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CHAPTER 1
INTRODUCTION

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RECEIVABLES MANAGEMENT

1.1 INTRODUCTION:

The receivables represent an important component of the current assets of a firm. The

purpose of the receivables management is to analyze the important dimensions of the efficient

management of receivables within the framework of a firms objectives of value dimensions of the

efficient management of receivables. This is followed by an in-depth analysis of the three crucial

aspects of management of receivables.

Meaning of Receivables Management:

Receivables management is the process of making decisions relating to investment in trade debtors.

We have already stated that certain investment in receivables is necessary to increase the sales and

the profits of a firm. But at the same time investment in this asset involves cost considerations also.

Further, there is always a risk of bad debts too.

The second section of the chapter examines the first aspect that is credit policies, which

have two dimensions:

(i) Credit standard: defined as the criteria to determine to whom credit should be extended;

(ii) Credit analysis: This section evaluates policies regarding both these aspects. The second

major part of receivables management is Credit terms comprising

(i) Cash discount.

(ii) Cash discount period.

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(iii) Credit period.

Next section is concerned with the third major component of receivables from

customers. The factoring services as a receivables collection/management strategy are illustrated in

the next section.

OBJECTIVIES:

The term receivable is defined as debt owed to the firm by customers arising from sale

of goods or services in the ordinary course of business. When a firm makes an ordinary sale of

goods or services and does not receive payment, the firm grants trade credit and creates accounts

receivable, which could be collected in the future. Receivables management, is also called trade

credit management.

Thus, accounts receivable represent an extension of credit to customers, allowing them

a reasonable period of time in which to pay for the goods received.

The sale of goods on credit is an essential part of the modern competitive economic

systems. In fact, credit sales and, therefore, receivables are treated as a marketing tool to aid the sale

of goods.

The credit sales are generally made on open account in the sense that there are no

formal acknowledgements of debt obligations through a financial instrument. As a marketing tool,

they are intended to promote sales and thereby profits.

However, extension of credit involves risk and cost. Management should weigh the

benefits as well as cost to determine the goal of receivables management.

The objective of receivables management is to promote sales and profits until that point

is reached where the return on investment in further funding receivables is less than the cost of

funds raised to finance that additional credit i.e. cost of capital

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. The specific costs and benefits, which are relevant to the determination of the objectives of

receivables management,

1.2 NEED FOR THE STUDY:

The project study is undertaken to analyze and understand how Andhra Pradesh Power

Generation Corporation is managing its Receivables and Tariff process in power sector, which gives

me an exposure to practical implication of theory knowledge.

Introduction of the Study

Electric power is playing vital role in human life. Now a days the situation is that, at

each and every point the usage of electric power is essential.

This study covers methodology of Management of the Receivables, managing different

Floats, Cost of Collection of Receivables, brief knowledge about Generation Tariff and a case study

on APGENCO tariff, one of the largest producers of power and a public sector unit under state

government.

There are different methodologies for studying the Receivables Management:

1. Different Costs

2. Credit Policies

3. Ageing Schedule

4. Floats etc.

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1.3 OBJECTIVES FOR THE STUDY

1. To study the relevance of Receivables Management in evaluating the Sundry Debtors.

2. To study the techniques of Receivables Management for decision making.

3. To know the effects of Power Generation techniques on profitable.

4. To measure the expenses incurred against the receivables.

5. To make suggestions if any for improving the financial positions of understanding the

company.

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1.4 METHODOLOGY FOR THE STUDY:

To achieve a fore said objective the following methodology has been adopted. The

information for this report has been collected through the Primary and secondary sources.

Primary Sources:

Through the interaction with the executives and employees of the company.
Secondary Sources

These secondary data is existing data which is collected data by others viz. source are

financial journals, annual reports of the AP GENCO Ltd., APGENCO website, through personal

interview with the concerned officers and other publications of AP GENCO.

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1.5 SCOPE FOR THE STUDY:

1. Lack of awareness of power generation sector of AP GENCO Ltd.

2. Lack of time is another limiting factor the schedule period 8 weeks are not sufficient to

make the study independently regarding Power Generation in AP GENCO Ltd.

3. The busy schedule of the officials in the AP GENCO Ltd is another limiting factor. Due

to eh busy schedule of officials restricted me to collect the complete information about

organization.

4. Non availability confidential financial data.

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CHAPTER 2
COMPANY PROFILE

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INTRODUCTION:

Government of Andhra Pradesh (GOAP) embarked upon Reforms in Andhra Pradesh

Power sector and as a sequel erstwhile Andhra Pradesh state Electricity Board (APSEB) was

unbundled and restructured into Andhra Pradesh power Generation Corporation Ltd. (APGENCO)

to look after the business of Generation and Transmission and Distribution respectively with effect

from 01-02-1999. By segregating the distribution activity from APTRANSCO four distribution

companies were formed which started functioning from 01-04-2000.

CONSTITUTION:

Andhra Pradesh Power generation Corporation Ltd. was incorporated as a company

under the provisions of Companies Act, on 29-12-1998 and obtained certificate of Commencement

of Business on 05-01-1999. However, with GOAP notifying the Andhra Pradesh Electricity

Reforms Act, 1998, APGENCO commenced its business operations effective from 01-02-1999. The

main objective that is to be pursued in accordance with the Memorandum of Association is to

acquire, establish, construct and operate Electric Generating Stations.

ORGANIZATION:

The Board consisting have a whole time Chairman and Managing Director, Director

(Thermal), Director (Hydel), Director (Technical), Director (Commercial), Director (Projects) and

Director (Finance) is managing the business of the Company. The directors are well experienced in

the business of Electricity as former executives of erstwhile APSEB. The C & MD is a senior I.A.S

officer and has very rich and long experience in the power sector.

CAPITAL STRUCTURE:

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The authorized share capital of the Company is Rs.2500 crores divided into 25 crores

Equity shares of Rs.100 each. The entire issued and subscribed capital of Rs.2107 crores is owned

by Government of Andhra Pradesh and by virtue of this APGENCO is a Government Undertaking

u/s.619 of the Companies Act. In terms of the Andhra Pradesh Electricity Reforms (Transfer

Scheme) Rules, 1999 APGENCO was vested with assets aggregating Rs.14192.14 crores out of

which the total Fixed Assets were Rs.10353.52 crores

HUMAN RESOURCES:
As at 1.4.2008 APGENCO was having a dedicated Human Resource base of 2664

Executives and 9288 Workmen. Out of this 2442 Engineering executives and 7411 Operation

&Maintenance employees are the main contributors for the outstanding performance of the Plants.

In fact this technical expertise and the dynamic leadership at Board level are the strengths of

APGENCO

APGENCO VISION:

1. To be the best power utility in the country and one of the best in the world.

APGENCO MISION:

1. To generate adequate and reliable power most economically, efficiently and echo

friendly.

2. To spearhead accelerated power development by planning and implementing new power

projects.

