Receivables Mgmt

8/3/2019 Receivables Mgmt

1/52

EXECUTIVE SUMMARY

Trade credit arises when a firm sells its products or services on credit and does not

receive cash immediately. It is an essential marketing tool, acting as a bridge for themovement of goods through production and distribution stages to customers. A firm grants

trade credit to protect its sales from the competitors and to attract the potential customers to

buy its products at favourable terms. Trade credit creates accounts receivable or trade debtors

that the firm is expected to collect in the near future.

A credit sale has three characteristics:

First, it involves an element of risk that should be carefully analysed. Cash sales

are completely riskless, but not the credit sales as the cash payment are yet to be

received.

Second, it is based on economic value. To the buyer, the economic value is goods

and services passes immediately at the time of sale, while the seller expects an

equivalent value to be received later on.

Third, it implies futurity. The buyer will make the cash payment for goods or

services received by him in a future period.

The firms investment in accounts receivable depends on:

The volume of credit sales and

The collection period.

Credit sales form an essential part in the companys day to day sales transactions.

Usually sales are made on credit when the customer will not make immediate payment for the

goods & products required by them & hence to boost sales, company will have to supply the

goods on credit. Hence credit becomes receivables which form a major part of the current

assets. It involves a certain degree of risk as the payment for the credit sales will be received

in the future. The customers from whom receivables or book debts have to be collected in the

future are called trade debtors or simply as debtors.

In regard to this, a study has been undertaken to understand the receivables managed

by Indian Oil Corporation Ltd at APSO (Andhra Pradesh State Office), which is one of themajor oil producing and distributing companies. All the activities related to receivables are

uploaded in SAP (Systems Application and Products) for reference. The company has certain

laid down credit policies and procedures. Credit limit is within which the payment has to be

made & the company provides credit on the basis of Bank Guarantee. For Ex: credit period

for fuels is generally 30 days, for lubes is 45 days, etc. And these receivables are monitored

so as to determine the current outstanding position of the trade debtors at any point of time.

An aging schedule is prepared to classify the debts which are 6 months old.

CMC (Central Management Committee) Report is prepared for every month to constantly

monitor the debtors.

1 | P a g e


2/52

INTRODUCTION

A sound managerial control requires proper liquid management of liquid assets and

inventory. These assets are a part of working capital of the business. An efficient use offinancial resources is necessary to avoid financial distress. Receivables result from credit

sales.

A concern is required to allow credit sales in order to expand its sales volume; it is not always

possible to sell goods on cash basis. Sometime other concern in that line might establish a

practice of selling goods on credit basis. Under these circumstances it is not possible to avoid

credit sales without adversely affecting sales. The increase in sales is also essential to

increase profitability. After a certain level of sales this increase in sales will not

proportionately increase production costs. The increase in sales will bring in more profits.

Receivables constitute a significant portion of current assets of a firm. But for investment in

receivable a firm has to incur certain costs. Further there is a risk of bad debts also. It is

therefore very necessary to proper control and management of receivables.

Cash is the most important component of current assets; therefore the firm basic

strategies are to reduce the operating cash requirement. The companys aim is to accelerate

the collection of receivables so as to reduce the average collection period. The receivables

represent an important component of current assets of a firm. The purpose of this analysis is

the important dimension of efficient management of receivables within the framework of a

firm objective of value maximization.

2 | P a g e


3/52

RESEARCH METHODOLOGY

Research is an academic activity and such the term should be used in technical sense.

Research methodology is the most important part of marketing research which consists of the

research design, sampling, data collection, and data analysis parts. The project is undertaken

to learn & interact with employees &b people working in an organisation & gain an in-depthknowledge about the daily activities.

OBJECTIVES OF THE STUDY :

To study as to how receivables are managed at Indian Oil Corporation Ltd. (APSO).

To understand the various credit management methods adopted by the company for

different products & how it has helpful in managing receivables.

To assess the efficiency of present management of receivables by comparing it with

last years performance.

To understand the various e-banking techniques adopted by the company & how it

has helped in better collection procedure.

To suggest any measures that can reduce the effort and time in overall process.

The study will give an analysis about the improvement in the collection procedure &

management of receivables by adoption of new methodologies. Also it will represent if there

are any flaws in the present methods of credit management techniques.

Methodology:

Primary data: Information available through discussion with the staff of the company.

Secondary data: It includes the SAP database of the organisation and monthly, annual

reports of the company.

The total project analysis is done specifically focusing the data of the finance department of

the Indian Oil Corporation Ltd., Andhra Pradesh State Office (APSO), Hyderabad.

LIMITATIONS OF THE STUDY:

The study relies on the data available from the company & the information collected

from the secondary sources. Hence it is not possible to collect detailed information on

all activities taken over the year.

The study pertains to the overall management of debtors without giving due

importance to individuals due to large number of customers.

3 | P a g e


4/52

INDUSTRY PROFILE

After the Indian Independence, the Oil Industry in India was a very small one in size

and Oil was produced mainly from Assam and the total amount of Oil production was not

more than 250,000 tons per year.

This small amount of production made the oil experts from different countries predict

the future of the oil industry as a dull one and also doubted India's ability to search for new

oil reserves. But the Government of India declared the Oil industry in India as the core sector

industry under the Industrial Policy Resolution bill in the year 1954, which helped the Oil

Industry in India vastly.

Oil exploration and production in India is done by companies like National Oil

Corporation (NOC), Oil and Natural Gas Corporation (ONGC) who are actually the oil

companies in India that are owned by the government under the Industrial Policy Rule. The

National Oil Corporation during the 1970s used to produce and supply more than 70

percentage of the domestic need for the petroleum but by the end of this amount dropped to

near about 35 percentages. This was because the demand on one hand was increasing at a

good rate and the production was declining in a steady rate. Oil Industry in India during the

year 2004-2005 fulfilled most of demand through importing oil from multiple oil producing

countries. The Oil Industry in India itself produced nearly 35 million metric tons of Oil from

the year 2001 to 2005. The Import that is done by the Oil Industry in India comes mostly

from the Middle East Asia.

The Oil that is produced by the Oil Industry in India provides more than 35 percent of

the energy that is primarily consumed by the people of India. This amount is expected to

grow further with both economic and overall growth in terms of production as well as

percentage. The demand for oil is predicted to go higher and higher with every passing

decade and is expected to reach an amount of nearly 250 million metric ton by the year 2024.

4 | P a g e


5/52

COMPANY PROFILE

In order to ensure greater efficiency and smooth working in the petroleum sector,

Government of India decided to merge the refineries and the distribution activities.

The Indian Refineries and Indian Oil Company were combined to form the giant

Indian Oil Corporation (IOCL) on 1st September 1964, with its registered office at Bombay.

In 1967, the pipeline division of the corporation was merged with the refineries division.

Research &Development of Indian Oil Came into Existence in 1972. In October 1981 Assam

Oil Company was nationalized and has been amalgamated with IOCL as Assam Oil Division

(AOD).

Formation of Indian Oil Corporation Ltd.

5 | P a g e


6/52

Indian Oil Corporation is an Indian public-sector

petroleum company. It is Indias largest commercial enterprise, ranking 105th on the Fortune

Global 500 listing (2009). It is also the 18th largest petroleum company in the world. It began

its operation on 30th

June, 1959 as an Oil Marketing Entity. Indian Oil Company wasrenamed as Indian Oil Corporation Ltd on 1st

September, 1964 following the merger of

Indian Refineries Ltd. (Established in August

1958) with it. Indian Oil and its subsidiary

account for approximately 48% petroleum

products market share, 34% national refining

capacity & 71% downstream sector pipelines

capacity in India.

As the flagship national oil company in

the downstream sector, Indian Oil reaches

precious petroleum products to millions of

people every day through a countrywide network of about 34,000sales points. They are

backed for supplies by 166 bulk storage terminals and depots, 101 aviation fuel stations and

89 Indane (LPGas) bottling plants. About 7,100 bulk consumer pumps are also in operation

for the convenience of largeconsumers,ensuringproductsandinventoryattheirdoorstep.Indian Oil operates the largest and the widest network of petrol & diesel stations in the

country, numbering over 17,600. It reaches Indane cooking gas to the doorsteps of over 50

million households in nearly 2,700 markets through a network of about 5,000

Indane distributors.

