Debt Management

Components of Debt:-
 Receivable Management
 Inventory Management
 Payable Management
 Cash Management

Receivables Management

The term receivable is defined as “debt owed to the firm by customers arising from sale
of goods in the ordinary course of business”. The credit sales are generally made on open account
in the sense that there are no formal obligations through a financial instrument. However
extension of credit involves risk and cost. Management should weigh the benefits as well as the
cost to determine the goal of receivable management.

The benefits from receivables are the increased sales and profits anticipated because of
a more liberal policy. When firms extend their trade credit, i.e. invest in receivables; they intend
to increase the sales level. The motive of liberal credit policy can be either growth oriented or
sales retention. The extension of credit has a major impact on sales, costs and profitability. Other
things being equal, a relatively liberal policy and therefore higher investment in receivables will
produce larger sales. However cost will be higher with the liberal policies than with more
stringent measures. Therefore accounts receivables management should aim at a trade-off
between profit (benefits) and risk (cost).

The cost associated with the extension of credit and accounts receivables are:
1. Collection cost
2. Interest cost
3. Delinquency cost and
4. Default cost.
1. Collection cost:
These are the administrative costs incurred in collecting the receivables from the
customers to whom credit sales have been made.

2. Interest cost:
The increased level of accounts receivables is investments in assets. They have to
be financed by increasing credit limits with banks which involves payment of
more interest. Hence the interest cost increases, which is therefore a part of the
cost of extending credit or receivables.

3. Delinquency cost:
Arises out of the failure of the customers to meet their obligations when
payment on credit sales becomes due after the expiry of the period of credit.
Blocking up of funds for an extended period and cost associated with steps that
have to be initiated to collect the over dues are components of such type of
costs.

4. Default cost:
When firms are unable to recover the over dues because of the inability of the
customer, the debts are treated as bad debts to be written of as they cannot be
realized, such costs are known as default costs.
 Receivable Management in Food Corporation of India

These sales are made against invoice. Receivable management is beyond credit control.
In Food Corporation of India Sales ledger debtors’ day collection is prepared to calculate
on a consistent basis throughout the corporation and for each unit, the number of day’s sales
represented by customer debts.

Department involved in receivable management

1. Accounts & Finance department

2. Sales & marketing department

Credit terms followed

All sales made are credit sales.

1. It has different payment terms with different customers and it is mutually agreed which
is shown on the PO (purchase order) made with each customer.
2. In general credit offer to most of the customers is for 30-45 days, and to few customers
it is 60 days.
3. Advance payment is received in case of foreign customer & the customer who are one
time purchaser or whose credit worthiness is not checked.
Credit policy: -
In credit policy as credit standards & credit analysis is done. But in Food Corporation of
India there is no written credit policy as such. No credit analysis is done before selling goods to
them. No documents are being filled by the customer & their financial performance is also not
judged. Sometime they just refer to their balance sheet. No information is collected either
internally or externally.

Collection policy: -

There is distinct credit collection policy in Food Corporation of India because no credit sales are
allowed in FCI and that is FCI not having any uniform collection policy.

Inventory management

Inventories are stock of the product, a corporation is manufacturing for sale. Inventories can exist
in the form of raw material, work-in-progress, finished goods, components and supplies, whereas
motive for holding inventories can be transaction motive, precautionary motive and speculative
motive.
But many companies can’t operate under this model. Those that sell time-sensitive items have to
have materials, if not finished products, on hand to satisfy the expectations of the customer who
needs an order right away. Now-a-days many large manufacturers operate on a just-in-time (JIT)
basis whereby all the components to be assembled on a particular day, arrive at the factory early
that morning, no earlier no later. This helps to minimize manufacturing costs as JIT stocks take up
little space, minimize stock holding and virtually eliminate the risk of obsolete or damaged stock,
because JIT manufacturers hold stock for a very short time, they are able to conserve substantial
cash.

Inventory Management – Objective

The basic objective of inventory management is twofold. First is the avoidance of over or under
investment in inventories and second is to provide the right quantity of material to the
production department at right time. The key issue for a business is to identify the fast and slow
stock movers with the objective of establishing optimum stock levels for each category and,
thereby, minimize the cash tied up in stocks. Factors to be considered when determining
optimum stock levels are:
 The projected sales of each product.
 Availability of raw materials, components etc.
 Delivery time by the suppliers
Can one remove slow movers from one’s product range without compromising best sellers?
Inventory Management Techniques

An inventory management technique includes the following: -

• Effective and efficient purchasing, storage and issuing procedures.