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3. To implement Renovation and Modernization of all existing units and enhance their

performance

APGENCO VALUES:

1. Excellence in all aspects of the company.

2. Respect for the individual and Personal growth

3. Tackling challenges and solving problems

4. Honesty, Integrity and Ethical business

5. People as the source of strength

6. Continued self-improvement never being satisfied.

CORPORATE PROFILE:
Andhra Pradesh Power Generation Corporation Limited is one of the pivotal organizations of
Andhra Pradesh, engaged in the business of Power generation. Apart from operation & Maintenance
of the power plants it has undertaken the execution of the ongoing & new power projects scheduled
under capacity addition programme and is taking up renovation & modernization works of the old
power stations.

APGENCO came into existence on 28.12.1998 and commenced operations from 01.02.1999. This
was a sequel to Governments reforms in Power Sector to unbundle the activities relating to
Generation, Transmission and Distribution of Power. All the Generating Stations owned by
erstwhile APSEB were transferred to the control of APGENCO.

The installed capacity of APGENCO as on 31.12.2011 is 8924.9 MW comprising 5092.50 MW

Thermal, 3829.40 MW Hydro , 2 MW Wind power stations and ,1.0 MW Photo Voltaic Cell
basedSolar Power plant ,contributes about half the total Energy Requirement of Andhra Pradesh.
APGENCO is third largest power generating utilitiy in the Country next to NTPC and Maharashtra.

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It's installed Hydro capacity of 3829.4 MW is the second highest among all power utilities in the
Country.

APGENCO has an equity base of Rs.2107 crores and about 11,000 dedicated employees as on
31.03.2011.The company has an asset base of approximately Rs.27690 crores. ( Provisional).

HISTORY OF APGENCO:

When APSEB came into existence in 1959, APSEB started functioning with the objectives of
maintaining the power sector efficiently and economically simultaneously ensuring demand meets
the supply.

During the last decade inadequate capacity addition and low system frequency operation of less
than 48.5 Hz for more than half a decade considerably reduced the power supply reliability.

The imbalance of the revenues against the cost of production, no significant reduction in technical
losses and energy thefts, high cost purchases from IPP's,other SEB's gradually worsened the
financial position of APSEB

HIGH LEVEL COMMITTEE AND ITS RECOMMENDATIONS

Government of Andhra Pradesh realizing the declining tendency of the financial position of APSEB
and considering the Government of India's Liberalized policy for attracting private investment into
power sector, set up a high level committee in January 1995 to look into present working of the
APSEB and suggest remedies for improvement. The committee after detailed deliberations with all
the concerned and critical analysis submitted the report in which it suggested some
recommendations

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Government of Andhra Pradesh considering the recommendations made by committee had

embarked upon the AP Electricity REFORMS ACT in 1998.As a sequel the APSEB was unbundled
into Andhra Pradesh Power Generation Corporation (APGENCO) & Transmission Corporation of
Andhra Pradesh Limited (APTRANSCO) on 01.02.99. APTRANSCO was further unbundled w.e.f.
01.04.2000 into "Transmission Corporation" and four "Distribution Companies" (DISCOMS).

Thus APGENCO was incorporated as a company under the provisions of Companies Act, on
29.12.1998. According to the Andhra Pradesh Electricity Reforms Act, 1998, APGENCO
commenced its business operations effective from 1.2.1999 and according to the memorandum of
Association APGENCO has to Acquire, Establish, Construct and Operate Power generating stations.
APGENCO A MODEL POWER UTILITY

Andhra Pradesh Power Generation Corporation (APGENCO), largest power generating

company of A.P. State with installed capacity of 7048.86 MW comprising 2962.5 MW Thermal,

3664.36 MW Hydel and 2MW wind power was established by government of Andhra Pradesh

under the Andhra Pradesh Electricity Reforms Act 1998 on 01.02.1999 with the principal objective

of generation of electricity.

APGENCO provides reliable and qualitative power more than 50% of its total power

requirement is not only engaged in the business of generation of electricity from its 5 own thermal

power stations and 17 Hydro stations but is also successfully executing operation and maintenance

contract for 272 MW gas based power project in joint sector at Vijjeswaram and 4x8 MW Aliminati

Madhava Reddy lift irrigation scheme.

APGENCO is the third largest power utility in India and has highest hydel capacity in

the country with an asset base of 13700 core and equity base of Rs.2106 Crore having annual turn

over of more than Rs 4200 crore.

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It has successfully commissioned prestigious Srisailam Left Bank Hydro Electric Power

Project and unique under ground powerhouse with 6nos reversible units of 150 MW each having

special features of pump and condenser mode.

Four units of KTPS B&C stations were renovated and up rated to 120 MW from 110

MW each the present plant load factor (PLF) of these units is more than 85% when compared to

60% prior to the up rating.

APGENCO thermal power stations are winning gold medals and bagging meritorious

productivity awards continuously for excellent performance year after year.

APGENCO is committed to achieve the massive capacity addition programmed of 3696

MW by March, 2012 and 3228 MW by March, 2017, integration its long term capacity addition

strategy for 10th, 11th and 12th Five Year Plans. APGENCO is playing a Pivotal role in powering the

growth of Andhra Pradesh and also the country.

APGENCO is powered with committed and dedicated work force of more than 11,000

with firm commitment to augment its installed capacity continuously and for better utilization of

man power and improve the ratio of Man MW (1.7 presently).

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Table- 2.1
APGENCO Installed Capacity

Thermal 3382.50
Hydel 3664.36
Wind 2.00
TOTAL 7048.86

Table- 2.2
THERMAL Installed Capacity
Name Of the Stations No. Units x Capacity MW
(MW)
Vijayawada 6x210 1260.00
Rayalaseema 2x210 840.00
Kothagudem 4x60+2x120+2x120 720.00
Kothagudem Stage V 2x250 500.00
Ramgundam B 1x62.5 62.50
Total Thermal 3382.50

Table- 2.3
HYDEL Installed Capacity

Machkund AP 3x17+3x23 84.00

TB Dam 4x9+4x9 57.60
Upper sileru 4x60 240.00
Donkarayi 1x25 25.00
Lower sileru 4x115 460.00
Srisailam RBPH 7x110 770.00
Srisailam LBPH 6x150 900.00
Nagarjuna Sagar 1x110+7x100.8 815.00
NS Right Canal PH 3x30 90.00
NS Left Canal PH 2x30 60.60
Nizam Sagar 2x15 10.00
Pochampad 3x9 27.00
Penna Ahobilam 2x10 20.00
Singur 2x7.5 15.00
Peddapally Mini Hydro 23units 9.16
Chettipera( Mini Hydro) 2x0.5 1.00
Palair (Mini Hydro) 2x1 2.00
Priyadarshini Jurala (PJHES) 2x39 78.00
Total Hydro 3664.36
Wind mills at Ramagiri 10x0.2 2.00
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3rd Largest Power Generation Utility in the Country

Installed Capacity (MW)

All India 1,45,555
NTPC 28,334
MAHAGENCO 10,564
APGENCO 7,049

2nd Highest Hydro Capacity in the Country

Hydro Capacity (MW)

All India 36,410
NHPC 3,673
APGENCO 3,664
KPCL, Karnataka 3,361

AP Power Grid - Installed Capacity (MW)

APGENCO 7048.9
Central Generating Stations 2963.2
Independent Power Producers 2139.5
Total 12423.6

SALIENT FEATURES:

1. Third largest Power Generation Utility in the Country.

2. 2nd Highest Hydel installed capacity in the Country.