Indian Oils ISO-9002 certified Aviation Service commands over 62% market share

in aviation fuel business, meeting the fuel needs of domestic and international flag carriers,

private airlines and the Indian Defence Services. The Corporation also enjoys a bulk

6 | P a g e


7/52

consumer business, including that of railways, state transport undertakings, and industrial,

agricultural and marine sectors.

IOCL Group consists of Indian Oil Corporation Ltd. and the following subsidiaries:

LANKA IOC Ltd.

Indian Oil (Mauritius Ltd)

IOCL Middle East FZE

Indian Oil Technologies Ltd

Chennai Petroleum Corporation Ltd (CPCL)

Bongaigaon Refinery & Petrochemicals Ltd. (BRPL)

SALIENT FEATURES

Indias Most Trusted Fuel Pump Brand (ET. Brand Equity-AC Nielson Survey 2007).

Indias largest commercial enterprise with leading market shares in downstreamsegment of oil business.

Highest ranked Indian corporate in Fortunes list of worlds 500 largest Companies(2008::116th)

20th largest petroleum company in the world- Fortune Global500

Local Currency Rating of A1+(short-term) & LAA+(long-term) from ICRA

Indias No.1 corporate in annual listing of Business Standards (BS 10000), BusinessIndia (BISuperior 100) &Economic Time (ET 500).

7 | P a g e


8/52

VISION, MISSION AND VALUES

VISION:

A major diversified, transnational, integrated energy company, with national leadership and a

strong environment conscience, playing a national role in oil security & public distribution.

MISSION:

To achieve international standards of excellence in all aspects of energy and

diversified business with focus on customer delight through value of products and

services, and cost reduction.

To maximise creation of wealth, value and satisfaction for stakeholders.

To attain leadership in developing, adopting and assimilating state-of-art technology

for competitive advantage.

To provide technology and services through sustained Research and Development.

8 | P a g e


9/52

To foster a culture of participation and innovation for employee growth and

contribution.

To cultivate high standards of Business Ethics and Total Quality Management for a

strong corporate identity and brand equity.

To help enrich the quality of life of the community and preserve ecological balance

and heritage through a strong environment conscience.

VALUES:

Care stands for: -

Empathy

Understanding

Co-operation

Empowerment

Innovation stands for:

-

Creativity

Ability to learn/absorb

Flexibility

Change

Passion stands for:

-

Commitment

Dedication

Pride

Inspiration

Ownership

Zeal & Zest

Trust stands for: -

Delivered Promises

Reliability

Integrity

Truthfulness

Transparency

OBJECTIVES:

To serve the national interests in oil and related sectors in accordance and consistent

with Government Policies.

To ensure maintenance of continuous and smooth supplies of petroleum products by

way of crude oil refining, transportation and marketing activities and to provide

appropriate assistance to consumers to converse and use petroleum products

efficiently.

9 | P a g e


10/52

To enhance the countrys self-sufficiency in crude oil refining and build expertise in

lying of crude oil and petroleum product pipelines.

To further enhance marketing infrastructure and reseller network for providing

assured service to customers throughout the country.

To create a strong Research & Development base in refinery processes, product

formulations, pipelines transportation and alternative fuels with a view to minimizing/

eliminating imports and to have next generation products.

To optimize utilization of refining capacity and maximise distillate yield and gross

refining margin.

To maximise utilisation of the existing facilities for improving efficiency and

increasing productivity.

To minimise fuel consumption and hydrocarbon loss in refineries and stock loss in

marketing operations to effect energy conservation.

To earn a reasonable rate of return on investment.

To avail of all viable opportunities, both national and global, arising out of theGovernment of Indias policy of Liberalization & Reforms.

To achieve higher growth through mergers, acquisitions, integration and

diversification by harnessing new business opportunities in oil exploration &

production, petrochemicals, natural gas and downstream opportunities overseas.

To inculcate strong core values among the employees and continuously update skill

sets for full exploitation of the new business opportunities.

To develop operational synergies with subsidiaries and joint ventures and

continuously engage across the hydrocarbon value chain for the benefit of society at

large.

FINANCIAL OBJECTIVES:

To ensure adequate return on the capital employed and maintain a reasonable annual

dividend on equity capital.

To ensure maximum economy in expenditure.

To manage and operate all facilities in an efficient manner so as to generate adequate

internal resources to meet revenue cost and requirements for project investment,

without budgetary support.

To develop long-term corporate plans to provide for adequate growth of thecorporations business.

To reduce the cost of production of petroleum products by means of systematic cost

control measures and thereby sustain market leadership through cost competitiveness.

To complete all planned projects within the schedule time and approved cost.

OBLIGATIONS:

10 | P a g e


11/52

Towards Customers and Dealers: To provide prompt, courteous and efficient service

and quality products at competitive prices.

Towards suppliers: To ensure prompt dealings with integrity, impartiality and

courtesy and help promote ancillary industries.

Towards Employees: To develop their capabilities and facilitate their advancement

through appropriate training and career planning. To have fair dealings with

recognised representatives of employees in pursuance of healthy industrial relations

practices and sound personnel policies.

Towards Community: To develop techno-economically viable and environment-

friendly products. To maintain the highest standards in respect of safety, environment

protection and occupational health at all production units.

Towards Defence Services: To maintain adequate supplies to Defence and other Para-

military services during normal as well as emergency situations.

SERVICES

The 4 major fields where Indian Oil provides services are:

Refining

Pipeline

Marketing

Research & Development

1. REFINING:

Indian Oil controls 10 of Indias 20 refineries. The group refining capacity is 60.2

million metric tonnes per annum (MMTPA) or 1.2 million barrels per day-the largest share

among refining companies in India. It accounts for 33.8% share of national refining capacity.

The strength of Indian Oil springs from its experience of operating the largest number of

refineries in India and adapting to a variety of refining processes along the way. The basket

of technologies, which are in operation in Indian Oil refineries include: Atmospheric/Vacuum

Distillation; Distillate FCC/Resid FCC; Hydro cracking; Catalytic Reforming, Hydrogen

Generation; Delayed Coking; Lube Processing Units; Visbreaking; Merox Treatment; Hydro-

Desulphurization of Kerosene & Gasoil streams; sulphur recovery, Dewaxing, Wax Hydro

finishing; Coke Calcining, etc.

Indian Oil refineries have an ambitious growth plan with an outlay of about Rs.55,000

crore for capacity augmentation, de-bottlenecking, bottom up gradation and quality up

11 | P a g e


12/52

gradation. Major projects under implementation include a 15 MMTPA grassroots refinery at

Paradip, Orissa, Naphtha Cracker and Polymer Complex at Panipat, Panipat Refinery

expansion from 12 MMTPA to 15 MMPTA, among others.

Innovative strategies and knowledge-sharing are the tools available for converting

challenges into opportunities for sustained organizational growth. With strategies and plansfor several value-added projects in place, Indian Oil refineries will continue to play a leading

role in the downstream hydrocarbon sector for meeting the rising energy needs of our

country.

2. PIPELINE:

Indian Oil Corporation Ltd. operates a network of 10329 km long crude oil and petroleum

product pipelines with a capacity of 71.60 million metric tonnes per annum. Cross-country

pipeline are globally recognised as the safest, cost-effective, energy-efficient and

environment friendly mode for transportation of crude oil and petroleum products.

Corporations largest crude oil handling facility at Vadinar marked the berthing of 4000th

tanker since inception. The terminal operates two offshore Single Point Mooring (SPM)

systems, to feed Koyali, Mathura and Panipat refineries.

Raising efficiency and emerging as the least-cost supplier, Indian Oil has added the 330

km Paradip-Haldia crude oil pipeline (PHCPL) to its busting pipeline network during the

year. The PHCPL system has a Single Point Mooring installed 20-km off the Paradip coast.

With this, it is now able to pump crude oil from very large crude oil carriers to the tank farm

set up onshore and onward to Haldia through the pipeline. The Pipeline has replaced the

earlier system of receipt of crude oil at Haldia port through smaller tankers.