• Settings of various levels like maximum, minimum, recorder level etc.

• Fixation of economic order quantity.

• Establishment of inventory budgets.

• Use of perpetual inventory system.

• Min-max plan.

• Order cycling system.

• ABC analysis.

• VED analysis.

• XYZ analysis.

• Use of inventory ratios.

• Aging schedule of inventories.

Inventory Management in Food Corporation of India.

In Food Corporation of India inventory management is done as various types of inventory are
required to be kept & valuation of inventory is done.

Types of Inventory

1. RAW MATERIAL
 BOP (Brought out part): - It is the inventory of main raw material. It is kept for continued
production.
 Development material: - It is the inventory that is being developed for new order until the
sample is being finalized.
 Key material: - It is the raw material of keys
 Plastic material: - It is the inventory of plastic material that is used for covering the keys.
 Job Work (3rd party RM): - It is the inventory that is being used by third party for
producing our goods. This stock is in a way the stock of Food Corporation of India only.

2. Work-in-progress: - It is the inventory of semi-finished goods.

 Key section: - It includes following:-
 Key blank: - It is the inventory of plain key material.
 Key bitted: - It is the inventory of key that is being cut as per the requirement of locks of
different vehicles.
  Key molded: - It is the inventory of key that is being molded to suit the requirement of
vehicle.

3. Rejection: - It is the inventory of item that has been out of use.

The material that can be used from rejected inventory is taken out & rest is the scrap

Technique of Inventory Management used :

Effective and efficient purchasing, storage and issuing procedures are being followed. On the
basis of schedules received from the customer forecasting of material requirement for the full
lead period is done.
Procedure of purchase, stock & issue are as follows:

Process flow of purchase, stock & issue

Schedule is received from customers i.e.

Central Govt. or State Govt.

Bill of material is prepared

MRP (material requirement planning) is done

 Availability of stock is checked

Production schedule is checked

Accordingly Order is placed with

suppliers/vendors

Material received is stored (one day

inventory is maintained)

Material is issued for production

using FIFO method
When supply is received then check is done at the gate of the wherehouse & it is checked
whether the material is supplied as per the invoice. If satisfied then MRR (material received
receipt) is issued at the gate. Material is then sent to the receiving department, there the
quantity of material is checked to know whether it is as per the order or not? After checking it is
then passed on to the quality store for the quality check i.e. whether the quality is as per the
order requirement or not? Then the material is finally stored in the store from where it is issued
to the production department through the issue slip. Material is issued using FIFO (first in first
out) method, where the material that comes first is issued first for the production. They use the
practice in which material is kept in racks in such a way that material coming first will be used
first.

JIT method: -
In Food Corporation of India JIT system of inventory management is used. It is the
method in which inventory is ordered only when demand comes. As in Food Corporation of India
the production schedule is followed. When & how much quantity of purchase & sale is to be
made is know beforehand. That’s why no excess inventory is maintained.

Bin card system: -

In case of this technique, each item of inventory is kept in bin. The bin contains such
quantity of inventory, which is sufficient to meet the consumption requirements till the next date
order is placed. A card for each bin is maintained in which total inventory received in quantity,
inventory used, purpose of issue is mentioned. Each time new inventory is received it is entered
in the card.

Aging schedule of inventories: -

Inventory aging is done where on the basis of period of stock holding inventory is
divided into four categories: -
• 30-60days :- Fast Moving
• 60-90 days Slow Moving
• 90-120 days
• 120 above :- Non-Moving

Continued Inventory aging is done to know the status of inventory. Analysis is done so as to
control & reduce the slow moving inventory.
Non-moving inventory are removed either by selling it as scrap or by making some modification
in it through job work and then using it again, if possible.
Which type of inventory is higher in different months? Remedial action can be taken against the
inventory. With the help of chart comparison becomes easy.