3. One of the units in Vijayawada Thermal Power Station (VTPS) has made record for

continuous running for 441 days without any break down.

4. Ranked No. 1 amongst all power utilities in the Country in terms of Plant Load Factor

(PLF).

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5. Rayalaseema Thermal Power Project (RTPP), Kothagudam Thermal Power Station Stage V

(KTPS V) and Vijayawada Thermal Power Station (VTPS) have secured top three positions

in the Country.

6. KTPS Stage V stood FIRST with a PLF of 94.5%in the Country.

7. RTPP stood SECOND with a PLF of 92.2% in the Country.

8. VTPS Stage I have unique plant design. The coalbunkers and mills are located in between

the boiler house an electro static precipitators unlike the usual practice of placing the

bunkers and mills in between the turbine and boiler.

9. Vijayawada Thermal Power Station Stage II units adopted tower type coal fired Boiler with

concrete pylons, Hydrogen cooled generator of 210 MW capacity. Micro Processor based

distributed digital Control System, direct-fired tube mill instead of vertical bowl mills and

steam leak detection system for the first time in Country.

10. Vijayawada Thermal Power Station has received the Prestigious ISO 9001 -2000

Certification fro Quality Management System.

11. Srisailam Left Bank Power House is the first larges capacity underground Hydro Electric

Power Project in South India, facilitating generation pump and condenser modes of

operations.

12. Nagarjunasagar main Power House units are also reversible type with special features of

operation as that so Srisailam Left Bank Poser House.

13. Nagarjunasagar Left Canal Power House is the first Hydro Power Station to use SCADA for

operation of the units from Control Room.

14. Pochampadu HEP is the fist Power Station to use Microprocessor base Controls.

15. APGENCO is making concerted efforts for fly ash utilization and presently utilizing about

43% of total fly ash generated from all of its thermal power stations.

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16. APGENCO Dr.NTTPS Training Institute has received best Technical Training Institute,

awarded by Central Electricity Authority, GOI, New Delhi.

17. Received 5 meritorious awards from Honble Prime Minister on 21.03.2007 for the

outstanding performance of Kothagudem TPS, Rayalaseema TPP stage-I & Upper Sileru PH

for 2004-05 and Vijayawada TPS & Upper Sileru PH for 2005-06.

18. Rayalaseema Stage II (2x210 MW) has been commissioned.

19. First 2 Units of Priyadarshini Jurala HEP (39 MW each) have been commissioned.

20. APGENCO has achieved highest generation of 33289 MU since inception during 2007-08.

21. Thermal power stations have achieved highest generation of 23685.8 MU during 2007-08
surpassing the previous high of 23360 MU achieved during 2004-05.

22. Hydro power stations generated 9587.5 MU during 2007-08, highest after 1994-95.

23. APGENCO power stations have recorded the highest daily generation of 132.59 MU on
26.09.2008 since inception.

24. APGENCO has earned a net profit of Rs.198 Crores during 2007-08. During 2006-07
APGENCO has turned in to a Profit making Company by wiping out the accumulated losses
for the last 3 years

for nine times.

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BOARD OF DIRECTORS:

SRI DINESH KUMAR IAS

Chairman

SRI .K.VIJAYANAND I.A.S

Managing Director

SRI.D.PRABHAKAR RAO
Joint Managing Director

SRI G.ADISHESHU
Director/Hydel

SRI UG KRISHNA MURTHY

Director/Technical

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SRI.C.RADHA KRISHNA
Director/Projects

SRI.G.VAMAN RAO
Director/HR

SRI S.ANJANEYA RAO

Director/Thermal

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CHAPTER 3

REVIEW OF LITERATURE

3.1 RECEIVABLES MANAGEMENT

INTRODUCTION:

The receivables represent an important component of the current assets of a firm. The

purpose of the receivables management is to analyze the important dimensions of the efficient

management of receivables within the framework of a firms objectives of value dimensions of the

efficient management of receivables. This is followed by an in-depth analysis of the three crucial

aspects of management of receivables.

Meaning of Receivables Management:

Receivables management is the process of making decisions relating to investment in trade debtors.

We have already stated that certain investment in receivables is necessary to increase the sales and

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the profits of a firm. But at the same time investment in this asset involves cost considerations

also.Further,there is always a risk of bad debts too.

The second section of the chapter examines the first aspect that is credit policies, which

have two dimensions:

(iii) Credit standard: defined as the criteria to determine to whom credit should be extended;

(iv) Credit analysis: This section evaluates policies regarding both these aspects. The second

major part of receivables management is Credit terms comprising

(i) Cash discount.

(ii) Cash discount period.

(iii) Credit period.

Next section is concerned with the third major component of receivables from

customers. The factoring services as a receivables collection/management strategy are illustrated in

the next section.

OBJECTIVIES:

The term receivable is defined as debt owed to the firm by customers arising from sale

of goods or services in the ordinary course of business. When a firm makes an ordinary sale of

goods or services and does not receive payment, the firm grants trade credit and creates accounts

receivable, which could be collected in the future. Receivables management, is also called trade

credit management.

Thus, accounts receivable represent an extension of credit to customers, allowing them

a reasonable period of time in which to pay for the goods received.

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The sale of goods on credit is an essential part of the modern competitive economic

systems. In fact, credit sales and, therefore, receivables are treated as a marketing tool to aid the sale

of goods.

The credit sales are generally made on open account in the sense that there are no

formal acknowledgements of debt obligations through a financial instrument. As a marketing tool,

they are intended to promote sales and thereby profits.

However, extension of credit involves risk and cost. Management should weigh the

benefits as well as cost to determine the goal of receivables management.

The objective of receivables management is to promote sales and profits until that point

is reached where the return on investment in further funding receivables is less than the cost of

funds raised to finance that additional credit i.e. cost of capital

. The specific costs and benefits, which are relevant to the determination of the

objectives of receivables management, are examined below

COSTS:

The major categories of costs associated with the extension of credit and accounts receivable are:

(i) Collection cost.

(ii) Capital cost.

(iii) Delinquency cost

(iv) Default cost.

(i) Collection Cost:

Collection costs are administrative costs incurred in collecting the receivables from the

customers to whom credit sales have been made. Included in this category of costs are:

(a) Additional expenses on the creation and maintenance of a credit department with staff

accounting records, stationery, postage and other related items;

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(b) Expenses involved in acquiring credit information either through outside specialist agencies or

by the staff of the firm itself. These expenses would not be incurred if the firm does not sell on

credit.

(ii) Capital Cost:

The increase level of accounts receivable is an investment in assets. They have to be

financed there by involving a cost. There is a time lag between the sale of goods to, and payment

by, the customers. Meanwhile, the firm has to pay employees and suppliers of raw materials, there

by implying us the firm should arrange for additional funds to meet its own obligations while

waiting for payment form its customers. The cost on the use of additional capital to support credit

sales, which alternatively could be profitably employed elsewhere, is, therefore a part of the cost of

extending credit or receivables.