On the west coast, the Mundra-Panipat pipeline is being further augmented to transport an

additional 3 Million Metric Tonne Per Annum (MMTPA) of crude oil to Panipat Refinery,

under expansion from 12 to 15 MMTPA. Additional requirement of crude oil for Koyali,

Mathura and Panipat refineries is planned to be met by de-bottlenecking and augumenting

Salaya-Mathura Pipeline system.

Indian Oil sees gas pipelines as major growth areas in the future. The gas market I India

is expanding fast, thanks to enhanced availability of the product from indigenous sources andthrough imports. The corporation will commission its first regassified LNG pipeline from

Dadri to Panipat (132 km) to synchronize with the completion of the first phase of the power

plant coming up under the Naphth Cracker project at Panipat.

Indian Oil has translated the expertise of its personnel in pipeline operations into

operations into a business opportunity, by offering training and consultancy to several Indian

and overseas companies. Currently, the Corporation is imparting training for personnel of the

Greater Nile Petroleum Company, Sudan.

12 | P a g e


13/52

3. MARKETING :

Indian Oil provides a wide range of marketing services and consultancy in fuel handling,

distributing, and storage and fuel/lube technical services. With a formidable bank of technicaland engineering talent, Indian Oil is fully equipped to handle small to large-scale

infrastructural projects in the petroleum downstream sector anywhere in the country.

Its project teams have independently or jointly as a consortium, have set up depots,

terminals, pipelines, aviation fuel stations, filling plants, LPG bottling plants, amongst others.

Indian oils fuel management system to bulk customers offer customized solutions that

deliver least cost supplies keeping in mind usage patterns and inventory levels.

A wide range of lubricant and fuel testing laboratories are available at major installations

which are further backed by sector-wise expertise in the core sectors of power, steel,

fertiliser, gas plants, textile mills, etc. cutting edge systems and processes are designed

around one simple belief to provide valuable customers with an unbeatable edge in their

business. Indian Oils supply and distribution network is strategically located across the

country linked through a customised supply chain system backed by front offices located in

conceivably every single town of consequence.

The Indian Oil Institute of petroleum management-a centre of excellence for nurturing

future leadership, situated on the outskirts of New Delhi, conducts advanced management

education programmed in collaboration with premier business schools and top line

professionals. Indian Oil operates 18 training centres across the country for up-skilling, re-

skilling and multi-skilling of employees in its pursuit of corporate excellence.

4. RESEARCH AND DEVELOPMENT

The R&D centre continues to provide significant support to the Indian Oil Group

refineries in product quality improvement, evaluation of catalysts and additives, health

assessment of catalysts, material failure analysis, troubleshooting and in improving overall

efficiency of operations. In-house developed FCC models are not only being used in Indian

Oil refineries for process optimisation but a similar model has also been sold to a

multinational company.

Indian Oil has launched several initiatives to exploit alternative sources of energy

such as Hydrogen and Bio-fuels. Subsequent to commissioning Indias first experimental H-

CNG (Hydrogen-Compressed Natural Gas) dispensing unit at the R&D Centre campus at

Faridabad, demonstration projects are underway on use of H-CNG blends in heavy and light

vehicles. Indian Oil R&D is also working on production, storage, transportation, distribution

and commercialization of Hydrogen as an alternative fuel.

13 | P a g e


14/52

Indian Oil has, till date, invested close to Rs.1000crore in setting up world-class

facilities at its R&D centre for building world-class capabilities in analytical services,

engines, test rigs and pilot plants for all major refinery processes, catalyst characterization &

development, etc. it plans to invest about Rs.500crore during the period 2007-12 to maintain

its leadership in downstream R&D activities in the hydrocarbon sector. While continuing

with cutting edge R&D in the core areas of lubricants formulations, refinery process

technologies and pipeline transportation, the thrust would now be on commercializing the

developed technologies and initiating research in new frontier areas such as petrochemicals,

residue gasification, coal-to-liquid, gas-to-liquid, alternative fuels, synthetic lubricants, nano-

technology, etc. through these R&D initiatives, Indian Oil will continuously enhance value

for all its stakeholders.

REC EIVABLES MANAGEMENT & E-BANKING

RECEIVABLES MANAGEMENT-An overview:

A business firm usually operates by selling goods on credit. Thus, finished goods sold

on credit become receivables, which again form a major part of the current assets of a firm.

Trade credit is an essential marketing tool which acts as a bridge for the movement of goods

through production and distribution stages to customers. A firm grants trade credit to protect

its sales from the competitors and to attract the potential customers to buy its products at

favourable terms.

A firms investment in credit sales depends on how much it sells on credit & how

long it takes to collect the receivables. Accounts receivables constitute the 3 rd most important

asset category for the business of the firms after plant and equipment and inventories.

But there involves cost of maintaining receivables:

Additional fund requirement for the company:

14 | P a g e


15/52

When a company maintains receivables, some of the firms resources remain

blocked in them because there is a time lag between the credit sale to customer

and receipt of cash from them as payment. To the extent that the companys

resources are blocked in its receivables, it has to arrange additional finance to

meet its own obligations towards its creditors and employees, like payment for

purchases, salaries and other production and administrative expenses.

Administrative cost:

When a company maintains receivables, it has to incur additional

administrative expenses in form of salaries to clerks who maintain records of

debtors, expenses on investigating the credit worthiness of debtors, etc.

Collection costs:

These are the costs which the firm has to incur for collection of the amounts atthe appropriate time from the customers.

Defaulting cost:

When customers make defaults in payments, not only is the collection efforts

to be increased but the firm may also have to incur losses for debts.

Accounts Receivables management consists of:

1. Formulation of credit policy

2. Credit Evaluation

3. Credit Granting Decision

4. Monitoring Receivable

The book debt or receivable which arise as result of trade credit have the following features:

i. It involves an element of risk and hence should never be fiddled with. Credit sales

leave a sum to be recovered in future which is not certain, and it is risky.

ii. It is based on economic value, while for the buyer, the economic value in goods

passes immediately at the time of purchase, while the seller expects an equivalent

value to be received later on.

iii. It represents future. The cash payments for the goods or services received by the

buyer will be made in future.

Importance:

15 | P a g e


16/52

The management of receivables gains more importance in the view of the fact that

more than one third of the total current assets are blocked in the form of trade debtors. The

interval between the date of sale and the date of payment is financed by working capital.

Thus trade debtors represent the investment. As substantial amount are tied up as trade credit

hence it requires careful analysis and proper management.

Goals of Management of Receivables:

As all other aspects of management, this also aims at the maximization of wealth by a

beneficial trade off between liquidity risk and profitability, the main aim of management is

not to maximise sales or minimise bad debts risk but in a way it is to expand sale to the extent

that the bad debts risk remained within the limits. So in an effort to maximise the wealth, the

goals of management of receivables are:

To obtain optimum value of sales. Sales maximisation is not the purpose of credit

management but an effective and efficient credit management helps in expanding

sales and acts as a marketing tool. A good and well-administered credit means

profitable credit accounts.

To control the cost of credit and keep it to minimum level: In order to maximise the

wealth of the firm, the cost involved in the credit and its management has to be

controlled within the acceptable limits. These costs can be brought to zero level but

that would adversely affect the sales,, therefore the objective should be keep

receivables to the minimum level. A dynamic credit policy and its management will

help to optimize the sales at a minimum cost. To maintain investment in debtors at optimum level: Debtors involve funds, which

has an opportunity cost. Therefore the investment in debtors should never be

excessive. Extending liberal credit pushes the sales and results in higher profitability

but the increase in level of investment in debtors result in increased cost.

Thus we need to bring the investment to an optimum level by doing trade off between the

cost and benefits. The level of debtors to a large extent depends on external factors such as

industry norms, level of activity, seasonal variations etc.

But there are a lot of internal factors that affect the firms credit policy. These factors

include credit terms, standard, limits and collection procedures. The internal factors should bewell administered to optimise the investment in debtors.

Aspects of credit policy:

The goals of the companys credit policy are to maximise the value of the firm. In

competitive market, the credit policy adopted by a company is considerably influenced by the

practices followed by the industry. The important decision variables of the credit policy are:

Credit terms:

16 | P a g e


17/52

The stipulations under which the firm sells on credit to customers are called credit terms.

