Project 8

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Project 8

  1. 1. A STUDY ON DEBTORS MANAGEMENT AT TATA STEEL & IT’S COMPARISON WITH OTHER KEY PLAYERS A Project Report submitted in partial fulfillment of the requirement for BACHELOR OF BUSINESS ADMINISTRTION (Affiliated To Ch.Charan Singh University, Meerut) 2007-2010UNDER THE GUIDANCE OFInternal Supervisior Submitted byMr.TUSHAR JINDAL(faculty) RahulIMS Ghaziabad 9351722External SupervisiorMr. K S M MATHEW INSTITUTE OF MANAGEMENT STUDIES GHAZIABAD 1
  2. 2. DECLARATION CERTIFICATE This is to certify that the work presented in the project entitled “DEBTORS MANAGEMENT in partial fulfilment of the requirement for the award of degree of ‘BBA, INSTITUTE OF MANAGEMENT STUDIES,GHAZIABAD, is an authentic work carried out under my supervision and guidance. To the best of my knowledge, the content of this project does not form a basis for the award of any previous degree to anyone else.Date: (Guide’s name&signature) Department of Management BBA IMS, GHAZIABAD 2
  3. 3. CERTIFICATE OF APPROVALThe foregoing thesis entitled “DEBTORS MANAGEMENT at TATA STEEL ANDITS COMPARISON WITH OTHER KEY PLAYERS”, is hereby approved as acreditable study and has been presented in satisfactory manner to warrant itsacceptance as prerequisite to the degree for which it has been submitted.It is understood that by its approval, the undersigned do not necessarilyendorse any conclusion drawn or opinion expressed therein, but approve theproject for the purpose for which it is submitted. Co-ordinator- BBA Academic Co- ordinator Director IMS-GZB. 3
  4. 4. AcknowledgementIt is my privilege to work on the project “Debtors management at Tata Steel Ltd and itscomparison with other key players”. At the very outset, I am obliged to TATASTEEL for the permission to undertake training program and provide me with the basicinfrastructure and facilities.I express my sincere sentiments of gratitude to Mr. K S M MATHEW (Head Sales &EPA A/c) who guided me throughout this project. I would also like to thank Mr.PRANAV JHA (Sr. Manager Sales & EPA A/c) for his continuous assistance withoutwhich this project would not have been a success. It is the spirit of being associated with the Finance and Accounts department particularand Tata Steel in general who inspired me to complete this project successfully. I am indebted to my mentor Mr. K B SINGH for extending his untiring guidance tome, by constantly discussing the project matter and helping me in clarifying my thinking inseveral pertinent issues and providing a meaning full insight into the subject.Last but not the least; I also thank Ms.VANDANA KHEMKA (Manager Sales &EPA A/c) & Ms. PADMA MOHANTY (Accountant) who has been a source ofinspiration through their constant guidance, personal interest, encouragement and help &has made my stay in the company such a pleasant memory. In spite of their busy schedulethey have always found time to guide me through the project. I am also grateful to them forreposing confidence in my abilities and giving me the freedom to work on my project.I owe my deep sense of gratitude and sincere thanks to all of them Thank you. 4
  5. 5. TABLE OF CONTENTSEXECUTIVE SUMMARY 1CHAPTER 1INTRODUCTION 1.1.1 Account receivable-definition…………………………..….…...... 5 1.1.2 Debtors management………………………………………....……. 6 1.1.4 Need for trade credit……………………………………….….…. 8 1.1.5 Determinants of size of receivables………………………………. 9 1.1.6 Cost & benefits associated with receivable management……….... 11 1.1.7 Expert view ………………………………………..…………….. 13 Company Profile 1.2.1 History of steel………………………………………...………….. 14 1.2.2 Indian Steel Industries ……………………………………...……. 16 1.2.3 Company Overview ……………………………………………..…... 19 1.2.4 Tata steel stand alone ………………………………………...…….. 45 1.2.5 Overview of the finance division of Tata steel………………….……. 57 1.2.6 Sundry debtors section…………………………………………....….. 58CHAPTER 2 5
  6. 6. RESEARCH METHODOLOGY 2.1 Type of Research……………………………………………..……… 60 2.2 Objective of the study……………………………………………….. 60 2.3 Scope of Study …………………………………………………….… 60 2.4 Sources of data collection……………………………………………. 60 2.5 Sampling…………………………………………………………….. 60CHAPTER 3CREDIT DECISION 3.1 Tata steel’s credit monitoring and control……………………… 65 3.2 Operational working at Tata steel for managing debtors…….…. 68 3.3 Channel financing…………………………………………...…… 70 3.4 Credit assessment modules…………………………………..…… 72 3.5 Understanding the debtor’s process system……………….....…………… 84CHAPTER 4COMPARATIVE ANALYSIS OF TATA STEEL WITH OTHER STEEL COMPANY 4.1 Tata steel vs. Steel authority of India limited (sail)…………………..... 89 4.2 Tata steel vs. Arcelor Mittal (Mittal steel) …………………………… 95 4.3 . Tata steel vs. Jindal steel & power ltd …………………..…………… 99CHAPTER 5TATA STEEL & RECESSION 5.1 Tata steel’s game plan to beat recession……………………...……. 108 6
  7. 7. 5.2 After recession…………………………………………........................ 109 5.3 Articles from the newspapers……………………………………...... 111CHAPTER 6CONCLUSION AND SUGESSTIONS 6.1 Suggestion………………………………………………………………….. 113 6.2 Limitation of the Study…………………………………………….………. 114 6.3 SWOT analysis of debtors management process at Tata steel…………… 115 6.5 Views of debtor management expertise……………………………...…… 117 6.4Conclusion………………………………….……………………….………….. 118REFERENCE ANNEXURE - Bibliography ExEcutivE Summary 7
  8. 8. The project deals in “DEBTORS MANAGEMENT AT TATA STEEL & ITSCOMPARISON WITH OTHER KEY PLAYERS”. Receivable management is one of themost important aspects of the organization, as it deals with the management of theoutstanding. The profit of the company mainly depends on the accounts receivables.Therefore it needs a careful analysis and proper management.Debtors occupy an important position in the structure of current assets of a firm. They arethe outcome of rapid growth of trade credit granted by the firms to their customers. Tradecredit is the most prominent force of modern business. It is considered as a marketing toolacting as a bridge for the movement of goods through production and distribution stages tocustomers. Till few years back, Tata Steel had a very strict policy of selling against advance payments. That was an era of controlled economy. However, with an increasing domestic and international competition, Tata Steel could no longer afford this policy, in order to maintain its premium position. Further in order to capture a greater amount of market share, it was compelled to go by the industry norms and thus it ushered into the new era of credit sales. This resulted in credit sales going up significantly. A credit limit was sanctioned to every customer. The customers were required to pay the outstanding amount on the due date. 8
  9. 9. iNtrODuctiON 9
  10. 10. 1.1What iS aN accOuNt rEcEivablE?Accounts receivable is an accounting transaction which deals with the billing of customerwho owes money to a person, company or organization for goods and services that has beenprovided to the customers. In most business entities this is typically done by generating aninvoice and mailing or electronically delivering it to the customer, who in turn must pay itwithin an established timeframe called credit or payment terms.An example of a common payment term is Net 30, meaning payment is due in the amount ofthe invoice 30 days from the date of invoice. Other common payment terms include Net 45and Net 60 but could in reality be for any time period agreed upon by the vendor and thecustomer.On a companys balance sheet, accounts receivable is the amount that customers owe to thatcompany. Sometimes called trade receivables, they are classified as current assets assumingthat they are due within one year. To record a journal entry for a sale on account, one mustdebit a receivable and credit a revenue account. When the customer pays off their accounts,one debits cash and credits the receivable in the journal entry. The ending balance on thetrial balance sheet for accounts receivable is always debit.Accounts receivable departments use the sales ledger. Other types of accounting transactionsinclude accounts payable, payroll, and trial balance.bOOK KEEPiNG FOr accOuNtS rEcEivablECompanies have two methods available to them for measuring the net value of accountreceivables, which is computed by subtracting the balance of an allowance account from theaccounts receivable account.The first method is the allowance method, which establishes a liability account, allowancefor doubtful accounts, or bad debt provision, that has the effect of reducing the balance foraccounts receivable. The amount of the bad debt provision can be computed in two ways -either by reviewing each individual debt and deciding whether it is doubtful (a specificprovision) or by providing for a fixed percentage, say 2%, of total debtors (a generalprovision). The change in the bad debt provision from year to year is posted to the bad debtexpense account in the income statement.The second method, known as the direct write-off method, is simpler than the allowancemethod in that it allows for one simple entry to reduce accounts receivable to its netrealizable value. The entry would consist of debiting a bad debt expense account andcrediting the respective account receivable in the sales ledger. 10