(iii) Delinquency Cost:

This cost arises out of the failure of the customers to meet their obligations where

payment on credit sales becomes due after the expiry of the credit period. Such costs are called

delinquency costs. The important components of this cost are:

(i) Blocking-up of funds for an extended period,

(ii) Cost associated with steps that have to be initiated to collect the over dues, such as,

reminders and other collection efforts, legal charges, where necessary, and so on.

(iv) Default Cost:

Finally, the firm may not be able to recover the over dues because of the inability of the

customers. Such debts are treated as bad debts and have to be written off as they are not being

realized. Such costs are known as default costs associated with credit sales and accounts receivable.

BENEFITS:
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Apart from the costs, another factor that has a bearing on accounts receivable

management is the benefit emanating from credit sales. The benefits are the increase sales and

anticipated profits because of a more liberal policy. When firms extend trade credit, that is, invest in

receivables; they intend to increase the sales. The impact of a liberal trade credit policy is likely to

take two forms. First, it is oriented to sales expansion. In other words, a firm may grant trade credit

either to increase sales to existing customers or attract new customers. This motive for investment

in receivables is growth-oriented. Secondly, the firm may extend credit to protect its current sales

against emerging competition. Here, the motive is sales-retention. As a result of increased sales, the

profits of the firm will increase.

From the above discussion, it is clear that investments in receivables involve both

benefits and costs. Other being equal, relatively liberal policy and, therefore, higher investments in

receivables, will produce larger sales. However costs will be higher with liberal policies than with

more stringent measures. Therefore, accounts receivable management should aim at a trade-off

between profit (benefit) and risk (cost). That is to say, the decision commit funds to receivables (or

the decision to grant credit) will be based on a comparison of the benefits and costs involved, while

determining the optimum level of receivables. The costs and benefits to be compared are marginal

costs and benefits. The firm should only consider the incremental (additional) befits and costs that

the result from a change in the receivables or trade credit policy.

While it is true that general economic conditions and industry practices have a strong

impact on the level of receivables, a firms investments in this type of current assets is also greatly

affected by its internal policy. A firm has little or no control over environmental factors, such as

economic conditions and industry practices. But it can improve its profitability through a properly

conceived trade credit policy or receivables

management.

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Credit Policies:

In the preceding discussions it has been clearly shown that the firms objective with

respect to receivables management is not merely to collect receivables quickly but attention should

also be given to the benefit cost trade-off involved in the various areas of accounts receivable

management. The first decision-area is Credit Policies.

The credit policy of a firm provides framework to determine

(a) Whether or not to extend credit to a customer and

(b) How much credit to extend.

The credit policy decision of firm has two broad dimensions:

(i) Credit standards.

(ii) Credit analysis.

A firm has to establish and use standards in making credit decisions, develop appropriate sources of

credit information and methods of credit analysis. We illustrate below how these two aspects are

relevant to the accounts receivable management of a firm.

Credit Standards:

The term credit standard represents the basic criteria for the extension of credit to

customers. The quantitative basis of establishing credit standards are factors such as credit ratings,

credit references, average payments period and certain financial ratios. Since we are interested in

illustrating the trade-off between benefit and cost to the firm as a whole, we do not consider here

these individual components of credit standards. To the cost of the firm as a whole, we do not

consider here these individual components of credit standards. To illustrate the effect, we have

divided the overall standards into

(a) Tight or restrictive,

(b) Liberal or non-restrictive.

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That is to say, our aim is to show what happens to the trade-off when standards are released or,

alternatively, tightened. The trade-off with reference to credit standards covers:

(i) The collection cost.

(ii) The average collection period/investment in accounts receivable.

(iii) Level of bad debt losses.

(iv) Level of sales.

These factors should be considered while deciding whether to relax credit standards or

not. If standards are relaxed, it means more credit will be extended while if standards are tightened,

less credit will be extended. The implications of the four factors are elaborated below.

The implications of relaxed credit standards are

(i) More Credit

(ii) A large credit department to service accounts receivable and related matters.

(iii) Increase in collection costs.

The effect of tightening of credit standards will be exactly the opposite. The costs are

likely to be semi-variable. This is because up to a certain point the existing staff will be able to

carry on the increased workload, but beyond that, additional staff would be required. These are

assumed to be included in the variable cost per unit and need not be separately identified.

Investments in Receivables or the Average Collection 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 payments.

Moreover, the higher the average accounts receivable the higher is the capital or

carrying cost. A change in the credit standards-relaxation or tightening leads to a change in the

level of accounts receivable either

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(a) Through a change in sales, or

(b) Through a change in collections.

A relaxation in credit standards, as already stated, implies an increase in sales which in turn, would

lead to higher average accounts receivable. Further, relaxed standards would mean that credit is

extended.

Bad Debt Expenses:

Another factor that is expected to be affected by changes in the credit standards is bad

debt (default) expenses. They can be expected to increase with relaxation in credit standards and

decrease if credit standards become more restrictive.

Sale Volume:

Changing credit standards can also be expected to change the volume of sales. As

standards are relaxed, sales are expected to increase; conversely, a tightening is expected to cause a

decline in sales.

The basic changes effects on profits arising from a relaxation of credit standards are

summarized on exhibit in the earlier paragraphs if the credit standards are tightened, the opposite

effects.

Profit on Incremental Sales this can be computed in two ways:

(i) Long approach and

(ii) Short-cut-method.

Long Approach:

According to this approach, the costs and profits on both the present and the proposed

sales level are calculated and the difference in profit at the two levels will be the incremental profit.

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Short-Cut Method

The profits on sales will increase by an amount equal to the product of the additional

profit per unit.

Cost of Marginal /Incremental Investment in Receivables:

The second variable relevant to the decision to relax credit standards is the cost of

marginal investment in accounts receivable. This cost can be computed by finding the difference

between the cost of carrying receivables before and after the proposed relaxation in credit standards.

It can be calculated as follows:

Credit Analysis:

Besides establishing credit standards, a firm should develop procedures for evaluating

credit applicants. The second aspect of credit policies of a firm is credit analysis and investigation.

Two basic steps are involved in the credit investigation process:

(a) Obtaining credit information, and

(b) Analysis of credit information. It is on the basis of credit analysis that the decisions to

grant credit to a customer as well as the quantum of credit would be taken.

Obtaining Credit Information:

The first step in credit analysis is obtaining credit information on which to base the

evaluation of a customer. The sources of information, broadly speaking are

(i) Internal

(ii) External.

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Internal:

Usually firms require their customers to fill various forms and documents giving details

about financial operations. They are also required to furnish trade references with whom the firms

can have contacts to judge the suitability of the customer for credit. This type of information is

obtained from internal source of credit information. Another internal source of credit information is

derived from the records of the firms contemplating an extension of credit. It is likely that a

particular customer/applicant may have enjoyed credit facility in the past. In that case, the firm

would have information on the behavior of the applicant (s) in terms of the historical payment

pattern. This type of information may not be adequate and may, therefore, have to be supplemented

by information from other sources.

External:

The availability of information from external sources to assess the credit-worthiness of

customers depends upon the development of institutional facilities and industry practices. In India,

the external sources of credit information are not as developed as in the industrially advanced

countries of the world. Depending upon the availability, the following external sources may be

employed to collect information.