These stipulations include:

1. The credit period and

2. The cash discount.

Credit terms can be effectively used as a tool to boost sales. The most desirable credit

terms, which increase the overall profitability of the firm, should be offered to the customers

and a cost benefit trade off between credit terms should be done to choose the best one.

1) The credit period:

The length of time for which credit is extended to customers is called the

credit period. Usually the credit of firm is governed by the industry norms, but

firms can extent credit duration to stimulate its sales.

2) The cash discount:

Cash discounts are the offer made by the firm to customer to pay less if

required amount is paid earlier. The cash discount terms indicate terms

indicate the rate of discount and the period for which discount has been

offered. If the customer does not avail this offer, he is expected to make the

payment by the due date.

Credit standards:

Credit standards are the criteria which a company follows in selecting customers for

the purpose of credit extension. The firm may tight credit standards, that is, it may mostly sell

on cash basis, and may extend credit only to the most reliable and financially strong

customers.

The sales and receivable levels are likely to be high if the credit standards of the firm

are relatively loose. In contrast, if the firm has relatively tight credit standards, the sales and

receivables are expected to be low.

Credit standards influence the quality of the firms customers. There are two aspects

of the quality of customers:

The time taken by customers to repay credit obligation and

The default rate.

The Average collection period (ACP) determines the speed of payment by customers. It

measures the number of days for which credit sales remain outstanding. The longer the

17 | P a g e


18/52

average collection period, the higher the firms investment for account receivables. Default

rate can be measured in terms of bad debt losses ratio the proportion of uncollected

receivable. Bad debt losses indicate default risk.

Default risk is the likelihood that a customer will fail to pay the credit obligation.

To estimate the probability of default, the financier or credit manager should consider three

Cs:

Character refers to the customers willingness to pay. The financial or credit

manager should judge whether the customers will make honest efforts to honour their

credit obligations. The moral factor is of considerable importance in credit evaluation

in practice.

Capacity refers to customers ability to pay. Ability to pay can be judged by

assessing the customers capital and assets which he may offer as security. Capacity is

evaluated by the financial position of the firm as indicated by analysis by analysis ofrations and trends in firms cash and working capital position.

Condition refers to the prevailing economic and other conditions which may affect

the customers ability to pay. Adverse economic conditions can affect the ability or

willingness of a customer to pay.

Collection policy:

The collection policy aims at accelerating collections from slow-payers and reducing

bad-debt losses. A collection policy is needed to ensure prompt and regular collection.

Prompt collection is needed for fast turnover of working capital, keeping collection costs and

bad-debt within limits and maintaining collection efficiency.

The collection program consists of the following:

Monitoring the state of receivables.

Dispatch of letters to customers whose due date is approaching.

Telegraphic and telephonic advice to customers around the due date.

Threat of legal action to overdue accounts.

Legal action against overdue accounts.

18 | P a g e


19/52

RECEIVABLES MANAGEMENT AT IOCL

Credit Standards:

Credit standards refer to the financial strength and creditworthiness a customer must

exhibit in order to quality for credit. The choice of optimum credit standards involves a trade-

off between incremental return & incremental costs. The basis on which IOCL providescredit to private customers is bank guarantee. Without a bank guarantee no credit is provided,

only government customers are provided credit without a bank guarantee. A bank guarantee

is a guarantee made by a bank on behalf of a customer, in case it fails to deliver the payment,

essentially making the bank a co-signer for its customers purchase.

The Credit Cap in respect of each state is different & the state offices have to ensure

at all times that the allowed credits are within the approved credit cap. The over credit cap

shall be reviewed at HO periodically and as and when there is any revision in the credit cap,

the same will be advised to state offices after obtaining necessary approval.

19 | P a g e


20/52

The credit cap has been broken product wise for proper monitoring of the credit

limits. In no case, any state office is allowed to exceed the overall credit cap for all customers

and products put together. However, the state heads have the flexibility of utilizing the

available credit cap in one product for another as per the requirement. The supplies on credit

are to be regulated in such a way so that the total credit exposure on individual customer

remains within the credit limit sanctioned to the customer.

At the time of approving any fresh credit proposal, the beyond credit outstanding

should also be included for the total credit availed against the credit cap.

A guarantee is written contract stating that in event that the borrower is unable or

unwilling to pay its debt to a merchant, the bank will act as a guarantor and step in to pay that

debt.

The amount for which the Bank Guarantee is raised and the period for which it would

be applicable is specified.

Whenever a customer makes purchases up to 90% of the credit limit provided, the

customer is informed and sometimes the supplies are stopped if they crossed that limit. In

rare instances while providing cheque facility, a CRISIL rating activity is undertaken.

The Divisional office makes the proposals for credit approval & they are approved at

State Office. Credit limits extendable to individual customers shall be decided primarily by

ensuring the same does not result into Selling below Cost and positive margins are

available to maximize the profitability. For this, it has to be ensured that the retained margin

on per unit of sales considering the cost of credit, discount and/or any other facilities

including free delivery etc., and marketing cost is not negative.

It has also been clarified that if the retained margin after reckoning cost of credit,

discount and other facilities but before considering the marketing cost is positive but does not

cover the marketing cost fully, the extent of margin available can be construed to be a

contribution to be a contribution to the fixed marketing cost & hence will not tantamount to

selling below cost.

Credit granting decision:

All Credit proposals should clearly bring out the financial implications of the proposal in

terms of:

Margins per unit sell after considering any other facilities like discount, transport

subsidy, marketing cost, etc. Obviously there wouldnt be any outgo of margin due to

extension of credit if credit is interest bearing. The retained margin thus arrived at

should invariably be positive.

Outgo of margin per selling unit due to extension of credit and retained margin per

selling unit. Monitory credit limit in respect of each customer for each credit control

area.

20 | P a g e


21/52

Validity period of credit approval.

Confirmation that the, credit proposal is within the overall credit cap allocated to the

customer/state.

All credit approval should be subject to finance concurrence.

The credits to be extended are based on credit worthiness assessment of the partiesthrough the CRISIL module where the rating confirms to the capability of the party to make

payment on the due date. In other words, ratings of C1 & C2 as per the module are only to be

considered for allowing credit. In exceptional cases like PSUs, joint sector companies, etc.,

C3 rating could also be discretionally considered with regular review of financial position

and monitoring of payment records. The copy of the credit evaluation report (credit rating)

duly signed by the Divisional Manager should be enclosed with the credit proposal.

Credit proposal is based on the following conditions:

Product requirement of the customer, IOC share, volume uplifting in the last sixmonths.

Existing terms (in terms of old customers) regarding volume, period, discount, credit

days, credit cost, credit limit.

Proposed terms-volume, period, discount, credit days, credit cost, credit limit, CRISIL

rating.

Justification, which includes the reason for discount/credit

Details of OMCs (Other Oil Marketing Company)

Past record of payments

Any default in timely payments and dishonour

Status of current outstanding Any other details pertaining to the customer.

A financial implication is calculated by including the discount, interest and the

required margin in view.

In case some of our existing major fertilizer/petrochemical customers, who do

not have high credit ratings, state heads may approve the credit to customers in

exceptional cases with full justification up to maximum 30 days period. However, all

such cases would be evaluated on its merits and a constant vigil shall be kept to

realize the dues on time.

In any case, for such cases if the credit is to be extended beyond 30 days

without interest and/or security the same shall be authorized only by Dir (M).

In case of new customers who are not in position to provide financial

statements enabling us to carry out the credit evaluation as per the CRISIL module,

the customers bankers report and details of working capital loan limits obtained by

the customer from the bank are to be obtained and evaluated duly concurred by Head

of Finance & approved by Head of State Office.

21 | P a g e


22/52

Credit Period:

The length of time for which credit is extended to customers is called the credit

period. It is generally stated in terms of net date. IOCL provides a standard credit period of

For all products (covered in the policy) other than Lubes/MS/HSD/ATF

Up to 90 days with interest and security from State Head Office.

Up to 30 days without interest and/or security from State Head Office.

For Lubes

Up to 90 days with interest and security from State Head Office.

Up to 60 days without interest and/or security from State Head Office.

For MS/HSD (Direct customers)

Up to 30 days with security and with/without interest from State Head Office.