  11. 11. 1.2 rEcEivablE maNaGEmENt – cONcEPtThe term receivable management is defined as “debt owed to the firm by customerarising from the sale of goods/ services in the ordinary course of business.” Thereceivable represents an important component of the current assets of the firm.Receivables may be known as accounts receivables, trade creditors or customerreceivable. When a firm its products / services and does not receive cash for itimmediately, the firm has said to be granted trade credit to the customers. Trade creditthus creates receivable / book debts, which the firm is expected to collect in near future.Accounts receivable are thus amounts due from customers, which bear no interest inessence, a company is providing no cost financing to the customer to encourage thepurchase of the company’s product/services.The extension of credit can be justified only if the increase in the sales and related cashcollections (discounted for the time until collection) exceeds the amount otherwise cashgenerated under a “cash only” policy.These customer from whom receivable or book debt are to be collected in the future arecalled as “trade debtors” or simply as “debtor” and represents the firm’s claim onassets. Trade debtors are expected to be converted into cash within a short period and areincluded in the current assets. Since receivables often accounts for the significanceportion of total assets, it requires careful attention and adequate management. It is skilldemanding field because the customer has to be bestowed with trust along with acontinuous vigilance. 11
  12. 12. ObJEctivE OF DEbtOrS maNaGEmENtIt is not always possible to sell goods on cash basis only, sometimes other firms in that linemight have establish a practice of selling goods on credit under these circumstances, it is notpossible to avoid credit sales without adversely affecting the sales. Hence the firm is requiredto allow the credit sale in order to expand its sales volume. The increase in sales is alsoessential to increase profitability. The sales of goods have become an essential part of themodern competitive economic system. In fact credit sales and receivables are treated as amarketing tool to aid the sale of goods. Credit sale is generally made in an open account in thesense that there is no formal acknowledgement of debt obligation through a financialinstrument. As a marketing tool they are indene to promote sales and thereby profits. Howeverextension of credit involves risk and cost. Management should weigh the benefits as well asthe costs to determine the goals of receivable management.Thus the objective of receivable management is:“To promote sales and profit until that point is reached where the return on investmentin further funding of receivable is less than the cost of funds raised to finance thatadditional credit(i.e. cost of capital)” 12
  13. 13. 1.4 NEED FOr GraNtiNG traDE crEDit:Trade credit is an important marketing tool. A policy of trade credit is followednearly in all capital intensive industries either for sales expansion and /or salesretention. Under any circumstances investment in receivable is growth oriented.Various factors that favours credit Market factors Customers’ Competition requirement Recessionary Marketing economic Tool conditions 13
  14. 14.  MARKET FACTOR: Market factors like price, forces accompany to grant credit. For example, TATA STEEL whose price is comparatively higher is forced to grant credit in order to maintain sale.  COMPETITION: In view of stiff competition from both domestic and international players, the company is left with no option then to grant credit. Competition is another vital factor, which affects the credit policy of a firm, and TATA STEEL is not an exception.  CUSTOMER’S REQUIREMENT: As the market has changed to the buyer’s market, the customers have become kings. If the customer expects credit and is worthy of it, he gets it.  MARKETING TOOL: T o push up sales of slow moving products and encourage bulk purchase of fast moving products, credit plays an effective role in this context.  RESESSIONARY ECONOMIC CONDITIONS: Liquidity crunch forces the company to grant credit.1.5 DEtErmiNaNt OF SiZE OF rEciEvablESBeside sales, a number of factors also influence the size of receivables. The followingfactors directly or indirectly determine the size accounts receivables.  Level of sales: The most important factor in determining the volume of receivable is the level of firm’s credit sales. With an increase in the size of the sales, it may bring about a proportional increase in the magnitude of receivable.  Credit policies: The firm with the liberal credit policy will have a higher level of receivable than with a conservative or rigid credit policy. 14
  15. 15.  Terms of trade: The size of receivables also depends upon the term of trade. The period of credit allowed and rates of discounts given are linked with receivables. If the credit period allowed is more, the receivable will also be more similarly if the rate of discount are reasonable, then also the size of the receivable will increase. Profit: The level of receivables increases as a result of increase in sales. When sales increase beyond a certain level, the additional cost incurred are less than the increase in revenue. It will be beneficial to increase sales beyond a point because it will bring more profit. The increase in profit will be followed by an increase in the size of the receivable. Market: It may be necessary for the firm to explore a new market for its products/services. One of the attractive way in which a firm enters a new market is by giving incentives to the customers in the form of credit facilities. In doing so, the size of receivable will increase. Grant of credit: Size of the receivable depends upon the policies and practices of the firm in determining which customer are to be granted credit. Paying habit of the customer: The paying habits of the customers also have a bearing on the size of receivables. The customers may be in habit of delaying payments even though they are financially sound. In such case, the firm should remain in constant touch with its customers. Collection policies: The vigour with which affirm collects its dues from the customers also affects its receivables, for if the amounts due are not collected timely; a firm suffers some financial difficulties, if not losses. Operating efficiency: The degree of operating efficiency in billing, record keeping and other function also exercise some influence on a firm’s credit policy which in turn influences its receivables. 15
  16. 16.  Credit collection: The collection of credit should be streamlined. Efficient credit collection machinery will reduce the size of receivable. Individual firm of tern set up their own well organised credit collection department. 16
  17. 17. 1.6 cOStS aND bENEFitS aSSOciatED With rEcEivablE maNaGEmENt COSTS COLLECTIONCOST COSTS CAPITAL COST COLLECTIONCOST DELIQUENCY COST CAPITAL COST DEFAULT COST DELIQUENCY COST DEFAULT COST 17
  18. 18. COSTS:The major categories of cost associated with extension of credit and receivable are:  Collection cost  Capital cost  Delinquency cost  Default costCOLLECTION COST:These costs are administrative cost incurred in collecting the receivable from the customers.This category includes: 1. Additional expenses on the creation and maintenance of a credit department with staff, accounting, records, stationary, postage and other related items. 2. Expenses involved in acquiring credit information either through outside specialist agencies or by the staff of the firm itself.CAPITAL COST:Accounts receivables, being an investment in current assets, have to be financed involving acost. There is a time lag between the sale of goods to, and the payment by, the customers.Meanwhile the firm has to pay employees and suppliers of raw material i.e. the firm shouldarrange for additional funds to meet its own obligations. Thus, the cost on the use of additionalcapital to support credit sales is therefore apart of the cost of extending credit.DELINQUENCY COST:This cost arises out of the failure of the customer to meet their obligations when payment oncredit sales becomes due after the expiry of the period of credit. Such cost includes:  Blocking up of funds for an extended period.  Cost associated with steps that have to be initiated to collect the overdue, such as reminders and other collection efforts, legal charges, where necessary , and so on.DEFAULT COST 18
  19. 19. In addition of the above cost the firm may not be able to recover the overdue because ofinability of the customers. Such debts are treated as bad debts and have to be written off, asthey cannot be realized. Though a concern may be able to reduce bad debts through efficientcollection mechanism, one cannot altogether rule out the possibility of this cost.BENEFITS:Apart from the cost, another factor that has a bearing on accounts receivable is the benefitemanating from credit sales. The benefits are: “The increased sale and thereby profits”However, the benefits would depend upon the credit policy adopted by the firm, i.e., aconservative or liberal credit policy. The impact of liberal credit policy is likely to have twoforms:- i. Sales expansion ii. Sales retentionIn sales expansion a firm may grant credit either to increase sales or to attract new customer.This motive is growth oriented; on the other hand the sales retention the firm may grant creditto protect its current sales against emerging competition. No matter whatever is the motive,the result the result of increased sales is the increase the profit of the firm. 19