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Financial Statements:

One external source of credit information is the published financial statements, that is,

the balance sheet and the profit and loss account. The financial statements contain very useful

information. They throw light on an applicants financial viability, liquidity, profitability, and debt

capacity. Although the financial statements do not directly reveal the past payment record of the

applicant, they are very helpful in assessing the overall financial position of a firm, which

significantly determines its credit standing.

Bank References:

Another useful source of credit information is the bank of the firm, which is contemplating the

extension of credit. The modus operandi here is that the firms banker collects the necessary

information from the applicants banks. Alternatively, the applicant may be required to ask his

banker to provide the necessary information either directly to the firm or to its bank.

Trade References:

These refer to the collection of information from firms with whom the applicant has

dealings and who on the basis of their e

xperience would vouch for the applicant.

Credit Bureau Reports:

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Finally, specialist credit bureau reports from organizations specializing in supplying

credit information can also be utilized.

Analysis of Credit:

Information once the credit information has been collected different sources; it should be

analyzed to determine the credit-worthiness of the applicant. Although there are no established

procedures to analyze the information the information, the firm should devise one to suit its needs.

The analysis should cover two aspects

(i) Quantitative.

(ii) Qualitative.

Quantitative the assessment of the quantitative aspects is based or, the factual

information available from the financial statements, the past records of the firm and so on. The first

step involved in this type of assessment is to prepare an Aging Schedule of the accounts payable of

the applicant as well as calculate the average age of the accounts payable. This exercise will give an

insight into the past payment pattern of the customer. Another step in analyzing the credit

information is through a ratio analysis of the liquidity profitability and debt capacity of the

applicant. These ratios should be compared with the industry average more over; trend analysis over

a period of time would reveal the financial strength of the customer.

CREDIT TERMS:

The second decision-area in accounts receivable management is the credit terms. After the credit

standards have been established and the credit-worthiness of the customers has been assessed, the

management of a firm must determine the terms and conditions on which trade credit will be made

available. The stipulations under which goods are sold on credit are referred to as credit terms. They

32
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relate to the repayment of the amount under the credit sale. Thus, credit terms specify the repayment

terms of receivables.

Credit terms have three components:

Credit period, in terms of the duration of time for which trade credit is extended during

this period the overdue amount must be paid by the customer.

Cash discount, if any, which the customer can take advantage of that is the overdue

amount must be paid by this customer and

Cash discount period, which refers to the duration during which the discount can be

availed of. These terms are usually written in abbreviations, for instance, 2/10 net 30. The three

numerals are explained below:

2 signifies the rate of cash discount (2per cent), which will be available to the

customers if they pay the overdue within the stipulated time;

10 represents the time duration (10days) within which a customer must pay to be

entitled to the discount;

30 means the maximum period for which credit is available and the amount must be

paid it any case before the expiry of 30 days.

In other words, the abbreviation 2/10 net 30 means that the customers is entitled to 2 per

cent cash discount (discount rate) if he pays with in 10 days (discount period) after the beginning of

the credit period (30 days). If, however, he does not want to take advantage of the discount, he may

pay within 30 days. If the payment is not made within a maximum period of 30 days, the customer

would be deemed to have defaulted.

The credit terms, like the credit standards, affect the profitability as well as the cost of a

firm. A firm should determine the credit terms on the basis of cost-benefit trade-off. We illustrate
33
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below how the three components of credit terms, namely, rate of discount, and period of discount

and the credit period. Affect the trade-off. It should be noted that our focus in analyzing the credit

terms is form the viewpoint of suppliers of trade credit and not the recipients for whom it is a source

of financing.

Cash Discount:

The cash discount has implications for the sales volume, average collection

period/average investment in receivables, bad debt expenses and profit per unit. In taking decision

regarding the grant of cash discount, the management has to see what happens to these factors if it

initiates increase, or decrease in the discount rate. The changes in the discount rate. The changes in

the discount rate would have both positive and negative effects. The implications of increasing or

initiating cash discount are as follows:

1. The sale volume will increase. The grant of discount implies reduced prices. If the demand

for the products is elastic, reduction in prices will result in higher sales volume.

2. Since the customers, to take advantage of the discount, would like to pay within the

discount period the average collection period would be reduced. The reduction in the collection

period would lead to a reduction in the investment in receivables as also the cost. The decrease in

the average collection period would also cause a fall in bad debt expenses. As a result, profits would

increase.

3. The discount would have a negative effect on the profits. This is because the decrease in

prices would affect the profit margin per unit of sale.

COLLECTION POLICIES:

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The third area involved in the accounts receivable management is collection policies.

They refer to the procedures followed to collect accounts receivable when, after the expiry of the

credit period, they become due. These policies cover two aspects:

1. Degree of effort to collect the over dues, and

2. Type of collection efforts.

Degree of Collection Effort:

To illustrate the effect of the collection effort, the credit policies of a firm may be categorized into

(i) Strict/light.

(ii) Lenient.

The collection policy would be tight if very rigorous procedures are followed. A tight

collection policy has implications, which involve benefits as well costs. The management has to

consider a trade-off between them. Likewise, a lenient collection effort also affects the cost-benefit

trade-off. The effect of tightening the collection is discussed below.

In the first place, the bad debt expenses (default cost) would decline. Moreover, the

average collection period will be reduced. As a result of these two effects, the firm will benefit and

its profits will increase. But, there would also be negative effects. A very rigorous collection

strategy would involve increased collection costs. Yet another negative effect may be in the form of

a decline in the volume of sales. This may to because some customers may not like the pressure and

intense efforts initiated by the firm, and may switch to other firms.

.Quick collection of funds and effective control over payments result faster turnover of receivables.
This can be done by the following measures
1. Payments on the due date, except when the discount offered for early payment is substantial.
2. Use of draft (bill of exchange) instead of cheques.
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3. Playing the float estimating accurately the time of presentation of issued cheques for
having only cash balance in the bank account to honors Cheque presented on a particular
date.

The three basics aspects of management of sundry debtors are:

1. credit policy- decisions on credit period to be allowed, early payment discount rates etc
2. credit analysis decisions on whether credit can be extended to a particular customer
3. control over receivables- steps for debtors follow up, faster collection of debtors
4.
The cost of maintaining receivables comprises the following
1. Interest on investment: additional funds are blocked in receivables. The cost in the of
interest (in case of loan funds) or opportunity cost of capital (in case of own funds)
2. Administrative cost: costs of record keeping investigation of credit worthiness etc.
3. Delinquency costs: cost of reminders, phone calls, follow-up letters etc.
4. Collections of costs: cost of contacting customers cheques in person outstation collection
charges etc.
5. Defaulting costs: bad debts legal charges in respects of suits pending against debtors etc.

Role on Collection policy:

Average collection period and bad debts losses are reduced by efficient and timely collection
of debtors. Hence a proper collection policy should be laid down.
Aspects of collection policy:
The following aspects should be recovered in collection policy and procedures
Timing of the collection process-when to start reminding etc.
1. Dispatch of reminders letters to customers.
2. Appointment of agents for collection or follow- up.
3. Dealing with default accounts, legal action to be initiated, notice to defaulting customers etc.