Up to 30 days without interest from Head Office. Retail outlets:

Cash & carry but sometimes are provided with a 5 days revolving credit i.e., the

customers are provided the sales of last 5 days of the month on credit basis for which

payment can be made later. This 5 days revolving credit provided (interest bearing) only

to some particular customers.

It is to be borne in mind that any credit extended on additional volumes alone

would contribute to the growth in profitability. It is therefore, imperative to be very

careful in extending any credits for the existing business over and above the payment

terms already in vogue, to register growth in the profitability.

The credit extension on Lubes shall be subject to the authority mentioned:

Up to 90 days with interest & security from State Heads.

Up to 60 days, without interest and/or security from State Heads.

Credit shall be extended only with interest. The interest for the credit period shall be

recovered at a rate not less than the applicable prime-lending rate of SBI as applicable to

IOCL. This rate is conveyed from time by Head Office to regions & State Offices as &

when there is any chance in the rate.

However, interest free credit (full or part), can be considered by approving authority

in exceptional cases taking into account the market conditions and competitive forces.

The reason for giving interest free credit should be recorded in the note by the approving

authority bringing out the circumstances leading to such offer.

22 | P a g e


23/52

However in case of default in payment after the approved credit period, interest should be

charged as under:

Interest bearing credit: The interest for the approved credit period to be charged

at the applicable rate to the customer and for the default period the interest to be

charged at this rate +1% Interest free credit period: No interest to be charged for approved credit period

and for default period interest to be charged at applicable SBI PLR +1%.

Credit is provided only in the form of interest bearing or interest free. No policy of

providing cash discount is present in IOCL. It should also be ensured that the total exposure

in terms of amount based on no of days credit is clearly brought out in the credit note.

Collection of the outstanding on the due dates shall be the sole responsibility of the

Head of the state office. It is therefore, necessary to institute proper control and monitoring

system to ensure the collection of outstanding on the due dates. It is the responsibility of thestate office to take all necessary safeguards to ensure that under no circumstances the debts

become bad of recovery.

IMPLEMENTATION OF SAP:

All the financial activities are taken up in IOCL by using SAP (Systems Applications

& Products). IOCLs SAP landscape comprises 458 locations with about 4000 concurrent

users.

Since its initial SAP implementation in the early 2000s, the system has grown

substantially, with the addition of those 850 customer-developed modifications adding

measurably to the overhead. The company then asked SAP Active Global Support to provide

it with the SAP Business Process Performance Optimisation service. Both SAP Business

23 | P a g e


24/52

Process Performance Optimisation and SAP Early Watch Alert are service of the SAP

Solution Management Optimisation portfolio.

The IT road map of IOC includes SAP ERP 6.0, supply chain management system as

well as Net Weaver process integration technology and line of business applications. The

company went for the implementation of ERP package across all its location in a phasedmanner during the year 2001. The company selected ERP solution of M/s SAP namely SAP

R/3. It later upgraded to SAP ERP 6.0 from SAP R/3 4.6 C to overcome oil and business

complexities.

All the information is uploaded into SAP, which provides a brilliant interface to

undertake the financial activities. This product adds a new dimension to Dynamic

Receivables Transaction processing by allowing the user to create receivable transactions

by importing information through different T-codes. Receivables and collection

management is based on a sub ledger that focuses especially on the needs of businesses

that handle a high volume of master and transaction data. The aim is to minimise manualwork through a high level of automation and keep downtime as minimum as possible.

The solution provides full control and reconciliation of sub ledger and general

ledger. Extensive handling capabilities for accounts receivables and collections ensure

revenues and a low rate of outstanding debts.

With pre-defined interfaces to SAP and non-SAP systems, receivables and

collection management is easily and highly integrated with the general ledger, billing

system, customer relationship management, credit management and the interaction centre

for financial customer care. With a main server a network based system all the proceduresbecame centralized and could be accessed at any place and could be updated to the main

database without analysis of time compiling of data.

MONITORING RECEIVABLES AT APSO:

State head office will be responsible for monitoring the outstanding and ensuring the

credit is contained within the credit cap.

State office/ regions while reporting the status of monthly outstanding for CMC, shall

also incorporate therein, the credit terms for each customer, nos. of days equivalent for the

outstanding shown as within credit and reason for beyond credit also for review by Dir (M).

The actions in case of default in payment:

24 | P a g e


25/52

The credit facility to be temporarily withdrawn.

Action to be taken to recover the outstanding amount including the credit supplies,

which are not yet due for payment.

Till the time all dues are recovered and credit is restored after appropriate approval,

all supplies to be made on cash and carry basis.

In case of credit extension against post dated cheques, if the post dated cheque is not

replaced by DD on due date (if the party has so opted for replacement), the location in

charge shall be responsible to deposit the cheque on the following day and a letter should

be written to the party advising him about the cheque so deposited.

The party should be further advised that all cost and charges inthis regard would be

recovered from him. In case such cheque is dishonoured, the necessary action as per the

extant instructions should be initiated.

The monitoring and control on credit extension shall be the responsibility of variousoffices as under:

Divisional Manager shall maintain the sanctioned credit limit (credit control area

wise) in SAP for each customer. It has to be ensured that the limits are strictly in

line with the approval.

It will be the responsibility of the supply locations to ensure that the supplies are

released within the sanctioned monitory limit of the customer.

Field officers/Divisional officers shall be primarily responsible for timely

collection of payment on due date. The Divisional manager should closely

monitor the release of supplies vis--vis the payment on due date and takeimmediate action in case of any delay.

Following system is followed in case the payment is mot realized on due dates:

In case the payment is not realised on due date after the credit period, Divisional

office will immediately advise the State Consumer Head to take immediate action for

recovery of amount due.

In case, payment is not realised within 15 days from the due date, Divisional

office/State Consumer Head has to bring the same to notice of the state office head.

In case, the payment is not realised within 30 days from the due date, State Office

Head shall report the matter to the concerned ED at HO with proposed action plan.

The credit facilities allowed to various customers will be reviewed Divisional Office.

The control on credit extension shall be reckoned as one of the performance criteria for

the divisional office. The divisional office, which is able to achieve sales volume with

minimum credit facility will be considered as high performing Divisional Office (DO).

Control on the Credit Cap:

25 | P a g e


26/52

State office in-charge shall be responsible for monitoring the outstanding and

ensuring that the credit approval is contained within the credit cap. For the purpose, the

following procedure should be followed:

A credit register is to be maintained at the state office, wherein the record of all the

credit approvals should be entered and the updated position of the balance available creditcap must be shown. As and when any new credit facility is approved to a customer, the same

should be immediately entered in the register and the balance available credit cap should be

accordingly reduced. In this way, state office should be able to ensure that credit extension do

not exceed the available credit cap while approving the credit proposals.

Customer master:

Customer master consists of the data relating to the customers and the records

regarding the transactions with them which are processed by the system. It includes all the

information about the customer that is required to conduct business transactions. Customer

Master Records represents the sub-ledger that supports the balance sheet accounts for

Accounts Receivable, Account Payable, Individual customer master records are referred to as

customer accounts and represents the amount owed by the customer (in the case of the

accounts receivable) or the amount of the deposit paid by a customer.

In order to make updating and changes in a matter, proper authority is required and is

usually available only to officers in senior grade.

Customer Code:

A customer dealing with the company is given a 6-digit code with which they are

identified & hence transactions between customers and company takes place. When a new

customer is inducted, its credentials are checked by the respective functional departments and

approved. The information is then sent to the Head office, which then provides the customer

a unique code e.g.: The customer code for Petrol supplies is 134465. This number acts as the

identification of the customer when it makes any transactions.

G/L Account:

The central task of G/L accounting is to provide a comprehensive picture regarding all

business transactions (primary postings as well as settlements from internal accounting) in a

software system that is fully integrated with all the other operational areas of a company and

ensures that the accounting data is always complete and accurate. The general ledger is

supported by one or more subsidiary ledgers that provide details for accounts in the main

ledger A/c. For instance, an accounts receivable general ledger (GL) would contain a separate

account for each credit customer, tracking that customers balance separately.