  20. 20. SOmE baSic DEFiNitiONWhen the buying and selling process steps forward and the customer is not able to pay thetotal amount, the amount which they are not able to pay at the same time of buying the amountis known as DEBT.In the balance sheet of companies those customers are DEBTORS. In their balance sheetcompany is a CREDITOR.On the basis of market performance and credit rating company decides the time period ofpayback of the amount. This time period is known as CREDIT PERIOD.The total amount called as debt is called as OUTSATNDING. When this total outstanding isnot paid within the credit period the amount remained to be collected is called as OVERDUE.The total overdue is divided in different parts such as overdue within 3months, from 3-6months, 6-12 months, 1 to 2 yrs, 2-3 yrs, above 3yrs, and above 5 yrs.When the customer is not able to pay back the due after five years then this amount is knownas BAD DEBTS.Tata Steel has kept some amount for this type of time of contingencies. This amount use fordecreasing the effect of bad debts is called as PROVISION.CURRENT ASSETS are those assets which can be converted into cash within the period of12 months starting from the company’s financial year.CURRENT LIABILITIES are those liabilities which are repaid within 12 months startingfrom company’s financial year. 20
  21. 21. ExPErt viEWIt is generally believed that credit policy stimulates sales as it helps inretaining existing customers and winning clients from rivals. Trade debtorsrepresent amounts owed to the firm as a result of credit sale of goods orservices in the ordinary course of business.The key function of credit management is to optimize the sales at the minimumpossible cost of credit.According to Joseph, "The purpose of any commercial enterprise is theearning of profit. Credit in itself is utilized to increase sales, but sales mustreturn a profit".The offer of trade credit should not only optimize sales but also lead tomaximization of overall return on investment. Management of receivables,therefore, should be based on sound credit policies and practices. 21
  22. 22. cOmPaN yPrOFilE 22
  23. 23. 3.1 hiStOry OF StEElSteel was discovered by the Chinese under the reign of Han dynasty in 202 BC till 220 AD.Prior to steel, iron was a very popular metal and it was used all over the globe. Even the timeperiod of around 2 to 3 thousand years before Christ is termed as Iron Age as iron was vastlyused in that period in each and every part of life. But, with the change in time and technology,people were able to find an even stronger and harder material than iron that was steel. Usingiron had some disadvantages but this alloy of iron and carbon fulfilled all that iron couldn’tdo. The Chinese people invented steel as it was harder than iron and it could serve better if itis used in making weapons. One legend says that the sword of the first Han emperor wasmade of steel only. From China, the process of making steel from iron spread to its south andreached India. High quality steel was being produced in southern India in as early as 300 BC.Most of the steel then was exported from Asia only. Around 9th century AD, the smiths in theMiddle East developed techniques to produce sharp and flexible steel blades. In the 17thcentury, smiths in Europe came to know about a new process of cementation to produce steel.Also, other new and improved technologies were gradually developed and steel soon becamethe key factor on which most of the economies of the world started depending. 23
  24. 24. FIG: Stages in Global Production of Steel • India is one of the world’s top ten steelmakers its domestic output is insufficient to meet the demand in all segments. • Consumption of steel is very fast and as a consequence of the prospective dynamic economic growth. • Secondly, there is demand for high-quality products which India will not be able to supply in sufficient quantities for the foreseeable future.3.2 thE GlObal StEEl iNDuStryThe current global steel industry is in its best position in comparing to last decades. The pricehas been rising continuously. The demand expectations for steel products are rapidly growingfor coming years. The shares of steel industries are also in a high pace. The steel industry isenjoying its 6th consecutive years of growth in supply and demand. And there is many moremerger and acquisitions which overall buoyed the industry and showed some good results.The subprime crisis has lead to the recession in economy of different countries, which maylead to have a negative effect on whole steel industry in coming years. However steelproduction and consumption will be supported by continuous economic growth. 24
  25. 25. cONtributiON OF cOuNtriES tO GlObal StEEl iNDuStryThe countries like China, Japan, India and South Korea are in the top of the above in steelproduction in Asian countries. China accounts for one third of total production i.e. 419m ton,Japan accounts for 9% i.e. 118 m ton, India accounts for 53m ton and South Korea isaccounted for 49m ton, which all totally becomes more than 50% of global production. Apartfrom this USA, BRAZIL, UK accounts for the major chunk of the whole growth.3.3 iNDiaN StEEl iNDuStriESThe challenges that confront Indian steel industry in the age of globalization are complex innature. The secret of sustainable turnaround lies in how Indian steel industry faces thechallenges and develops combative and anticipatory prowess. Problems and solutions mayvary with organizations but there is more a commonality than initially meets the eye. A two-step strategy is suggested for the sustainable turnaround in the industry. These stages, aimedto ensure survival and growth have been termed survival strategy and growth strategy. Thesurvival strategy provides a foundation upon which a potent growth strategy could beformulated. While the survival strategy would ensure the survival of the ailing steel industry,the growth strategy would simultaneously take care of its total transformation towards abetter future. Both stages, to be implemented through an integrated plan, are essential toenable the industry overcome the present imbroglio. • Indian steel industry is poised for rapid growth. • India’s share in world production of crude steel increased from 1.5% in 1981 to around 7.3% in 2008. 25
  26. 26. • The private sector is considered engine of growth in the steel industry and technological changes and modernization are taking place in both the public and the private sector integrated steel plants in India.SOME OF THE LEADING COMPANIES IN INDIAN STEEL INDUSTRYARE AS FOLLOWS:  Tata Steel: Producer and supplier of wire rods, bars, and steel flats  Steel Authority of India: Manufacturer of steel and iron  Ambica Steel: Producer of carbon steel, alloy, and stainless steel  Bokaro Steel Plant: Steel manufacturer  Central Steel Corporation: Producer of alloy and tool steels  Allied Ferromelt: Producer of non alloy and alloy steel  Anchor Engineers Files: Producer of steel files for engineers 26
  27. 27.  Essar Steel: Producer of sponge iron, steel and iron ore pellets ColdFab: Producer of pre-fabricated buildings of steel Hisar Metal: Producer of strips and stainless cold rolled steel coils Buyao Info: Producer of steel products and re-rolled iron Jindal Iron & Steel: Producer of galvanized steel products Kanoi Group: Dealer of corrugated sheets and steel coils Jindal Steel & Power: Manufacturer of mild steel slabs and sponge iron Metalman Industries: Producer of tubular and flat steel items 27
  28. 28. 3.3 cOmPaNy OvErviEWBacked by 100 glorious years of experience in steel making, Tata Steel is the world’s 6thlargest steel company with an existing annual crude steel production capacity of 30 MillionTons Per Annum (MTPA). Established in 1907, it is the first integrated steel plant in Asiaand is now the world`s second most geographically diversified steel producer and a Fortune500 Company Tata Steel has a balanced global presence in over 50 developed European andfast growing Asian markets, with manufacturing units in 26 countries.Tata Steel`s Jamshedpur (India) Works has a crude steel production capacity of 6.8 MTPAwhich is slated to increase to 10 MTPA by 2010. The Company also has proposed threeGreenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh in India withadditional capacity of 23 MTPA and a Greenfield project in Vietnam.Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand) andNatSteel Holdings, Singapore, Tata Steel has created a manufacturing and marketingnetwork in Europe, South East Asia and the pacific-rim countries. Corus, whichmanufactured over 20 MTPA of steel in 2008, has operations in the UK, the Netherlands,Germany, France, Norway and Belgium. Tata Steel Thailand is the largest producer of longsteel products in Thailand, with a manufacturing capacity of 1.7 MTPA. Tata Steel hasproposed a 0.5 MTPA mini blast furnace project in Thailand. NatSteel Holdings producesabout 2 MTPA of steel products across its regional operations in seven countries.Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has also entered thesteel building and construction applications market.The iron ore mines and collieries in India give the Company a distinct advantage in rawmaterial sourcing. Tata Steel is also striving towards raw materials security through jointventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman. TataSteel has signed an agreement with Steel Authority of India Limited to establish a 50:50 28