Cost benefits analysis:

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There are certain routine costs associated with collection from customers e.g.
contacting customers collecting cheques in person , collecting agency fees etc. in a firm spends
more on collections of debts , likely to have smaller bad debts. Hence the amount of collection costs
to be incurred should be determine analysis level of expenditure on one hand and decrease in bad
debts losses and investment in debtors on other .
Monitoring of receivables involves following measures:
1. Average age of receivables : debtors turn over ratio and average collection period are
worked out intervals. These are compared with the industry norms .in case of high collection
period, intense collection efforts are initiated.
2. Ageing schedule: the pattern of outstanding/receivables is determined by preparing the
ageing schedule. If the receivables are denoted old outstanding due for longer periods,
suitable action should be taken to collect immediately
3. Collection programmed: the procedures for collecting e.g. reminding letters, direct follow
up etc should be initiated based on the company s polices and procedures.

In an ageing schedule the receivables are classified to their according to their age, i.e. period for
which they have been outstanding. e.g. less than 30 days, 30-45 days 45-60 days, above 60 days etc.

Role: preparation of ageing schedule helps management in the following ways:

1. analysis of quality of individual accounts
2. intra-firm and intra-firm comparison, I .e. liquidity of present receivables with the past
periods and also comparing current liquidity of receivables
3. trend analysis of debtors
4. supplement to average collection periods of receivables / sales analysis
5. recognition of recent increase and slumps in sale

The following are illustrative steps in a collection programmed

1. Monitoring the state of receivables.
2. Intimation of due dates to customers.
3. Telegraphic and telephone advice to customers on due date.
4. Threat of legal action on overdue accounts.
5. Legal action on overdue accounts.
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The following are some alternatives for external financing of accounts receivables/ debtors.
1. bills discounting
2. loans against book debts
3. Loans against supply of bills to government departments.
4. Factoring, forfeiting etc
5. Debt securitization.
6. Advances from customers

Type of float Technique

Billing float in sending in voice to Immediate preparation of bill, on the date
customers of dispatch of goods
Mailing float- in sending invoice to Use of faster modes of mailing. Including
customers e-mail sending the invoice by fax first.
Followed by normal mail
Mailing float- receipt of Cheque from Concentration banking and lock box system
customers
Cheque processing float
Banking processing float

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CHAPTER 4

DATA ANALYSIS

APGENCO has two major sources of Revenue

a. Sale of Power to APTRANSCO that is the main activity.

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b. Providing Operation & Maintenance Services to M/s. APGPCL that is an ancillary activity of

APGENCO.

Here billings in both the cases are different and the revenue is also different, as the business is

different and terms and conditions are different. Hence we have to deal both the cases separately.

APGENCO has also got other income like Income from investments, Revenue from Sale of Scrap

etc. But here we will take up only above two mentioned incomes i.e., Revenue from Sale of Power

and Revenue from O&M services

a, SALE OF POWER TO APTRANSCO

The erstwhile APSEB is unbundled in APGENCO and APTRANSCO (with Discoms) on

1.2.1999. Since 1.2.1999 APGENCO owns and operates Thermal and Hydel, which stand
40
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transferred to and vested in APGENCO in terms of Section 23 and 24 of the Andhra Pradesh

Electricity Reforms Act, 1998 and the Andhra Pradesh Electricity Reform (Transfer Scheme) Rules,

1999 and subsequent additions thereon. Whereas APTRANSCO will operates the Transmission

lines and Distribution activities as per the above mentioned same Rules and Acts.

APGENCO and APTRANSCO have agreed on the terms and conditions of the Sale and

Purchase of the Available Capacity and Electric Energy generated in the Thermal and Hydel stations

allotted to APGENCO during the Reforms.

From then APGENCO main activity is to generate energy and sell the same to

APTRANSCO. APGENCO has the only customer i.e., APTRANSCO. These organizations do the

business based on the Power Purchase Agreement (PPA) that is prepared following the APERC and

CERC guidelines.

Power Purchase Agreement is entered on yearly basis and this Agreement is generally for a

financial year. This PPA is modified based on the APERC and CERC Guidelines where ever and

whenever.

Power Purchase Agreement will contain the details of the Terms and Conditions to be

followed by APGENCO and APTRANSCO in raising the bills and their payment terms. A brief

description about the Tariff Order and the Terms and Conditions are given in the next page.

Terms and Conditions of PPA between APGENCO & APTRANSCO

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1. Billing is done on the Energy delivered by APGENCO to APTRANSCO during a month.

Here month means the calendar month.

2. Bills shall be raised by APGENCO on monthly basis.

3. Billing date shall be 5 (five) days after the Meter Reading date in each calendar month.

4. Due date for payment of bill is 30 days from the date of billing, and in case of

supplementary bill shall be 30 days from the date of presentation.

5. For arriving energy delivered, meter readings have to be taken that are placed in all the

generating stations.

6. Metering date for the first calendar month will be (00:00 hours) of April and subsequent

metering date will mean midday (12:00 hours) of the last day of each calendar month.

However, the metering dates of the financial year ends at (24:00 hours) on 31st March.

7. Tariff for APGENCO Power Stations

The Tariff for APGENCO Power Stations is determined by APERC on the basis of a

Two Part Tariff and shall be fixed for the Tariff Year (Generally Financial Year).

a. The monthly Tariff shall be the sum of a Fixed Charges equal to one twelfth of the

Annual Fixed Charges decided by APERC.

b. The monthly Tariff for Variable Charges will vary for the energy sent out through the

Thermal Stations and based on the variation in the delivered cost of Coal and Oil.

Revenue from Sale of Power to APTRANSCO

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Following the earlier mentioned terms and conditions APGENCO issues bills on monthly basis as

per the tariff proposals. The year wise revenue from sale of energy is as under:

Table-4.1

Amount Energy Generated

Year
(Rs. in Crs) (in Million Units)
2007 - 08 (Audited) 4069.50 Crs. 25420.22 mu
2008 - 09 (Audited) 4156.40 Crs. 28720.58 mu
2009 - 10 (Audited) 3866.91 Crs. 28767.75 mu
2010 11 (Audited) 4199.99 Crs. 31441.94 mu
2011 - 12 (Audited) 4617.30 Crs. 33323.33 mu
Figure-4.1

INTERPRETATION:

In the above chart the revenue bars shows an increasing trend during 2007-08 and slightly

decreased in 2009-10.It shows an increasing trend from 2010-11.

Outstanding Receivables (Sundry Debtors) against Sale of Power by APGENCO

Table-4.2

Amount
Year
(Rs. in Crs)

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2007 - 08 1844.14 Crs.

2008 - 09 2019.20 Crs.
2009 - 10 1958.20 Crs.
2006 07 1636.57 Crs.
2011 - 12 1453.68 Crs.