26 | P a g e


27/52

This subsidiary ledger would then be totalled and compared with its controlling

account (in this case, Accounts Receivable) to ensure accuracy as part of the process of

preparing a trial balance. Thus the data related to the customers (sub-ledger) are again

mapped to particular GL accounts. Thus the GL account is a collection of the group of

accounts that supports the items shown in the major financial statements.

It is built up by posting transactions recorded in the sales daybook, purchase daybook,

cashbook and general journals daybook, this helps in linking different applications to the

accounts receivables section.

There are various GLs each pertaining to a particular aspect of receivables

management like GL of all the interest debit notes raised, GL of the customers shifted to the

bad debts account, GLs of a particular category of customers.

Pooling of balances:

Pooling of balances is done to arrive at a balance, which should show the total

outstanding position of the state office in the trial balance of the state office. Whenever a

customer makes purchases in different state from the owing company state then they are

mapped to that particular state. But in order to arrive at a complete picture of the customer

transaction of that particular state all those customers are pooled in to the owing company

code.

If a customer belonging to other company codes makes transactions in AP then they

are pooled out. YFR146 (a report in SAP) is the main file, which includes all the balances ofthe customers. After pooling the YFR146 shows the correct balances matching with the Trial

Balance across all the states.

Format of YFR146 extract:

Cus.

Code

Com.

Code

Cust.

Name

Owning

Company

Code

Opening

balance

Closing

balance

C.dr C.cr Total

balance

Recon

a/c.

27 | P a g e


28/52

Financial statement:

A trial balance is obtained for the fiscal period. The trial balance of 2 years is compiled and

compared by using a report of f.01.

Particulars Reporting Year Comparative Year Absolute Difference

The total balance for a particular period (quarters), which appear in the YFR146, is tallied

with the values in the trail balance. Hence after the polling exercise is done successfully, the

balances in the YFR146 and the trial balance must match.

Owning Company Code:

All the states are provided with a company code. A customer primarily is owned by a

particular state, usually based on where he has his registered office.

For e.g. If a customer has his registered office at Hyderabad and his primary operations are at

Hyderabad, his Owning Company Code becomes 4400 as the owning state is Andhra

Pradesh. But he may also operate in other states; hence he will be additionally mapped to

those State Company codes also without the change in Owning Company Code. E.g. any

customer who operates in Andhra Pradesh is mapped to company code-4400. But his owning

company code may be of Karnataka-4300 or Tamil Nadu-4100 etc.

In short, a customer can operate anywhere in India, but his owing company code

would be responsible and have full control over all his transactions-sales, collections etc.

Credit Control Area:

IOCL deals with many products & hence each product is recognized a unique control

area (CCA). For e.g. A customer for HSD has a credit control area of C004 whereas for lubes

it is C001. Similarly for kerosene it is C005 & LPG it is C002. If a customer is in business for

more than one product, say two then either he has two different customer numbers or has one

customer code with assuage of two or more credit control areas.

Credit balances in debtors account:

28 | P a g e


29/52

If for any customer the credit (payments/credit notes) is more than its debit

(invoices/debit notes) then he is said to possess a net credit balance.

The credit balance can occur in two cases, where the customer has paid advance &

not uplifted the product & secondly the customer has made an excess payment for the

load lifted. These credit balances are maintained as such and they get debited whenever the

customer makes further transactions with IOCL.

If the customers refrain from doing further transactions then he can ask for refunding

the amount. For this he can put a request note to the company stating the necessary

details. Then the concerned functional department checks the amount, which is

rechecked in the financial department. Then the amount is refunded back either

through cheques or through e-transfer.

If the credit balance in the debtors account is unmoved for more than 3 years then it is

transferred to the miscellaneous income account as per the company policy. But even

if the customer claims for the amount after then it is refunded back to the customer.

If there is a group customer i.e. a customer deals with more than one product (e.g.

APSRTC dealing in more than one product) the balances is analyzed in totality, as a

sum of all the customer codes and not individually.

Ageing of credit balances in debtors account:

An ageing analysis of credit balances in debtors accounts such has been undertaken

to classify them on the basis of time period for which they have been unmoved. The ageingschedule of credit balances in debtors accounts as on 31-3-11 is compared with the credit

balances as on 31-3-08. If the difference between the both balances comes out to be zero then

it is shifted to the miscellaneous income account.

Refund of customer balances:

Sometimes some customers make a lump sum payment in advance. Those balances

for which no sales have occurred appear as credit balances. These customers can ask for

refunding the amount. Refunds are made by the customer controlling state office based on thecustomers request duly recommended by functional department and account reconciled with

the party. Refunds to the customer can affect only after the joint reconciliation is done. All

open items in joint reconciliation should be duly accounted for before making any refund.

Refunds procedure is:

The customer makes a fund request with complete details of the past payment and

supplies of the post reconciliation period to the functional department of customer

controlling DO/AO.

29 | P a g e


30/52

On receipt of the request the functional group of DO/AO has to ensure that there are

no pending debit notes (ex. Non submission of concessional sales tax forms, interest

on delayed payments should have been posted in the customers account).

DO/AO forwards the documents to the SO after ensuring that the amount against

which refund is sought is already credited to IOCs Bank A/c i.e. no refund can be

made against unrealized credit.

The SO ensures that the concerned customer does not have a debit balance in any

other company code. SAP provides a facility wherein if a customer has a debit

balance in any other company code, refund voucher can be processed maximum up to

the credit balance on all India bases. In case the customer happens to be vendor also,

care is taken that the vendor a/c does not have any debit balance. It is also ensured

that there are no open items in the billing due list.

Refund is made directly by debiting customers account.

Refund voucher is approved by the finance officer strictly in line with limits specified

in the delegation of Authority manual (DOA). All funds beyond Rs. 1 lakh is made through RTGS/NEFT (if the facility is available)

otherwise traditional mode of payment like cheques/DD are issued and couriered.

A refund register is to be maintained at DO/AO/states to have a control on refund

claims received and processed by them.

Ageing of debtors:

An ageing analysis consists of classifying accounts into categories according to the

age of the debt. Whenever a customer shows a debit balance, he is accountable to pay itwithin the credit period. The credit period provided depends on the decisions of respective

functional departments as discussed above. Generally the credit provided for customer

category (fuels) is 30 days or lesser, lubes 30/45/60 days. LPG distributors are cash and carry

customers.

Retail customers are also cash and carry customers but they can be given a 5 days

revolving credit. Based on this the debts are classified as:

>6 months: if the debts of a customer are appearing for more than 6 months then they are

classified as >6 months. These are segregated and sent to the functional department which

then undertakes which then undertakes the necessary follow up and the necessary collection

procedure.


31/52


32/52

5) The total outstanding balance is then bifurcated into fuels, lubes, LPG, retail

outlets by referring to the credit control area to which they pertain.

6) Then the sales figure of each customer is plotted based on their credit period and

within/beyond credit balance is arrived at (this sales figures are extracted using

the SAP t-code fbl5n and document type RV, ZX for the particular list of

customers).

7) The list is compared with the total balances to find the within and beyond credit

position.

If sales is greater than debt than the total outstanding amount is treated as

within credit.

If sales are lesser than the amount of sales is denoted as within credit and

the rest is treated as beyond credit.

INTEREST CHARGED:

IOCL sells goods on credit on two conditions of interest.

1. Interest bearing: Interest is charged once the goods are sold. In this the cumulative

balance as on the date. The interest charged is the prime running rate of SBI i.e.

12.25% and once they cross the period of payment an interest of 2% extra is charged

for delayed payment.

Opening

balance as on

01-05-2009

1438505.

2

Date Debit Credit Cumulative Interest

08-05-2009 146000 -2149408 3379.5 (1438505.2*12.25%*7)/(365)

08-05-2009 391966 370471.2

08-05-2009 391966 -21494.8

08-05-2009 391192 369697.2 124.08 (369697.2*12.25%*1)/365

09-05-2009 378806 748503.2 753.63 (748503.2*12.25%*3)/365

12-05-2009 390418 1138921.2 764.48 (1138921.2*12.25%*2)/365

14-05-2009 386805 1525726.2 9217.0

6

(1525726.2*12.25%*18)/365

Closing

balance as on

31-05-2009

152526.2

32 | P a g e


33/52

May-

interest

14238.75

*note: the above table is a sample data.