  29. 29. joint venture company for coal mining in India. Also, Tata Steel has bought 19.9% stake inNew Millennium Capital Corporation, Canada for iron ore mining.Exploration of opportunities in titanium dioxide business in Tamil Nadu, Ferro-chrome plantin South Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growthand Globalisation objective of Tata Steel.Tata Steel’s vision is to be the global steel industry benchmark for Value Creation andCorporate Citizenship.Tata Steel India is the first integrated steel company in the world, outside Japan, to beawarded the Deming Application Prize 2008 for excellence in Total Quality Management.milEStONES 1868 1874 1902Jamshedji Nauserwanji TATA The central INDIA spinning, The Indians hotelsstarted a private trading firm, weaving and manufacturing company is incorporatedlaying the foundation of the company is set up, marking to set up the Taj MahalTATA Group. the group entry into textiles. Palace and Tower, Indias first luxury hotel, which opened in 1903. 1907 1910 1911The TATA Iron and Steel The first of the three TATA The Indian Institute ofCompany (now TATA Steel)is Electric Companies, The Tata Science is established inestablished to set up Indias Hydro-Electric Power Supply Bangalore to serve as afirst iron and steel plant in Company, (now TATA Power) centre for advancedJamshedpur. is set up. learning. 29
  30. 30. 1912 1917 1932TATA Steel introduces eight- The TATAs entered the TATA airlines, a divisionhour working days, well consumer goods industry, with of TATA sons, isbefore such a system was the TATA Oil Mills Company established to opening upimplemented by law in much being established to make the aviation sector inof the West. soaps, detergents $ cooking India. oils. 1939 1945 1952TATA Chemicals, now the TATA engeneering and Jawahar lal Nehru India’s largest producer of soda ash Locomotive (renamed as first prime minsterin the country, is established. TATA MOTORS) is requested the TATA established to manufacture Group to manufacture locomotive and engeneering cosmetics in India, products. leading to satting up the LAKME. 1962 1968 1970 • TATA finlat (now TATA TATA consultancy services TATA McGraw-Hill tea), one of the largest tea (TCS) India’s first software Publishing Company is producers is estblished. services company is created to publish • TATA export is established as a division of educational and technical established. Today the TATA sons. books. company renamed as TATA International, is 30
  31. 31. one of the leading export houses in india. 1984 1996 1998TITAN Industries- a joint TATA Teleservices (TTSL) is TATA Indica – Indiasventure between TATA Group established to spearhead the first indigenouslyand Tamil Nado Industrial Groups foray into the telecom designed andDevelopment corporation is sector. manufactured car – isset up to manufacture watches. launched by TATA MOTORS, spearheading the Groups entry into the passenger car segment. 2002 2004 2005•• The TATA Group acquires a • TATA MOTORS acquires • TATA Steel acquires controlling stake in VSNL, the heavy vehicles unit of Singapore-based steel Indias leading international Daewoo Motors, South company NatSteel by telecommunications service Korea. subscribing to 100 provider. • TCS goes public in July per cent equity of its 2004 in the largest private subsidiary, NatSteel•• TATA Consultancy Services sector initial public offering Asia. (TCS) becomes the first (IPO) in the Indian market, • VSNL acquired Indian software company to raising nearly $1.2 billlion. cross one billion dollars in revenues. • Titan launches Edge, the slimmest watch in the world. 31
  32. 32. •• Idea Cellular, the cellular service born of a tie-up involving the TATA Group, the Birla Group and AT&T, is launched.•• TATA Indicom, the umbrella brand for telecom services from the TATA Teleservices stable, starts operations. 2007 2008TATA steel acquires CORUS TATA Group acquiresthus becoming the sixth JAGUAR & LAND ROVERlargest steel maker of the from FORD MOTERS.world. 32
  33. 33. We aspire to be the global steel industry benchmark for Value Creation and Corporate Citizenship.We make the difference through: • Our people, by fostering team work, nurturing talent, enhancing leadership capability and acting with pace, pride and passion. • Our offer, by becoming the supplier of choice, delivering premium products and services, and creating value with our customers. • Our innovative approach, by developing leading edge solutions in technology, processes and products. • Our conduct, by providing a safe working place, respecting the environment, caring for our communities and demonstrating high ethical standards . GrOuP viSiON 33
  34. 34. We aspire to be the global steel industry benchmark for Value Creation and Corporate Citizenship. We make the difference through:Our PEOPLE, by fostering team work, nurturing talent, enhancing leadership capability and acting with pace, pride and passion.Our OFFER, by becoming the supplier of choice, delivering premium products and services and creating value with our customers. Our INNOVATIVE APPROACH, by developing leading edge solution in technology, process and products.Our CONDUCT, by providing a safe working place respecting the environment, caring for our communities and demonstrating high ethical standards. 34
  35. 35. 35
  36. 36. ProductsTata Steel`s Jamshedpur Works produces hot and cold rolled coils and sheets, galvanizedsheets, tubes, wire rods, construction rebars and bearings. In an attempt to decommoditisesteel, Tata Steel has introduced brands like Tata Steelium (the worlds first branded ColdRolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), TataBearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanized wire products),Tata Pipes (pipes for construction) and Tata Structura (contemporary constructionmaterial).Apart from these product brands, the company also has in its folds a service brandcalled “steel junction”.Corus’ main operating divisions comprise Strip Products, Long Products and Distribution &Building Systems Division.The NatSteel group produces construction grade steel such as rebars, ‘cut-and-bend’ cages forconstruction, mesh, precage bore pile, PC wires and PC strand.Tata Steel Thailand produces round bars and deformed bars for the construction industry. 36
  37. 37. Corporate SuStainabilityRegarded globally as a benchmark in corporate social responsibility, Tata Steelscommitment to the community remains the bedrock of its hundred years of sustainability. Itsmammoth social outreach programme covers the company-managed city of Jamshedpur andover 800 villages in and around its manufacturing and raw materials operations throughuplift initiatives in the areas of income generation, health and medical care, education,sports, and relief.The Company, fully conscious of its responsibilities to the future generations, has alwaystaken pro-active measures to ensure optimum utilization of natural resources. This isreflected in the ISO-14001 certification that all its operations have achieved for environmentmanagement. The SA 8000 certification for work conditions and improvements in theworkplace at the steel works in Jamshedpur, along with its Ferro Alloys and MineralsDivision, is a reiteration of its commitment towards the Companys employees. Tata Steelhas pioneered numerous employee welfare measures such as the 8 hours working day andthe three tier joint consultation system of management which have been the platform fornearly 80 years of industrial harmony in its Steel Works in Jamshedpur.inVeStMentS oF tata SteelIn INDIA  12 MTPA plant in Jharkhand  6 MTPA plant in Orissa  5 MTPA plant in Chhattisgarh  Jamshedpur steel works became a 7 MTPA unit in 2008OVERSEAS  VIETNAM  SOUTH AFRICA  AUSTRALIA 37
  38. 38.  MOZAMBIQUE IVORY COST OMAN 38
  39. 39. aWarDS anD reCoGnitionS 39
  40. 40. Awards and Recognitions • Tata Steel India awarded the Deming Application Prize 2008 for excellence in Total Quality Management. It is the first integrated steel company in the world, outside Japan to get this award. • World Steel Dynamics has ranked Tata Steel as the worlds best steel maker (for two consecutive years) in its annual listing in February 2006. • Tata Steel has been conferred the Prime Minister of Indias Trophy for the Best Integrated Steel Plant five times. • It has been awarded Asias Most Admired Knowledge Enterprise award five times in 2003, 2004, 2006, 2007 and 2008. • Conferred the prestigious Global Business Coalition Award for Business Excellence in the Community in recognition of its pioneering work in the field of HIV/ AIDS awareness. • Tata Steel works has been conferred the prestigious social accountability (SA) 8000 certification by social. Accountability international (SAI), USA. It is the first steel company in the world to receive this certificate. • Corporate Sustainability Report of Tata Steel hailed by United Nations Environment Programme (UNEP) and Standard and poor as strongest, submitted by any corporate house from emerging economies. • Best governed company Award 2006 for setting high standards in governance practices. 40