Figure-4.2

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INTERPRETATION:

In the above graph the sundry debtors against sale of power curve shows an

increasing trend during the period of 2007-09 and then shows an continuous decreasing trend during

the period of 2009-12

Ageing Schedule

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2007-08 2008-09 2009-10 2010-11 2011-12

PARTICULARS
(Audited) (Audited) (Audited) (Audited) (Audited)
Revenue from Sale of
Power to
APTRANSCO (Crs.) 4069.48 4156.40 3866.91 4199.99 4617.30
Amount Due from
APTRNASCO (Crs.) 1844.14 2019.20 1958.20 1636.57 1453.68
Out Standing Amount
(Days) 165 177 185 142 115
One Months Credit
Period (Days) 30 30 30 30 30
Dues above Credit
Period (Days) 135 147 155 112 85
Dues above Credit
Period (Months) 4.51 4.91 5.16 3.75 2.86
Out Standing Amount
Due in (%) 45.32 48.58 50.64 39.00 31.00
Dues Considered
Good (Crs.) 1844.14 2019.20 1958.20 1636.57 1453.68
Dues Considered
Doubtful (Crs.) 0 0 0 0 0
Dues Considered Bad
(Crs.) 0 0 0 0 0

Table-4.4

Age Wise Breakup of Sundry Debtors

2007-08 2008-09 2009-10 2010-11 2011-12

PARTICULARS
(Audited) (Audited) (Audited) (Audited) (Audited)

< 6 months (Crs.) 1844.14 2019.20 1958.20 1636.57 1453.68

6 months to 1 year
(Crs.) 0 0 0 0 0
1 Year to 3 Years
(Crs.) 0 0 0 0 0

> 3 Years (Crs.) 0 0 0 0 0

TOTAL (Crs.) 1844.14 2019.20 1958.20 1636.57 1453.68

b. OPERATION & MAINTENANCE SERVICES TO APGPCL

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(Ancillary activity of APGENCO)

APGPCL has constructed 272 MW Naphtha/Natural Gas/Mixed Fuel based Gas Turbo

Power Station (GTPS). APGENCO is having expertise in the business Operation and maintaining

power-generating stations and APGPCL has engaged APGENCO to perform operation and

maintenance of said power generating station upon the terms and conditions set forth in the

agreement. This agreement is governed by and construed in accordance with the Laws of India.

APGENCO shall maintain the Facility with base load and with best professional skills by

employing Prudent Utilities Practices and meet the performance targets. APGENCO shall provide

technical advice and support to APGPCL regarding operation and maintenance issues. Operation

and maintenance is an ancillary activity of APGENCO.

This Operation and maintenance contract agreement is entered initially for a period of 5

years, on expiry of the initial 5 years this agreement is renewed regularly for the succeeding periods

with modifications in the agreement. This shows that APGENCO is providing this service up to the

satisfaction of the owner (APGPCL).

Terms and Conditions of Operation and Maintenance Contract between

APGENCO & APGPCL
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1. Here APGENCO is the service provider called as operator and APGPCL is the service recipient

and the owner.

2. The agreement period between these two parties is initially for a period of 5 years and also

extendable based on the interest of the APGPCL (owner).

3. APGENCO has to provide the owner with a monthly summary of all operation and maintenance

activities performed by APGENCO during such month.

4. APGENCO has to maintain the facility in perfect condition and if any repairs operator must inform

to the owner and get it done.

5. APGENCO has to maintain the Books of Accounts of APGPCL.

6. APGENCO has to maintain the confidentiality with regard to the critical designs and other vital

information and shall divulge to any person or organization other that statutory authorities during

the continuance of O&M contract or thereafter.

TERMS OF PAYMENT

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A. Payments for Service Portion

For First Year

1. 25% of the fee applicable for 1st year shall be paid as mobilization advance against Advance Bank

Guarantee as per the Format after submission of Contract Performance Security and siding of this

agreement.

2. Balance 75% of the fee applicable for 1st year shall be paid in twelve equal monthly installments,

commencing one month after the date of handing over of the plant to the Operator.

3. The bank guarantee against the advance payment shall be released after the last payment of the first

year.

For the Subsequent Year

1. Annual Service Charges for the respective years shall be paid in twelve equal monthly installments

for that year.

B Payments for Supply of Spares Portion

1. For the complete contract period. Annual charges for the spares supply shall be paid in twelve

equal monthly installments for that year.

B. Payments for Major Overhauls

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1. For each major overhaul the owner has to pa 10% of the cost of spares and service charges for one

overhauling shall be paid as advance, 30 days upon satisfactory before the scheduled overhaul

against furnishing of Bank Guarantee.

2. Balance 90% of the cost of spares and service charges for one overhauling shall be payable within

30 days upon satisfactory completion of the major overhauling as certified by owners

representatives.

3. The Bank Guarantee against the advance payment shall be released within 30 days upon

satisfactory completion of Major Overhaul and receipt of Overhaul Reports form the Operator.

4. Price of each major overhaul will not change even if the time schedule is altered due to any reason

whatsoever. In case, any of the Major overhauling does not take place due to any reasons

whatsoever, the Operator will not be entitled to receive that particular payment.

Revenue from Operation and Maintenance contract to APGPCL

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Following the earlier mentioned terms and conditions APGENCO issues bills on monthly basis. The

year wise revenue from Operation and Maintenance is as under:

Table-4.5

Year Amount
(Rs. in Crs)
2007 - 08 (Audited) 15.04 Crs.
2008 - 09 (Audited) 15.18 Crs.
2009 - 10 (Audited) 20.82 Crs.
2010 - 11(Audited) 22.60 Crs.
2011 - 12 (Audited) 25.99 Crs.
Figure-4.3

INTERPRETATION

In the above graph the revenues curves from O & M shows a continuous increasing trend during the

period of 2011-2012 to 2011-2012.

Outstanding Receivables (Sundry Debtors) against O&M Contract by

APGENCO Table-4.6

End of the Year Amount

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(Rs. in Crs)
2007 - 08 (Audited) 1.57 Crs.
2008 - 09 (Audited) 4.53 Crs.
2009 - 10 (Audited) 13.02 Crs.
2010 - 11(Audited) 13.40 Crs.
2011 - 12 (Audited) 18.98 Crs.
Figure-4.4

INTERPRETATION:
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In the above graph the sundry debtors against O & M curve shows an

continuous increasing trend from 2007 - 08to 2011-2012.

Ageing Schedule

Table-4.7

2007-08 2008-09 2009-10 2010-11 2011-12

PARTICULARS
(Audited) (Audited) (Audited) (Audited) (Audited)
Revenue from
O&M Contracts 15.04 15.18 20.82 22.60 25.99

Due 1.57 4.53 13.02 13.40 18.98

O.S in days 38 109 228 216 267

One Months Credit
Period (in Days) 30 30 30 30 30
Dues above Credit
Period (in Days) 8 79 198 186 237
O.S Amount Due
in (%) 10.45 29.84 62.57 59.29 73.02

Table-4.8
Age wise breakup of Sundry Debtors
2007-08 2008-09 2009-10 2010-11 2011-12
PARTICULARS
(Audited) (Audited) (Audited) (Audited) (Audited)

< 6 months 1.57 4.53 13.02 13.40 18.98

6 months to 1 year 0 0 0 0 0

1 Year to 3 Years 0 0 0 0 0

> 3 Years 0 0 0 0 0

TOTAL 1.57 4.53 13.02 13.40 18.98

CHAPTER 5

FINDINGS
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SUGGESSTIONS

CONCLUSIONS

5.1.1 FINDINGS (in respect of Revenue from Sale of Power to APTRANSCO)

From the Terms and conditions, Ageing Schedules, and the Float Chart the following observations
were made:

1. APGENCO is issuing bills on monthly basis.

2. APGENCO is giving a credit period of 1 month.

3. APTRANSCO has to pay the bill amount within 30 days from the date of bill issued.

4. APTRANSCO has to open an irrevocable Letter of Credit for an amount of Rs.200 Crores.

5. There is no penalty clause in the Power Purchase Agreement.

6. APGENCO is issuing penalty bills even though there is no clause in the Power Purchase

Agreement.