Calculation of interest:

The debit balance on 1-05-09 was Rs. 1438505.2 and it is outstanding till customer

makes a payment of Rs. 1460000 on 8-05-09. Thus interest is calculated for the 7 days from

1-05-09 to 7-05-09 on the amount 1438505.2.

Interest= outstanding balance*(rate of interest/365)*(no. of days)

=Rs. 1438505.2*1.1225/365*7

=Rs. 3379.5

Similarly the interest for the cumulative balance is calculated as on that day.

2. Interest free: Interest is charged only on the amount which is outstanding beyond the

credit period and no interest is charged on the payments within credit.

The rate of interest which is charged is PLR (Prime Lending Rate) of SBI +2% I i.e.14025%.

Interest debit notes are raised and the customer is debited with this interest when he makes

the payments.

Opening

balance as on

1-03-09

35645351

Date Debit Credit Cumulative Interest for delayed period

05-03-2009 8000000 27645351

05-03-2009 406499 28051850

05-03-2009 407839 28051850

05-03-2009 407839 28867528

05-03-2009 393369 29260897

05-03-2009 303792 29564689

05-03-2009 393101 29957790

06-03-2009 414002 30371792

33 | P a g e


34/52

06-03-2009 414270 30786062

06-03-2009 414538 31200600

06-03-2009 403016 31603616

07-03-2009 412930 32061546

07-03-2009 390957 32407503

07-03-2009 404891 32812394 (27645351*14.25%*2/365)

=21586.08

17-03-2009 374000 32438394 (27645351-

374000*14.25%*1/365)=

10647.03

18-03-2009 600000 31838394 135366.2

18-03-2009 292731 32131125

31-03-2009 15000000 17131125

31-03-2009 4000000 13131125 2994.97

Total interest

charged for

the month

170594.4

*note: the above table is a sample table.

Calculation of interest:

Interest is calculated only on that amount which is beyond the credit period. The

customers have to make payments within 15th of the following month.

Interest= outstanding amount*(rate of interest/365)*no. of days

=Rs. 276453651*(0.1425/365)*2

(Rest amounts are due to sale within credit period)

(Delayed period of 2 days because payments was made on 17th instead of 15th)

=Rs. 21526.08

34 | P a g e


35/52

JOINT RECONCILIATION:

Joint reconciliation is a process in which the company and the customers follow a

combined procedure of matching the accounts in their respective account books. This is

necessary to arrive at a consensus about the actual amount outstanding in the accounts. IOCL

sends a copy of the outstanding balance statement to the customer after kocking off theprevious customer balances already reconciled.

This is a process of linking payments with related invoices and generation of resultant

open items, which can be correctly categorized for the aging of debts with bill wise details.

Basically it is a process in which the total outstanding balances in the books of the seller and

the buyer are equated. There might be differences due to the following reasons:

Debit/credit notes issued but not accounted by the other party

Debit/credit noted accounted for a wrong amount

Discount agreed to be provided but not deducted from the bills etc. Payments made by party not accounted in IOC books.

Invoices raised by IOC not accounted in customers books.

Thus the job is partially outsourced to chartered accountant firms who match

the accounts with the bill and arrive at an amount with which both the parties agree.

An example of joint reconciliation can be seen as an annexure. This statement is sent

to the customer.Then the customer matches the amount in its books. Both the books

must show an equal amount with reconciled differences, these differences will be

accounted for in the books of accounts after the reconciliation.

The major focus of IOCL is:

The major focus and aim of IOCL is to achieve 75% reconciliation.

Process of reconciliation is to be carried on in a regular basis depending on the

size and complexity of the customers. In order to achieve this company identifies

those customers which show a high outstanding balance which generally includes

fuels and lubes customers because retail and LPG is cash and carry.

Thus joint reconciliation between IOC and customers is a compulsory and

perpetual prerequisite to avoid disputes by customers at a later date. Functional

groups drive the process of joint reconciliation.

A committee of finance, customer, retail and LPG heads at office drive and

monitor the reconciliation process on a sustained basis and provide the necessary

details related to the invoices and payment procedure. The committee ensures that no

customer is left out from joint reconciliation within a period of 12 months in a

financial year.

35 | P a g e


36/52

Joint reconciliation is mandatory in case of reconciliation of

dealers/distributors/SKO agents, if the IOC balance has been disputed by the

concerned parties. Customers having an outstanding of more than 10 lakhs at the

close of any month during the previous 12 months shall be constructed as major

customers.

For all these customers reconciliation is complete during the financial year by

the state finance groups jointly with respective functional groups. Cash and carry

customers having nil balances can be ignored for reconciliation.

Also the customers having credit balances more than Rs 10 lakh at the close of

any month during the previous 12 months also need to be reconciled by the State

finance groups jointly with respective functional groups to ensure that the balance is

factual and correct.

While reconciliation all credit/debit notes issued, approvals on credit/discountmust be produced. Post reconciliation all open items should be cleared and corrections

be carried out, for which it is necessary for the functional departments to provide

necessary backup documents/approvals.

The reconciliation that are carried out at DO/AO level, a quarterly MIS should

be sent to the State Finance. Similar MIS is also maintained by State Office for the

reconciliations carried out by them for the reference of State heads/HO as and when

needed. These MIs include status of reconciliation whether fully reconciled or any

disputed issues existing etc. the MIS report is an executive summary.

CREDIT CAP:

The credit cap is the maximum limit within which credit at a point of time.

This credit cap is set up by the HO for different state offices for different product

depending upon the volume of sales made. It is decided based upon the going price,

discounts offered. The state office has to be within that cap while providing goods on

credit.

COLLECTION PROCEDURE:

Billing Procedure:

Billing plays a very important role in making the collection effort faster for a

company. Often there is a time lag between goods and services and sending of the

bills. By preparing and sending the bills promptly a firm can ensure earlier

36 | P a g e


37/52

remittances. In IOCL after the implication of SAP, a networked system has been set

up. The information is relayed as soon as the billing is done. As a result the time lag

which can occur due to delay in complication of data from the regional offices to the

HO is eliminated.

Collection Policy:

IOCL has a collection policy procedure to collect the outstanding from

customers. After the preparation of CMC reports those customers who show a beyond

credit outstanding, then the functional department undertakes more collection effots.

It may consist of following ways,

Telephone calls

E-mails

Letters

If the customer does not make payments then they are threatened to invoke the

bank guarantee.

Thus collection policy in IOCL can be considered as not that vigorous as due

concern is given only when they remain outstanding for more than 6 months or so, but

far enough to maintain a moderate outstanding value of debts.

E-COLLECTIONS :

IOCL had a traditional mode of collection of payments of customer i.e. through

cheque, credit, letter of authority. But it improved its system of collection and subjected to e-

collections.

Demerits of traditional mode:

1. Unnecessary involvement of bulk documents.

2. Delayed realization of money.

Ex. If a customer deposited a cheque then it took around 3-4 days for its realisation &

for outstation cheques around 7-10 days. This added to the cost of the company by

increasing the interests which the company had to pay.

37 | P a g e


38/52

Advantages of E-banking:

Bank availability 34 hours, 7 days a week, 365 days a year.

No time limit access into account.

Immediate realization of payment operation orders.

Advance value date fixing when sending orders. Monitoring account balance in different time periods.

No additional commission for executed payment operations.

Since cheques on hand come down drastically, savings on account of interest.

The various modes which a customer can use for payments are:

Cash

38 | P a g e

Customer

bank

Options Charges Timings Time

taken

SBI Internet banking No charges 24*7 10-15

min

SBI Core banking 0.1% of

transactionamount

As per bank hours

SBI RTGS (BNP

Paribas) in 18 digit

a/c code

As per bank 9a.m-3.30p.m (mon-fri)

9a.m -11.30a.m(sat)

2-3

hours

SBI

Associates

Online RTGS Rs.25 per

transactions

9a.m-3.30p.m (mon-fri)

9a.m -11.30a.m(sat)

10-15

min

SBI

Associates

RTGS in 18 a/c no As per bank 9a.m-3.30p.m (mon-fri)

9a.m -11.30a.m(sat)

2-3

hour

HDFC Internet banking No charges 24*7 15 min

ICICI Bank Internet banking No charges 24*7 15 min

CITI Internet banking No charges 24*7 15 min

Any Bank RTGS (IOCL SBI

a/c) in 18 digits

As per bank 9a.m-3.30p.m (mon-fri)

9a.m -11.30a.m(sat)

2-3

hours


39/52

Cheque/DD: customers can make payment through cheque facility but customers are

provided with a cheque facility after undertaking a CRISIL rating of the customer.