  41. 41. (As on 7th May, 2009) Mr. B Muthuraman Managing Director Mr. H M Nerurkar Executive Director, India and South East Asia Operations Mr. A D Baijal Vice President & Tata Steel Group Director, Global Mineral Resources Mr. R P Singh Vice President, Engineering Services & Projects Mr. Koushik Chatterjee Group CFO, Tata Steel Mr. Anand Sen Vice President, Flat Products & TQM Mr. Abanindra M. Misra Vice President, Raw Materials & CSI Mr. Varun K Jha Vice President, Chhattisgarh Project Mr. Om Narayan Vice President, Shared Services Mr. Radhakrishnan Nair Chief Human Resource Officer Mr. Partha Sengupta Vice President, Corporate Services Mr. H Jha Vice President, Safety & Long Products Mr. N K Misra Vice President & Tata Steel Group Head, M&A Mr. B K Singh Vice President, Orissa Project Mr. J C Bham Company Secretary 41
  42. 42. 42
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  47. 47. StrateGiC buSineSS unitS oF tata Steel 47
  48. 48. Corus: Europe’s second largest steelmaker with operations in the UK andmainland Europe and over 40,000employees worldwide. Its long and stripproducts cater to the construction,automotive, packaging, engineering andother markets worldwide. Corus isimplementing major investments at itsplants at IJmuiden, in the Netherlands andat Scunthorpe in the UK as part of its driveto strengthen product differentiation,improve operational efficiency andreinforce existing competitive position,particularly in the construction andautomotive sectors, including thedevelopment of new advanced high strengthsteels.(www.corusgroup.com)Tinplate Company of IndiaLimited (TCIL): With a market share ofover 35%, it is the industry leader in India.It has the capability to supply all tinningline products including electrolytictinplate / tin-free steel and cold-rolledproducts.(www.tatatinplate.com)Tayo Rolls Limited: Indias leading rollmanufacturer and supplier, the companyproduces rolls which find application inintegrated steel plants, power plants, thepaper, textile and food processing sectors,and the government mint.(www.tayo.co.in) 48
  49. 49. Tata Ryerson Limited (TRYL):TRYL Is in the business of steel processingand distribution. It offers hot and coldrolled flat steel products in customised sizesand quantities through processing servicesand materials management services.(www.tataryerson.com)Tata Refractories Limited (TRL): Itproduces High Alumina, Basic, Dolomite,Silica and Monolithic Refractories andoffers design, procurement and re-liningapplications services. It is one of the fewcompanies worldwide to produce silicarefractories for coke ovens and the glassindustry. The Company has a basic bricksmanufacturing unit in China.(www.tataref.com)Tata Sponge Iron Limited (TSIL):TSIL is the first Indian sponge iron plantbased on Tata Steels Direct ReductionTechnology. Its major product lines aresponge iron lumps and fines.(www.tatasponge.com)Tata Metaliks: Amongst the top wealthcreating companies (EVA+) in the country,Tata Metaliks is engaged in the business ofmanufacturing and selling foundry gradepig iron.(www.tatametaliks.com)Tata Pigments Limited: TPLs rangeof products includes oxides of iron, drycement paint, exterior emulsion paint anddistemper. Its products are used in paints,emulsion, cement floors, plastic etc.(www.tatapigments.com) 49
  50. 50. Jamshedpur Injection PowderLimited (Jamipol): JAMIPOLmanufactures carbide de-sulphurisingcompounds which are used for de-sulphurising hot metal for the production oflow-sulphur, high-quality steel.(www.jamipol.com)TM International Logistics Limited(TMILL):TMILL provides materialhandling and port operation services atHaldia and Paradip Ports in addition toproviding freight forwarding and charteringservices.(www.tmilltd.com)mjunction services limited :mjunction, operating at the cutting edge ofInformation Technology, is a 50:50 ventureof SAIL and Tata Steel. It is Indias largesteCommerce company and the worldslargest eMarketplace for steel. Mjunctionoffers a wide range of selling, sourcing andknowledge services that empowerbusinesses with greater process efficiencies.(www.mjunction.in)TRF Limited :TRF, one of Indiasleading companies in the business ofdesign, manufacture, supply, installationand commissioning of engineered-to-orderequipment and systems in the areas of bulkmaterial handling, processing, reclaimingand blending. TRF has also made its markin the fields of coke oven equipment, coaldust injection systems for blast furnaces andcoal beneficiation systems.(www.trfltd.com) 50
  51. 51. Jamshedpur Utility andService Company Limited(JUSCO) : Re-engineered out of TataSteels town services, JUSCO is a whollyowned subsidiary of Tata Steel and is thecountrys first enterprise that providesmunicipal and civic services for townships.JUSCO is the only EMS 14001 civicservices provider in the country.(www.juscoltd.com)The Indian Steel and Wire ProductsLimited (ISWP) : Recently acquired byTata Steel, ISWP has two units - a wire unitcomprising wire drawing mills, wire rodmills and a fastener division and a steel rollmanufacturing unit named JamshedpurEngineering and Machining Company -JEMCO.Tata BlueScope Steel Limited: A jointventure with BlueScope Steel Limited,Australia, Tata BlueScope Steel Limitedoffers a comprehensive range of brandedsteel products for building and constructionapplications. The Company is constructinga state-of-the-art metallic coating andpainting facility at Jamshedpur.(www.tatabluescopesteel.com)Dhamra Port Company, Orissa: A JVbetween Larsen & Toubro Ltd. and TataSteel Ltd., the company will build a deep-draft (18 metres) all weather port on theeast coast of India. The port will handle 80million tonnes per annum of cargo.(www.dhamraport.com) 51
  52. 52. Hooghly Met Coke & PowerCompany: A joint venture with WestBengal Industrial DevelopmentCorporation Ltd., HMC&PCenvisages an annual met cokeproduction capacity of 1.2 milliontonnes and 90 MW of electric power.(www.hooghlymetcoke.com)Lanka Special Steel Limited: The onlyunit in Sri Lanka manufacturing galvanisedwires.Sila Eastern Company Limited:Established to develop limestone mines inThailand, mainly for the captive use of TataSteel.NatSteel Holdings (NSH) : A leadingsupplier of premium steel products for theconstruction industry. NatSteel Holdingsbecame a 100% subsidiary of Tata Steel inFebruary 2004. NSH produces about 2 MTof steel products annually across itsregional operations in seven countries.(www.natsteel.com.sg)Tata Steel Thailand: The company isthe dominant steel producer in Thailand.The company has the capacity to produce1.7 million tonnes of steel for theconstruction industry per year.(www.tatasteelthailand.com) 52
  53. 53. Tata Steel KZN: Proposes to set up highcarbon ferrochrome plant in South Africa.The plant is slated to be commissioned byOctober 2007 with an annual productioncapacity of 135,000 tonnes during Phase 1.Tata NYK: A joint venture with NipponYusen Kabushiki Kaisha (NYK Line) forsetting up a shipping company to cater todry bulk and break bulk cargo. Tata Steeland NYK will each hold 50% stake in thejoint venture company. National International Jharkhand Vietnam Chhattisgarh South Africa Orissa - Australia Kalinganagar Mozambique - Dhamra Port Ivory Coast (West Africa) Tamil Nadu Oman 53
  54. 54. The Company has set itself the objective of expanding its capacities and becoming globallycompetitive in its business. as a part of its growth strategy, the Company believes inadopting the ‘best practices’ that are followed in the area of Corporate Governance acrossvarious geographies. The Company emphasises the need for full transparency andaccountability in all its transactions, in order to protect the interests of its stakeholders. TheBoard considers itself as a Trustee of its Shareholders and acknowledges its responsibilitiestowards them for creation and safeguarding their wealth. 54
  55. 55. tata GroupS DiVerSiFieD area oF buSineSSInformation systems and communications: The Tata group has well-establishedenterprises in the fields of software and other information systems, telecommunications andindustrial automation.Engineering: The Tata group has a robust presence in engineering, with operations inautomobiles and auto components and a variety of other engineering products and services.Materials: The Tata group is among the global leaders in this business sector, withoperations in steel and composites.Services: The Tata group has widespread interests in the hospitality business, as also ininsurance, realty and financial and other services.Energy: The Tata group is a significant player in power generation and is also involved inthe oil and gas segment.SOME OF WHICH ARE: • Tata Tele Services • Tata Power • Tata Consultancy Services • Tata Chemicals • Tata Assets Management • Tata Motors • Tata Capital • Titan Industries • Tanishq • Taj Group of Hotels 55
  56. 56. proDuCtS oF tata Group 56
  57. 57. 57
  58. 58. TATASTEELSTANDALONE 58
  59. 59. trenD oF SaleSYEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08SALES 11920.96 15876.87 17144.22 19762.57 22191.8 59
  60. 60. proDuCt WiSe net SaleS are aSFolloWS Figures in Rs (crs) FY 2006-07 FY 2007-08STEEL 14858 16541TUBES 1099 1217FERRO ALLOYS AND MINERALS 1454 1808BEARINGS 140 127 60
  61. 61. analySiS:The increase in the net sales of Tubes division was due to the increase in both the volumeas well as prices. The Ferro Alloys and Minerals division of the company registered agrowth of 24% in terms of value though there was a decline in terms of quantity due to thecompany’s decision during the year to stop the sale of ores. There was a decline in the netsales of the Bearings division of the company mainly due to lower off -take by theautomotive sector, which is a major customer sector of the division. 61