Payable Management
Creditors are a vital part of effective cash a management and should be managed carefully to
enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing
function can create liquidity problems. Ironically, some companies looking to take Debt off the
balance sheet nurture slow, inefficient or even obstructive A/P processes. It’s one case where
negligence can improve financial performance. But squeezing the vendors is a shortsighted
policy. A better strategy is to shrink the vendor base radically, then use one’s clout to negotiate
longer terms with the vendors. Vendor rationalization is a process that can pay off in a big way.
Apart from the question that who should authorize purchasing in the corporation- should it be
tightly managed or spread among a number of (junior) people? The following comes under good
payable management.

1. Purchase quantities should be geared to demand forecasts

2. Order quantities should be used which takes account of stock holding and purchasing
costs.
3. The cost to the corporation of carrying stock should be clearly defined.
4. A corporation should have alternative sources of supply. It should get quotes from
major suppliers and shop around for the best discounts, credit terms, and reduce
dependence on a single supplier.

Payable Management in Food Corporation of India

In Food Corporation of India it is being ensured that timely payment is made to the
supplier/vendors. The payment schedule is so designed that it will be made when the payment is
received from the debtors/customers & they have tried to delay the payment as much as they
can so that the excess cash balance is not required from the bank& their WCDL (Debt draw down
limit) is not used.
Payment terms: -

1. Payment terms with the various vendors is decided on the basis of their PO i.e. purchase
order. The unit to be purchased cost of each unit, period of credit, when & how
payment is to be made. Everything is stated in the PO.
2. Payment is made to the vendors twice in a month in all the units of Food Corporation of
India. First installment is made in between 8th-10th & second installment is made in
between 25th–29th.
3. Payment is made to the vendors through RTGS, NEFT only if all the required bank detail
(like IFSC code, Bank name, its branch, a/c no.) of the respective vendor is available, if
not then the payment is made through a/c payee cheque.

Methodology of payment

In Food Corporation of India the complete data base of the vendors is made in which each &
every information & bank detail of the suppliers is available.

1. For making the payment every time it become due, the suppliers’ liability is checked on the
basis of their credit period and amount that is due for the respective period is found out and
it is being tallied with the ledger of that supplier.
2. If the amount in ledger doesn’t tally with the ledger of supplier then balance confirmation is
asked from the respective supplier to know the due amount.
3. Then the amount due is recorded in the database & it is checked that through which medium
payment is to be made. If amount is more than “one lack” then payment is made through
RTGS otherwise through NEFT, and if bank detail is not available or the supplier whose bank is
not registered with RBI then in that case payment is made through account payee cheque.
4. Food Corporation of India has recently started the service of outsourcing cheque payment
from HSBC bank, whereby, now only the details of supplier & the amount to be paid will be
 sent to the bank & bank will make the cheque & payment on its behalf this will save the time
& efforts of the employees & the process will also get fastened.

CASH MANAGEMENT

Cash is an important part of any business organization; therefore it should be manage properly so
as to ensure smooth functioning of the organization. It
is the maintaining of liquidity of a firm to minimize the risk of insolvency? (An insolvent
corporation is one where it is unable to meet its maturing liabilities on time because it has
inadequate liquidity to meet its debt obligation). Cash Management is also about the proper
balancing of keeping cash without letting it idling around. Profit is not equating to cash flow. A
highly profitable corporation might collapse if without adequate cash flow due to the tying up of
corporation’s funds with the accounts receivable and worsen by the needs to make regular
payments like wages, rent & utilities, taxes

Motives/Reasons of Holding Cash

Three (3) motives advocated by British economist, John Maynard Keynes namely for:

1. Transaction motive
2. Precautionary motive and
3. Speculative motive

Cash Management in Food Corporation of India:

Cash is the lifeblood of every business organization. Every organization needs to have
adequate flow of cash to meet its entire requirement, whether short term or long term. In any
manufacturing organizations before starting any business activity proper planning of cash inflow
& outflow is required to be made. So, on the basis of receivable period cash inflow is planned for
the beginning of each month and accordingly outflow that is to be made is also planned, as to
when payment is to be made.
On daily basis unit wise cash flow is prepared as discussed above & the position is
monitored. It is being identified in which unit the outflow is greater than the inflow, & where
there is discrepancy between the Budgeted & Actual inflow & outflow.