IOCL has a package which helps in determining the CRISIL rating of the customers. For

proving the CRISIL rating different scores are given.

1. Financial score: obtained from the financial ratios of cash profit margin, interest

coverage, debt equity, revenue to assets.

2. Business score: a score is given based on the area of operation, market share.

3. Industry score: based on the diversification of the industry, turnover.

Based on the scores an overall score out of 4 is given to the customers and then they are

classified as:

Overall score CRISIL rating Ability to make

payment

Approving Authority

3-4 C1 Indicates high ability

to make short term

payments

Divisional Officer

2-3 C2 Indicates good ability

to make short term

payments

Divisional Officer

1-2 C3 Indicates adequate

ability to make short

term credit regularmentoring of

financial position is

critical

Executive Director

0-1 C4 Indicate poor ability

to make short term

payments.

Executive Director

39 | P a g e


40/52

INTERNET BANKING :

Internet banking is form of banking in which the customer can directly make his

payments without the involvement of any bank.

This is the fastest mode of transfer. It takes around 15-20 minutes for commencing

the transfer. It is least used from because the customer are generally computer illiterate.

Steps in internet banking:

1. The internet banking forms can be downloaded from the SBI website or can be

collected from the bank directly. These forms are duly filled and submitted. Then the

customer gets a kit of id and password.

2. Then the customer logs into corporate banking with the id and provides the necessary

details of the address, customer codes, location codes etc and specify the transactionlimits.

3. Then the bank approves the rules submitted and the limit put on the transaction. Only

after that the customer is approved to make the transaction.

4. Then the customer has to select IOCL as supplier and provide necessary details. Only

after IOCL approves the details provided the customer then is the customer mapped to

IOCL and then he can make the transactions.

5. Using the ID and password which they receive after submitting the CINB-C7, they

can log in and make the payments or transfers. Here they have to specify the debiting

amount and the destination account (the account which has to be credited).

6. An e-cheque is generated with a unique no. which forms the basis for future

reference.

7. Then the IOCL employee logs on SBI web page and can view the MIS generated for

the specified period. This MIS is downloaded and uploaded into SAP using the t-code

YF29 at a real time basis in Mumbai at an interval of 10 min then the customer

transactions can be viewed in the customer.

CORE TO CORE:

Core banking is a general term used to describe the services provided by a group of

networked bank branches. Bank customers may access their funds and other simple

transactions from any of the member branch office. Normal core banking functions will

include deposit accounts, loans, mortgages and payments. SBI provides a core to core

banking facility. The advantage of using core to core:

1. The forms or undertaking SBI core to core transfer along with a cancelled cheque is

submitted by the customer at the location which is transferred to the SO which sends

40 | P a g e


41/52

a copy of it to the HO. This form contains the necessary details of the customer

accounts and the necessary SAP details.

2. Then the customer is registered by the HO on the SBI webpage. After logging to the

SBI webpage, in manage dealers all the mandatory information is provided and the

registration approved. Only those customers can be approved who

Have an SBI account

Core enable branch

One customer account against a customer code.

1. Then the letters of IOCL bank details along with the procedure for bank details are

issued to the dealers from the SO.

2. After the registration the dealer goes to the bank and can make the payments.

3. Bank processes the transaction on screen no.5130 and use the cheque to deposit

option.

4. The amount is credited to the IOCL account.

5. The MIS which is generated is downloaded and uploaded in SAP & then executed togenerate the document no.

6. The transaction can be viewed in the customers account.

Errors committed:

Dealers making transaction before getting approved.

Transaction done through cash deposit or advising bank branch to directly transfer

without submitting cheque by the dealer.

Processing the transaction without using screen 51073-cheque by deposit optionsoption by the bank.

Transactions subsequently reversed by the bank after crediting IOCL account.

Core to core transfer charges debited in IOC account in spite of the customers

accounts. IOC makes an analysis in every 15 days and subsequently debits the

customer account.

RTGS:

It is the transfer of money on a real time and gross settlement basis. It is one of thefastest possible modes which include a bank as an intermediary. It provides administrative

convenience as the remitter advices his bank to directly credit the beneficiarys account.

Without any hassles of depositing instrument the supply location.

STEPS:

1. On the acceptance of the customer to make payments through RTGS mode a RTGS

letter issued to the customer containing the bank details and a specific 18 digit

account no. is provided to the customer in which the 1st 11 digit represents the IOCL

41 | P a g e


42/52

account no., the 12 digit is a character which denotes the product (CCA) and the last

6 digit represent the customer code.

2. During the remittance at that particular branch the customer has provide thefollowing details:

a. Customer account n., beneficiary customer name, IFSC (Indian Financial

System Code) of receiving branch, required amount, IOCL account no.

3. Then the remitting bank of the customer processes the transaction and transmits then

the RBI which processes the transaction a real time basis and sends it the beneficiary

bank i.e. SBI in this case. Then the customer receives a unique UTR code (unique

transfer reference) which forms the basis for future reference. This UTR no. is in the

form of ANDB0914773385

Bank name (Andhra Bank)

This UTR no. is specific for the particular day and particular transactions.

4. SBI on receipt of incoming RTGS credit to IOCL RTGS a/c reading the first 11 digits

and simultaneously generates MIS using 12th digit as product code description and

13-18 as the SAP code of the remitter.

5. Then this MIS is downloaded from the SBI webpage which is uploaded in SAP using

the t-code YF29 at the Mumbai HO on real time basis. Then the transaction can

viewed in the customers account.

Errors committed:

Whenever a customer makes any mistake while entering the customer no., then it is

not shown in customers account but gets transferred to the suspense account. Then the

customer has to send a copy of bank statement so that it can be transferred to the customers

account. If any mistake occurs while entering the account no. then it goes to the bank

suspense account. For this, there is a helpline no. available to the customers for providing the

details of their a/c no. can correctly credited to that customers a/c & with that the balance in

the suspense a/c.

ONLINE RTGS:

This process can occur by including all the banks apart from SBI. This is used when

the amount is greater than Rs. 1 lakh. It can be taken up by the associate banks or any other

bank. The process for online RTGS is similar to that of the steps of registration in internet

banking. Then after the approval it follows the same process as the normal RTGS.

42 | P a g e


43/52

The only difference is that here the requirement of the bank as an intermediary

institution is eliminated. Apart from this there is different mode of transfer called NEFT

(National Electronic Fund Transfer). In this, transaction is not processed on a real time basis

but on a batch wise process at an interval of 24-36 hrs.

Apart from this there is facility provided to ICICI customers called ICICI instructioncard. This is a type of credit card facility in which the customer can swipe the card at the

particular depot. This transaction is processed by the bank account is credited. ICICI releases

the amount after one day i.e. IOCL accounts gets credited on 3rd day.

Potential difficulties in e-banking:

An initial financial outlay is required to establish computer banking. This will

involve the purchase and maintenance of a computer and the establishment of

a telephone line.

Computer banking requires some personal computer skills although banks and

companies are making efforts to make their software as user friendly as they

can.

43 | P a g e


44/52

DATA ANALYSIS

Comparison of debtors position in various categories:

Category 31.12.1

0

31.03.10 %

change

STU 1217.83 668.2 82.25

Fertilizer (govt. & pvt.) 0.00 0.00 0

Power House 1509.45 1030.72 46.45

Steel Plant (govt. &

pvt.)

0.00 0.00 0

Others Govt. 6365.12 4440.08 43.35

Other pvt 3176.66 2418.31 31.35

LPG 5217.36 2346.7 122.31

Total 1748.42 10904.0

1

60.36

Category % outstanding as on 31.03.10 % outstandi

Receivables Mgmt

Documents

Transcript of Receivables Mgmt