  62. 62. trenD oF DebtorS YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08 DEBTORS 756.06 581.82 539.4 631.63 543.48analySiS:There has been decrease in the trend of debtors in last five years, from Rs.756.6crores toRs.543.48 crores. This decrease in debtors shows a more profit to the company. The increasein the debtors during 2006-07year might be due to the acquisition of CORUS. 62
  63. 63. DiViSion/proFit Centre WiSe DebtorS in tata SteelFor Fy 07-08PROFIT CENTERS For the FY 06-07 For the FY 07-08STEEL 509.09 397.84WIRE DIVISION 43.82 33.30TUBES 37.01 31.13BEARINGS 7.01 7.29F.A.M.D 70.44 107.59TOTAL DEBTORS 667.37 577.15 63
  64. 64. trenDS oF DebtorS in tata SteelDebtors Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb MarFY 06-07 614 688 756 663 658 753 680 670 731 709 774 667FY 07-08 694 687 662 683 669 767 733 636 677 691 716 577 64
  65. 65. trenD oF Current ratio YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08 CURRENT RATIO 1.03 1.1 1.1 2.18 0.9analySiS:The ratio is constant. An ideal current ratio is 1:1. In the year 2006-07 the ratio is very highwhich is not desirable since it means there was less efficient use of funds which waslowering down the profitability of the concern. In year 2007-08, the ratio has quite improvedto 0.9 from 1.03 in the year 2003-04 and is coming closer to the ideal ratio. 65
  66. 66. trenD oF DebtorS turnoVer ratio YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08 Debtors Turnover Ratio 13.38 23.81 28.73 31.9 35.66analySiS:Debtors turnover rate indicates how quickly receivables or debtors are converted into cash .The liquidity of debtors, therefore, is measured through the debtors turnover rate. A higherdebtors turnover coupled with quick average collection of debtors enables the firm totransact a larger volume of business without corresponding rise in the investment in debtors .From the above chart it is clear that the debtors turnover has been kept on increasing from2003-04, where it was 13.38times to 35.66 times in the year 2007-08. 66
  67. 67. trenD oF aVeraGe ColleCtion perioD YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08 AVERAGE COLLECTION PERIOD 27.27 15.33 12.7 11.44 10.23analySiS:The turnover rate converted into average collection period is a significant measure of thecollection activity of debtors. An average collection period is a measure of how long it takesfrom the time the sales is made to the time the cash is collected from the customers.Lesser the period better the situation for the company. In case of TATA STEEL there is acontinuous fall in average collection period from 27.7 days in 2003-04 to 10.23 days in2007-08, which is a good sign for the company. 67
  68. 68. trenD oF aVeraGe DebtorS to turnoVer ratio YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08 Debtors Turnover Ratio 13.38 23.81 28.73 31.9 35.66analySiS:The analysis of the trends in sales and trade debtors shows the effectiveness of the credit policyin activating sales. An uninterrupted upward trend in sales accompanied by downward trend indebtors indicates that the credit policy implemented by the company is very effective instimulating more sales. This can be easily seen in case of TATA STEEL where the averagedebtors to turnover has been decreased from 6.75% in 2003-04 to 2.65% in 2007-08.Further, ifthe pace of increase in sales is more than the pace of increase in debtors, it is also a symptom offairly favorable credit policy. 68
  69. 69. PROVISION OF BAD DEBTS TO NET DEBTORS IN LAST FIVEYEARSyear 03-04 04-05 05-06 06-07 07-08 Debtors 651 582 539 632 543Provision 6 3 3 3 3 for 1 9 2 6 4doubtful debt 69
  70. 70. ASSET TURNOVER RATIO IN LAST FIVE YEARS YEARS FY 2003-04 FY2004-05 FY 2005-06 FY 2006-07 FY 2007-08 ASSET TURNOVER RATIO (%) 100.78 110.41 108.76 77.02 106.25ANALYSIS:This ratio indicates the extent to which the investments in fixed assets contribute towardssales. When compared with a previous period, asset turnover ratio indicates whether theinvestment in fixed assets has been judicious or not. There has been an increase in the FixedAssets Turnover Ratio; this might be due to increase in net sales or due to the acquisition ofCORUS during the year2007. 70
  71. 71. 1.2.5 OVERVIEW OF THE FINANCE DIVISION OF TATA STEEL The whole finance and accounts department of Jamshedpur is divided in different groups and sections. These were:1.CASH OFFICE2.FINANCE AND COSTS3.PAYROLL ACCOUNTS4.PURCHASE AND CAPITAL GROUP5.SALES AND INDIRECT TAXATION This project is related to DEBTORS MANAGEMNET, which is dealt by sales and indirect taxation group. Everything related to debtors is termed as sundry debtors work. Sales and indirect taxation group is responsible for accounting for activities such as: FREIGHT- OUTWARD & INWARD (ROAD AND RAIL) INVOICE INDIRECT TAXATION MATTERS (EXCISE AND SALES) It is also related to post sales activities like debtors and town accounting. It comprises of the following sections: EXCISE SECTION FREIGHT SECTION TOWN DEBTOR’S SECTION 71
  72. 72.  OUTWARD INVOICE SECTION SUNDRY DEBTORS SECTION 72
  73. 73. SUNDRY DEBTORS SECTIONAs the name suggests, this section is responsible for the consolidated reporting of all thedebts due to the company and related information to the management. The section plays amajor role in monitoring the movements of debts & advising recoveries from the bills ofthose vendors who are also the defaulting customer of the company. Notes are often put upto the concerned profit centres to highlight probable cases of default.ACTIVITIES OF SUNDRY DEBTORS SECTION: 73
  74. 74.  Inter office collection (on behalf of other divisions/ profit centres /sales offices). Updating of debtors ledger and preparation of reviews for reconciliation of debtors ledger balances with the corresponding balances as per financial accounts Updating of advance ledger maintained for tender sales and for preparation of reviews of advance ledger Updating of auction ledger and preparation of monthly review foe auction ledger Maintenance of security deposit ledger for the purpose of refund of security deposits and for payments of interest on security deposits. Preparation of reports: • Board note on debtors (Tata steel debtors) • Associated company’s outstanding debtor’s report. • VP (F) Report (Gives the detailed outstanding of all major parties). • Preparation of the outstanding report for secondary products, Rings, Agrico & town. • Annual Business Plan Report The Memorandum of understanding of sundry debtors section and continuous monitoring of the performance against targets set. OTHER ACTIVITIES: Inputs for the credit control meeting Preparation of the minutes of the CCCM. Updating the status of the minutes of the CCCM 74
  75. 75. RESEARCH METHODOLOGY2.1 TYPE OF RESEARCH The study is descriptive in nature in the sense that it focuses basically on analyzing the debtors management at TATA STEEL.2.2 OBJECTIVE OF THE STUDY The process of debtors management in TATA STEEL how the outstanding debtors are accounted & what steps and actions are taken and should be taken to recover these dues on time. Comparison of Tata Steel with other key players with respect to the debtors. Position of debtors in different industries. 2.3 SCOPE OF THE STUDY The scope of this study is limited to the study of Debtors Management at TATA STEEL. The scope encompassed with the debtors section of the company which is a part of finance and accounting department. 75
  76. 76. 2.4 SOURCES OF DATA COLLECTION • Primary data are collected by interviewing customers and employees of TATA STEEL. • Secondary data are collected by using internet, magazines and text books.2.5 SAMPLINGThe study was done by using the age wise analysis of debtors. CREDIT DECISION PROCEDURE OF CREDIT DECISION 76
  77. 77. WHAT IS CREDIT POLICY?The credit policy provides the yardstick for measurement of credit level of receivables and isthe indentified and compared monthly, as per the requirements. The policy is influenced by the 77
  78. 78. nature of market and strength of the competition. The policy clearly defines the standard fortarget debtor level, which in turn is a significant influence both ion payment terms and on thewhole of the credit control operation, since it determines how much tolerance, if any, is to beshown to slow paying customer.CREDIT POLICY OF TATA STEELTATA STEEL has a body known as credit control committee, which formulates and gives thefinal approval for many credit policy matters. The credit guidelines as they have emergedtoday are combined efforts of finance and marketing department.The credit control committee is headed by Sr.V.P & E.D (F&A) and consists of all productand sales manager from various divisions along with G.M (F&A) and other concernedexecutives as its members. The committee meets at least in two months. The annual limit of credit sale is provided by Sr.V.P (F&A) in consultation with othermanagement officials. The committee then discusses in detail about the breakup of the abovelump into the credit limits for different sales offices and also for various customers i.e. bothregional and party wise credit limit is set by the body.Hence the basic purpose this committee is to set the standard and also have the overall controlof the credit situation, thereby keeping the financing of the working capital cost effective andpreventing any liquidity problems from arising.As a general rule, credit is allowed to customer who takes large and repeated orders. One timecustomers are not entertained for credit.CREDIT TERMSCredit terms refer to the terms and conditions on which the trade credit will be madeavailable. Thus the stipulations under which the goods are sold on credit are referred to ascredit terms.These relate to the repayment of the amount under the credit sale. These terms can befinalalized after the scrutiny of number of factors. The various factors which must be takeninto account are: The seller company’s place in the market and the credit terms on which it is buying from its own suppliers. 78
