P Y Y :,.<<,;5...<3:

1..,:+3,5;...55 ! .2P# Y 5,0.;,<35.55<<

Ca,$u,ati%n .%r :I=I" ' ?tatement of increase in credit period 4A7TICDGA7? A# Credit period @# Annual sales 0+5,3:0,2.+.50 C# Gevels of receivables 1at sales value# 1A!# 1++,;51,.00.<:. :10,.23,;;:.3:; 1;2,<31,:25.;1+ 5<1,5:<,0.1.120 12:,33+,225.:3 =[I?TIF, 32 (AA? 1Z10P# 122 (AA? 1'12P# <2

;5

(# Incremental investment in receivables 1 C' 1++,;51,.00.<:.# =# Assume incremental profit X .2P 12..2! (# 8OR1IN" NOTES" ' 1# Annual sales "' 122 days Y

+;,102,+5<.<01 ' ' ;,5+2,2:3.;;2.

1.:,;5<,.01.1;.#

;,+53,:02..+55

0+5,3:0,2.+.50 Y

10+5,3:0,2.+.50 ! 10 P#

:10,.23,;;:.3:; ' 10+5,3:0,2.+.50 ! 12 P#

<2 days Y

0+5,3:0,2.+.50

Y 5<1,5:<,0.1.120 .# Gevel of receivables 1at sales value# "' 1A!# * +:2 32 days 122 days <2 days Y Y Y 32 ! 0+53:02.+.50 +:2 122 ! :10,.23,;;:.3:; +:2 <2 ! 5<1,5:<,0.1.120 Y Y Y 1++,;51,.00.<:. 1;2,<31,:25.;1+ 12:,33+,225.:3

+# Incremental investment in receivables " ' 1C 32 days 122 days ' 1++,;51,.00.<:.# Y 2

Y 1;2,<31,:25.;1+ ' 1++,;51,.00.<:. Y +;,102,+5<.<01

<2 days

Y 12:,33+,225.:3

' 1++,;51,.00.<:.

;0

Y 1.:,;5<,.01.1;.# 5# Assumed incremental profit X .2P 12.. ! (# " ' 32 days Y 2 122 days Y +;,102,+5<.<01 ! .2P Y <2 days ;,5+2,2:3.;;2.

Y 1.:,;5<,.01.1;.# ! .2P Y 1;,+53,:02..+55#

Ca,$u,ati%n .%r :I==" ' ?tatement of increase in credit period 4A7TICDGA7? A# Credit period @# Annual sales 5.;,;0.,05:..+ C# Gevels of receivables 1at sales value# 1A!# 12:,3+<,1+:.00; :51,:.<,<12.3+0 1;<,.+2,..0..;. 5.;,;0.,052.:.+ 33,20:,1.2.1+< =[I?TIF, 32 (AA? 1Z10P# 122 (AA? 1'12P# <2

;:

(# Incremental investment in receivables 1 C' 1++,;51,.00.<:.# =# Assume incremental profit X .2P 12..2! (# 8OR1IN" NOTES" ' 1# Annual sales "' 122 days Y

;1,.3.,2<<.;10 ' ' 15,.0<,51;.;5+

1;<,<.2,1:2.513#

110,;:5,2+..2<+#

5.;,;0.,05:..+Z Y

15.;,;0.,05:..+! 10 P#

:51,:.<,<12.3+0 15.;,;0.,05:..+! 12 P#

<2 days Y

5.;,;0.,05:..+'

Y 5.;,;0.,052.:.+ .# Gevel of receivables 1at sales value# "' 1A!# * +:2 32 days 122 days <2 days Y Y Y 32 ! 5.;,;0.,05:..+Y +:2 12:,3+<,1+:.00;

122 ! :51,:.<,<12.3+0Y 1;<,.+2,..0..;. +:2 <2 ! 5.;,;0.,052.:.+ Y 33,20:,1.2.1+< +:2

+# Incremental investment in receivables " ' 1C 32 days 122 days ' 1++,;51,.00.<:.# Y 2

Y 1;<,.+2,..0..;.' 12:,3+<,1+:.00; Y ;1,.3.,2<<.;10

<2 days

Y 33,20:,1.2.1+< '12:,3+<,1+:.00; ' Y 1;<,<.2,1:2.513#

;;

5# Assumed incremental profit X .2P 12.. ! (# " ' 32 days Y 2 122 days Y ;1,.3.,2<<.;10! .2P Y <2 days 15,.0<,51;.;5+

Y 1;<,<.2,1:2.513# ! .2P Y 110,;:5,2+..2<+#

Ca,$u,ati%n .%r :I=:" ' ?tatement of increase in credit period 4A7TICDGA7? A# Credit period @# Annual sales C# Gevels of receivables 1at sales value# 1A!# 1<.;2.:3 50:;.:; .1211..3 0<+:.5; 5.;,;0.,052.:.+ +:05.1+ =[I?TIF, 32 (AA? 1Z10P# 122 (AA? 1'12P# <2

;<

(# Incremental investment in receivables 1 C' 1++,;51,.00.<:.# =# Assume incremental profit X .2P 12..2! (# 8OR1IN" NOTES" ' 1# Annual sales 1Cr#"' 122 days Y