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7. APGENCO is maintaining regular correspondence with APTRANSCO and AP Government for the

dues receivable from APTRANSCO.

8. APGENCO is conducting regular meetings with APTRANSCO and APDISCOMS for bringing the

outstanding dues from APTRANSCO.

9. The Power Purchase Agreement suggests paying the Working Capital Loan brought by APGENCO

to meet the regular routine raw material expenses.

5.1.2 SUGGESITIONS (in respect of Revenue from Sale of Power to APTRANSCO)

Following are some of the suggestions which APGENCO may consider for improving the
receivables from APTRNASCO:

1. It may suggested to APGENCO to reduce the billing period 15 days instead of 1 month, so

that bills can be issued regularly and the amount can be recovered early.

2. It may suggested to include the penalty clause in the future Power Purchase Agreement; due

to fear of the penalties APTRANSCO may make the payments in time to APGENCO.

3. The Billing Float can be reduced and the preparation of the bill may be done within a day or

two, due to which the bill can be served quickly and this will reduce the creditor pe

4. riod.

5. The Credit period can also be reduced in order to make quick recovery of the bill amount.

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6. APGENCO must insist for the Letter of Credit for Rs.200 Crores from APTRANSCO as

agreed in the Power Purchase Agreement, in order to ensure in timely recovery of the bills

issued.

7. APGENCO and APTRANSCO must go for internet banking in order to reduce the payment

float i.e., Cheque preparation Float, Mailing Float, Depositing of the received Cheque float

etc. due to which whenever APTRANSCO want to release payment that amount can be

directly credited in to APGENCOs account with out any above mentioned floats.

8. Cash discount must be given to APTANSCO if the pay the bill amount (or) over due amount

with in the given stipulated time.

9. APGENCO must know the credit worthiness of its customer (APTRANSCO) in order to the

liquidity position of APTRANSCO for giving the credit period.

5.1.3 CONCLUSIONS (in respect of Revenue from Sale of Power to APTRANSCO)

APTRANSCO & APGENCO are both undertaking by government. The rules framed in

Power purchase agreement towards receivables are not so rigid and the APGENCO is losing lot of

amounts in the form of interest due to delay payment and obtaining lot of loans for working capital

requirement from the ageing schedule it can be made that, dues receivables are less than 6months it

can be said all are debts receivable are good debts and all the debts can be realized from these it is

conclude that there are no bad and doubtful debts

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5.2.1 FINDINGS (in respect of APGPCL O&M CONTACT)

From the Terms and conditions, Ageing Schedules, and the Float Chart the following observations

were made:

1. APGENCO and APGPCL both are in the same business of Power Generation.

2. APGENCO issues the Operation and Maintenance Contract bills on monthly basis.

3. Repairs and Maintenance expenditure is initially borne by APGENCO and then reimbursed

by APGPCL.

4. APGENCO can raise supplementary bill based on the actual generation.

5. APGENCO can also claim incentive bill based on the Plant Load Factor.

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6. Credit period for any bill raised is 30 days.

7. APGENCO has never done credit evaluation of APGPCL.

8. It is learnt that a meeting was held between APGPCL and APGENCO, because of the

outcome of the meeting APGPCL has cleared all the dues were cleared by APGPCL during

F/Y 08 09, as the accounts were under finalization figures are not disclosed.

5.2.2 SUGGESITIONS (in respect of APGPCL O&M CONTACT)

1. APGENCO has to perform the credit evaluation of APGPCL.

2. As the receipts seems to be good in respect of Operation and Maintenance Contract with

APGPCL, the only suggestion that can be give to APGENCO is maintain an Internet

Banking account in order to reduce the Cheque receipt float, Deposit float and clearance

float by the bank.

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5.2.3 CONCLUSIONS (in respect of APGPCL O&M CONTACT)

The receipt from APGPCL is to be reasonable.the entire debt outstanding on the last day of the year

seems to be good.as the age of outstanding amount seems to be lessthan 6months and there is no

much flot found in the operation and maintance contract with APGPCL

Finally it can be concluded from the above findings and dues positions that APGENCO

& APGPCL has very good terms in respect of the bussiness

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5.3 OVER ALL SUGGESTION

TO APGENCO IN RESPECT OF ALL THE BUSINESSES

1. It may suggested to include the penalty clause in all APGENCOs agreements; absence of

the penalty clause is the main reason for delayed receipts or bad debts.

2. APGENCO has to carry out the Credit Evaluation of its customers, by studying the

Financial Statements, Credit worthiness certificate from bankers or any other consultants

etc., to know that how far the credit can be allowed to its customers.

3. Factoring services must also be availed from the bankers for early recovery of its

outstanding dues.

4. It may suggested to give cash discounts so as to make effective and early recoveries.
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5. While discounting the bills care must be taken that there is no negative effect on the profits,

because the decrease in prices would affect the profit margin per unit of sale.

6. While giving credit APGENCO must also make Credit Analysis i.e., by obtaining credit

information from Internal sources, External sources, Financial statements, Banks, Credit

Bureaus etc.

7. The most important suggestion I want to give to APGENCO is to open an Internet Banking

Mechanism in order to reduce the cost of collection and float in Cheque receipt, Cheque

deposit and its clearance.

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BIBILOGRAPHY

BIBLIOGRAPHY

Books Referred:

1. I.M. Pandey , Financial Management, Vikas Publishers, Delhi, Page No.s-843-864

2. R.P.Rustagi, Financial Management, Galgotia Publications, Delhi , Page Nos-691-696
3. M.Y.Khan & PK Jain, Financial Management, MC Graw Hill Company, Page Nos-30.1-
30.9
4. Shashi K Gupta, Management Accounting, Kalyani Publishers, Page Nos-24.17-24.23

Websites browsed:

1. www.apgenco.co.in
2. www.tatamcgrawhill.com

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Journal Articles

1. Wallis LP, managing your receivables in todays economy, Journal:strategic

finance,Year:2002,Volume:84,issue:2

2. Janice H.levin, selling accounts receivable and the underinvestments problem,

3. James A.gentry and jesus m, A generalized modle for monitoring accounts

receivable,1985

4. Smith,CliffordW.,Jr.,Shehzad L, Accounts receivable management policy:theory and

evidence, Blackwell publishers Ltd,journal of finance,ISSN:0022-1082,Year:1992

5. Zvi Lieber,Yair E.orgler, An integrated model for accous receivable management

6. Author:Rosentein,Daniel,stein,George, Automatcing payables and receivables, CFO

publishing corp,treasury&risk management,ISSN:1067-0432,Year:2003

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