  79. 79.  The availability of the capital it needs to finance its own credit sales and whether this is to be borrowed and if so at what cost; also the availability of capital to finance the payment of other overheads.  The existence of buyer and seller’s market  The volume of sales planned and how these will be spread over the range of customers.  The profit margin to be obtained.  The competitive factors.  The character of the market A. The period the buyer will have the goods i.e. the buying company’s inventory turnover and average collection period will ultimately decide the selling company’s credit terms. B. The condition of the customer finances and the degree of the credit risk, which the credit sale will involve. CREDIT TERMS HAS THREE COMPONENTS i. Credit period ii. Credit limitiii. Cash discount CREDIT PERIOD: is the duration of time for which trade credit is extended. During this period the customers must pay the overdue amount. CREDIT LIMIT: is decided by the top management and varies according to the market condition. This total amount is broken up into regional limits, which is further segregated into monthly limits within which the different parties have to accommodate. This function is performed by the credit control committee as discussed above. CASH DISCOUNT: is offered to induce the customers to make prompt payments. The customers can take advantage of discount if they pay the amount within the stipulated time. 79
  80. 80. These credit terms usually written in abbreviation for e.g. 2/10net 30 where:• 2 signifies the rate of cash discounts (2%)• 10 represent the time duration (10days)within which a customer must pay to be entitled to the discount• 30 represent the credit period. CREDIT TERMS OF TATA STEELThe credit terms, i.e. the credit period and cash discount, followed by TATA STEEL are asfollows:• CREDIT PERIOD: the credit period is decided on the basis of the type of theproduct and is generally of fixed nature. However, special customer may be allowed avariance in the set credit period depending upon the volume of sales and customerrelationships.• INTEREST CHARGED: interest free credit is allowed for 30 days in most cases. Aevery 30 days extension there is a 1% rise in interest rate for secured credits. The rate ofinterest for unsecured credit is1% more than the corresponding rate under secured credit .there is a penal interest of 3% over the applicable rate of interest. Time period Secured credit Unsecured credit After 30 days 18.5% 19.5% After 60 days 19.5% 20.5% After 90 days 20.5% 21.5% CASH DISCOUNT: 80
  81. 81. Cash discount of 2% has also been allowed for certain products in different division. Thediscounts had a positive response from certain customers who had working capital problemsi.e. whose inventory turnover have also ignored the discounts and debtor’s turnover is low orwhose operating cycle is longCOLLECTION EFFORT:A constant touch with the customers is the best way of reminding him about his paymentschedule in a polite but firm manner. A daily, weekly and monthly report regarding the totalsale is done to keep a track on debtors and cash position. Tata steel ‘s collection efforts werenot up to the mark that is the reason why outstanding of greater than six months wereincreasing continuously which has now improved to a great extent. 4.1TATA STEEL’S CREDIT MONITORING AND CONTROLAs the most of the credit is unsecured, keeping a timely vigilance on the debtors is importantfrom the safety and the liquidity position of the firm. This primarily requires an efficientcollection process because slackness in the collection efforts lengthens the average collectionperiod, and increase the % of bad debt, for monitoring the debtors TATA STEEL is usingsome steps. These steps are:• Preparation of a ageing schedule• Calculation of days sales o/s• Calculation of ACPWith the help of these, monthly reports are generated and are sent for review to creditcontrol committee chaired by V.P (F&A).In case of secured credit where Tata Steel is also a debtor of its customers, it uses itsaccounts payable as tool to realize its accounts receivables. In cases, which have thesymptoms of becoming the bad, a reconciliation statement is prepared and the mutualagreement arrived at. However in the worst case legal action is pursued and bad debts are notwritten off before five year. 81
  82. 82. FOLLOW UPProper follow up is done for the timely collection of debts. A daily, weekly, monthly reportregarding the sales is done to keep track on debtors and the cash position. Efficient andcapable Customer’s Accounts Managers are appointed for this purpose. Customer’s AccountsManagers is responsible for the collection of debts and follow up of the customers. NowTATA STEEL has adopted many ways to follow-ups: • Phone • Fax • E-mail • Letters • Personal visit TATA STEEL PROVISION POLICYDEBTORS STATUS AS ON ……………… SUMMARY AS ON…………………DEBTORS PROVISIONGUIDELINE %Age Amount of Provision Provisions outstanding required required1) BIFR CASES a) Above three years 100% I. Recoverable 100% II. Non Recoverable Total b) Below three years 100% I. Recoverable II. Non Recoverable 100% Total 82
  83. 83. TOTAL2) LEGAL CASE c) Above three years 100% I. Recoverable 100% II. Non Recoverable Total d) Below three years I. Recoverable II. Non Recoverable 100% Total 100%TOTAL3) GOVT./TOWN DUES 0% e) 6 month-1 year I. Recoverable 100% II. Non Recoverable 50% Total f) 1-2 Years 100% I. Recoverable II. Non Recoverable 100% Total g) Above 2 years 100% I. Recoverable II. Non Recoverable TotalTOTAL4)SUBSIDUARY COMPANIES h) 6 months-2 years 0% I. Recoverable II. Non Recoverable 100% Total i) Above 2 years I. Recoverable 100% II. Non Recoverable Total 100% 83
  84. 84. TOTAL5)OTHERS j) 6 months-three years 0% I. Recoverable II. Non Recoverable 100% Total 100% k) 3 years-5 years I. Recoverable 100% II. Non Recoverable Total 100% l) Above 5 years 100% I. Recoverable II. Non Recoverable TotalTOTALGRAND TOTAL4.3 OPERATIONAL WORKING AT TATA STEEL FOR MANAGING DEBTORSOVERVIEWManaging the debtors for Tata steel is an important and chief function of the sales accountsdivision of finance and accounts. All the transactions of commercial nature are dealt with bythis department in a detailed outline frame of working. The debtors arise each month out ofthe sales made on credit and suitable feeding of the required figures has to be made once in amonth. This function is very much a difficult task owing to the various subsidiaries andassociate companies being controlled by TISCO itself. 84
  85. 85. The activities of each of the companies are diverse in operations and require different policyformulations and strategies for complying with the existing market requirements. But theyare controlled in a centralized manner so that they give an actual overview of the standing ofthe company. The profitability of each of the above is equally important to arrive at aconsensus for finding out the actual earnings and future prospects. As such each of thecompany under subsidiary and associate is incorporated under distinct centres as ProfitCentre.To flatten the organizational structure and developed authority and responsibility for thequicker responsiveness to changing market conditions and greater initiative in dealing withdifferent target markets, Tata steel has brought in the concept of profit centre. For allpractical purpose, each profit centre functions as a separate company within the hold of Tatasteel. From the debtors management point of view also each profit centre has theresponsibility of appraising and dealing with its customers. However the overall control iscentralized and is in the hands of the finance department. The main function which lies at thehands of Tata steel, Jamshedpur is to report such standings of the actual debtors as on aparticular date to the MD in the form of a monthly report. The figures thus arrived at give anoverview of which profit centres contribute the most to the debtor’s standing and the specificreasons for the same.Being a steel manufacturing concern, Tata steel is mainly concerned with the actual debtorsarising for the following profit centres: STEEL WIRE DIVISIONS FERRO ALLOYS AND MINERALS DIVISION TUBES DIVISION BEARINGSEach of the above profit centers have debtors of their own which are handled and managedin a centralized manner. For an example, tubes division is one of the most important divisionwhich has the maximum contribution to the total sales taking together all the profit centers at 85