1.:<.<2 ' ' .0+.;:

131+.0+#

11<..;2#

1<.;2.:3Z Y

11<.;2.:3! 10 P#

.1211..3 cr 11<.;2.:3! 12 P#

<2 days Y

1<.;2.:3'

Y 1:55+.:. .# Gevel of receivables 1at sales value# "' 1A!# * +:2 32 days Y 32 ! 1<.;2.:3Y +:2 122 days Y 50:;.:;

122 ! .1211..3Y 0<+:.5; +:2 <2 days Y <2 ! 1:55+.:. Y +:05.1+ +:2 +# Incremental investment in receivables " ' 1C ' 50:;.:;# 32 days 122 days Y 2 Y 0<+:.5;' 50:;.:;

Y 1.:<.<2 <2 days Y +:05.1+ '50:;.:; Y 131+.0+# 5# Assumed incremental profit X .2P 12.. ! (# " ' 32 days Y 2 122 days Y 1.:<.<2! .2P

;3

<2 days

Y .0+.;: Y 131+.0+# ! .2P Y 11<..;2#

Ca,$u,ati%n .%r :I=<" ' ?tatement of increase in credit period 4A7TICDGA7? A# Credit period @# Annual sales C# Gevels of receivables 1at sales value# 1A!# .15;<.:0 0+:3.:: .5;22.55 :<:1..+ 13++2.;< 5.30.;. =[I?TIF, 32 (AA? 1Z10P# 122 (AA? 1'12P# <2

<2

(# Incremental investment in receivables 1 C' 0+:3.::# =# Assume incremental profit X .2P 12..2! (# 8OR1IN" NOTES" ' 1# Annual sales 1Cr#"' 122 days Y

1531.0; '

112;+.3+#

1.15.;<# ' .3<.+1

.15;<.:0Z Y

1.15;<.:0! 10 P#

.5;22.55 cr 1.15;<.:0! 12 P#

<2 days Y

.15;<.:0'

Y 13++2.;< .# Gevel of receivables 1at sales value# "' 1A!# * +:2 32 days Y 32 ! .15;<.:0Y +:2 122 days Y 0+:3.::

122 ! .5;22.55Y :<:1..+ +:2 <2 days Y <2 ! 13++2.;< Y 5.30.;. +:2 +# Incremental investment in receivables " ' 1C ' 0+:3.::# 32 days 122 days Y 2 Y :<:1..+' 0+:3.::

Y 1531.0; <2 days Y 5.30.;. '0+:3.:: Y 112;+.3+# 5# Assumed incremental profit X .2P 12.. ! (# " ' 32 days Y 2 122 days Y 1531.0;! .2P

<1

<2 days

Y .3<.+1 Y 112;+.3+# ! .2P Y 1.15.;<#

<.

CHAPTER-V
&IF(IF,? C>FCGD?I>F ?D,,=?TI>F @I@IG>,7A46A

FINDIN"S
(ebtor-s turnover ratio increasing every year from .223 to .21+. Average collection period decreasing every year from .223 to .21+. The scenario analysis was conducted assuming credit period to be <2 days and 122 days. The result should that while credit period is 122 days the company is getting profits. /hen the credit period is <2 days <+

the company is getting losses. @ased on the report it is concluded that credit policies are decided by $onal manager so, powers are centrali$ed. Credit standards are determined based on economic conditions. Credit is 32 days and if credit is paid before that period the company will give cash discount.

CONC USIONSO'
Although a relatively young discipline, credit risk management has matured rapidly. Improved risk measurement and reporting techni%ues paired with comprehensive credit risk policies can provide e!tremely effective protection against credit risk losses. The best risk management techni%ues are operational and legal, with collateral providing the best financial risk mitigation. Credit insurance and credit default swaps offer financial

<5

protection against default, but each at its own costSwhich must be compared to the benefits of reducing the specific risk it is intended to mitigate. In view of these limitations, we believe that an alternative approach is now needed which should have two components. &irst we believe that the regulatory capital regime should seek directly to assess the e!tent to which a firmCs earnings are vulnerable to stress losses of any type ' a measure we refer to as regulatory e%uity at risk ' and should then establish a capital re%uirement which is sufficient to provide a high level of assurance that the firm could survive such a stress event and still remain solvent during a work out period. ?econdly we argue that there needs to be much more e!plicit regulatory oversight of the li%uidity management arrangements in place at the firm, since effective li%uidity management arrangements rather than capital provide the primary protection against any stress events affecting the firm.

SU""ESTIONSO'

It is suggested to management to increase credit period to 122 days. ?o that company can earn profits.

It is suggested to management to offer more incentives for prompt payment of <0

credit. ?o that receivables are paid promptly by dealers. In management can be littlie bit liberal in credit policies so that more profits are achieved. 7ela!ing credit standards will enable to increases the customers.

BIBI O"RAPHY

1. &inancial management .. &inancial management

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by by

I.8.4AF(=A 8A H6AF 4H KAIF

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+. Company-s annual report .223'.21+.

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