  86. 86. a point of time. It has various parties of its own as debtors such as ESSAR STEELLIMITED, BLUE STAR LIMITED, TATA CHEMICALS LIMITED,MECHATRONICS and many debtors. A database relating to the different parties ismaintained in a pre specified format which helps in understanding the actual standing of thedebtor from the point of view of the actual sale being made to the party on credit till date.This format helps in maintaining the records in a form which helps in judging the actualageing of the debtors and the amount being recovered from the total debt. By ageing wemean to give an actual definition to the debtors in terms of how old has the debt been to himand thereby categorizing him for the purpose. A same prescribed format is used by all theprofit centers for managing their respective debtors.EXPLANATIONThrough this preparation we get to know the actual total debtors figures and the majorparties that have contributed to the increase and decrease in the debtors as when comparedwith the previous financial period. It mainly emphasizes upon the total debtors figures andthe overdue debtors and their major contributors in the form of party names and figures. Italso gives all list of indications for the debtors whose standing are for periods beyond sixmonths. This reporting is crucial for the reason that it gives the management the indicativeareas for focus, the reasons for a rise in debtors and suitable control for future standingwhich is profitable to the company as a whole.4.3 CHANNEL FINANCINGThe core objective of channel financing is to provide integrated commercial and financialsolutions to the supply and distribution channels of a given industry. Channel finance givessupport to the commercial relationship between our clients and their suppliers andcustomers.The commercial aim of the channel finance is to add value supply and distribution channelsby providing unique solutions that meet our customer’s demand. 86
  87. 87. By providing short term lending to clients utilizing qualified receivables as collateral, valueis added to the client by way of working capital support, reduced account receivables andimproved control of the sales/ distribution channels. In addition, payables discounting servesto add value by improving supplier relationships and enhancing cash flow management.Forward and backward linkages in a business organisation play a significant role in thesuccess or failure of the business entity. For,(say) a manufacturing or trading firm, while thesuppliers of the raw material are important as they provide input for production, equallyimportant is the role of its distributors which sell products manufactured by the firm throughretailers to the ultimate consumers. Channel financing relates to ensuring that integratedfinancial and commercial solutions are available to the entire chain of supply anddistribution that could ensure health of the firm, financed by the bank.How channel financing is different from conventional lending?Channel financing is different from the conventional lending since in conventional lendingthe financing banks are generally not concerned as how the suppliers of the firm and dealersof teh product of the firm are financing their activity. The weak financials of thesupplier(leading to delay in supply and non availability of market credit)or the dealers of theproduct (delay in receipt of payments leading to higher book debts) could adversely impactthe top line sales and bottom line profits of the financed firms. In the channel financing, thefinancing bank may have to find the ways and means as to how the suppliers and thebuyers(dealers of the product) can be financed through various instruments/facilities. Hence,the channel financing adds value to the transaction for all the parties concerned, be it themanufacturer/trader , the supplier of the inputs or the dealer/ buyer or the financing bank.METHODOLOGYThrough channel financing the business firms can outsource a major part of their workingcapital needs thereby reducing their dependence on bank finance. For instance, it need notavail of credit from the bank to pay off the supplier, if the supplier gets the finance in hisown name from the bank for raw materials supplied on credit in the form of say, drawee bills 87
  88. 88. financing. The bank can also allow loan to the dealer for credit term that has been fixedbetween the firm and the dealer in the form of receivable finance or finance against bookdebts or factoring of receivables. This enables the manufacturing firm to get the cashimmediately for the finished goods supplied. This firm functions as the principal customerwhich suggests the names of its suppliers and dealers to the bank. Thereafter the bank makesthe a due diligence assessment of the suppliers/dealers standing credit worthiness anddecides to provide finance on merit.BENEFITS TO THE FINANCED CONCERN, THE SUPPLIERAND THE DEALERS/BUYERSThe pre and post sale of working capital requirement of the manufacturing concern would bescaled down. Such firms can concentrate more on their core competence area of productionand marketing their products besides saving time and costs involved in arranging creditorsand monitoring recovery. As regards the suppliers and the dealers, the major benefit is thatthey get payments promptly, which improve their liquidity position and cost. This also helpsthem as well as bank to cut level of counter party risks.GAINS TO BANKSThe bank also gain substantially from the process of channel financing which includeincreased customer base, effective due diligence and smoothness of lending activity and loanorigination process. Besides, the banks will be able to ensure better credit discipline. Sincethe risk is diversified through finance to supplier, manufacturer and the dealers, the creditexposure norms are better observed. Hence the channel financing is a very convenient tool inmanaging their assets portfolio. 88
  89. 89. CREDIT ASSESSMENT MODULESCAM-1(SOLVENCY)CAM-2(FINANCIALS)CAM-3(TECHNOLOGYAND COMMERCIAL) CAM-4(qUALITYAND CREDIBILITY) 89
  90. 90. 4.4 CREDIT ASSESSMENT POLICYCredit management module (based on lotus notes)Behind every credit decision there is an inherent potential for loss informed credit decisionwill minimize the risk, enhance the profitability and lead to better structuring of credit. Forcredit appraisal and risk assessment customers are broadly classified into three groupsnamely ORGANISED SECTOR (public and private ltd, companies including govt. undertakings) UNORGANISED SECTOR (traders, partnership firms, SIS units etc) GOVERNMENT DEPARTMENT (defence , irrigation, power , railways, PWD, CPWD)CREDIT RISK ASSESSMENT OF THE CUSTOMER IS ASSESSEDBASED ON THE FOLLOWING PARAMETERS: ABILITY TO PAY- It is easy to assess the ability of the customer to pay and is applicable to the organized sector• Solvency• Financial viability Technological soundness• Commercial feasibility WILLINGNESS TO PAY- it is based on the judgement and is applicable to both organised and unorganised sectors. This is the only criterion adopted for assessing the customers in the unorganised sectors.The assessment criteria are: Quality of management Credibility 90
  91. 91.  Past performance  Health of group companies  CREDIT DECISION: • Risk classification of the entry i.e. low/medium/ high • Should we extend credit to this entity? • If yes, the recommended credit limit • The structure of the credit i.e. Secured (%) Unsecured (%) • Recommend credit as per % of the net worth • Sanctioned credit limit(specify the structure and the amount)• Individual firm / company wise credit limits(in case the entity has different firms or companies)• Sales centre wise allocation of the sub limitsThe assessment criteria are:1. SOLVENCY2. FINANCIAL VIABILITY3. TECHNOLOGICAL SOUDNESS4. COMMERCIAL FEASIBILITYDepending upon the above basis Tata steel have developed a module for assessing the riskassociated with each and every accounts and to judiciously take a decision based on theinformation availableThis system is based on the lotus notes applications, which have been described as below: 91
  92. 92. CREDIT ASSESSMENT MODULE-1SolvencyCorporate bankruptcy prediction (“Z”)ratios description result Coefficient “ Z ”X1 Working A1 - capital/ total Z assets 1X2 Retained A2 - Z earnings/ 2 total assetsX3 EBIT/ total A3 - Z assets 3X4 Net worth/ A4 - Z total 4 liabilities 92
  93. 93. TOTAL (Z1+Z2+Z3+Z4)CREDIT DECISION (tick the appropriate column)LOW RISK MEDIUM RISK HIGHRISK NOTE:“Z” SCORE ABOVE4.00 TO BE CONSIDERED AS LOW RISK“Z” SCORE BETWEEN 4.00 & 2.60 TO BE CONSIDERED AS MEDIUM RISK“Z” SCORES LESS THAN 2.60 TO BE CONSIDERED AS HIGH RISK“Z” SCORE LESS THAN 1.60 IS A SIGN OF BANKRUPTCYCREDIT ASSESMENT MODULE -2 RATIOS DESCRIPTIONSTRUCTURAL RATIODebt equity ratio Debt/ equityinterest coverage ratio PBIT/interest on debtLIqUIDITY RATIOCurrent ratio Current asset/ current liabilitiesAcid test ratio Quick asset/ current liabilitiesTURNOVER RATIOAssets turnover ratio Sales/ total assetsInventory turnover ratio Sales/ inventory 93
  94. 94. Receivables turnover ratio Sales /receivablesPROFITABILITYRATIOGross profit ratio PBIT/salesNet profit ratio PAT /salesCredit decision (tick the appropriate column)LOW RISK MEDIUM RISK HIGH RISKNote: 1& 2 year are immediately preceding financial years • A high debt equity ratio and increasing trend of this ratio is a common trait among the failing companies. • No ratio should be interpreted in isolation and the credit decision should be taken after reviewing the ratios in totality. FINANCIAL VIABILITY: UNDERSTANDING THE RATIO 94

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