Final Project Report

Summer Internship Project Report
on
A STUDY OF RECEIVABLE MANAGEMENT AND ROLE OF
e-PAYMENT IN INDIAN OIL CORPORATION LTD.
Submitted towards the Partial Fulfillment
of
MASTER OF BUSINESS ADMINISTRATION
ACADEMIC SESSION
2011-2013
Under the kind guidance of

College Guide
Industry Guide
Submitted by
PAWAN KUMAR MEENA
1
Student Declaration
I, Pawan kumar meena to the best of my knowledge & belief, hereby declare that the project report
entitled :
A Study of Receivable Management and Role of e-Payment in Indian Oil Corporation
Ltd.
is the result of my own work in the fulfillment of academic requirement. The training is done in
Indian Oil Corporation Limited (IOCL) [Eastern Region,Marketing Division, West Bengal State
Office] for a period of two months commencing from 06.05.2010 to 06.07.2010. This project
work is submitted to R.A.Podar Institute of Management , Jaipur. As well as in Indian Oil
Corporation Limited[ Marketing Division, Rajasthan State Office]. It is
not to be used copied or edited by any person. Written order has to be taken from appropriate
authority for that.
Pawan kumar meena

MBA (Finance)
CERTIFICATE
Hereby it is certified that the project work entitled A Study of Receivable Management and
Role of e-Payment in Indian Oil Corporation Ltd is a work carried out by
Pawan kumar meena

Management Trainee
R.A.Podar Institute of Management ,
Jaipur.
It is certified that all the subjective matter carry out by him is verified. The project report has
been approved as it satisfies the academic requirements in respect of Project Work.
ABSTRACT
Indian Oil Corporation Limited, with an yearly turnover of about 2 Lac Crores is the biggest
Company in India in terms of sales. It has once again topped the Indian Companies in the
Fortune 500 list of Companies with a rank of 125. In such a large sized corporation the common
problem is the Receivable Management and formulating a sound Credit Policy and Collection
Procedure. In this fluctuating Oil Market it is very difficult to maintain the level of the Sundry
Debtors and hence the Profitability. Moreover the Private Companies are entering the Oil
Industry which has provided a tough competition for IOCL. In this study the Ratios are analyzed
to interpret the Financial Status of the Corporation and then it is compared with the market
Competitors. The Debtors of the Eastern Region has been analysed in details and a few probable
solutions to the existing problems has been formulated.
Acknowledgement
Its a privilege to be associated with Indian Oil Corporation Limited, a fortune Global 500
Company, Indias 2nd most top brand also worlds 18th best largest company.
This acknowledgement is not only the means of formality, but to me, it is a way by which I am
Getting the opportunity to show the deep sense of gratitude and obligation to all the people who
Have provided me with inspiration, guidance and help during the preparation of the project.
At the very outset, I would like to express my gratitude from bottom of my heart to Mr. Sharad Rakesh
[ Manager-Finance ] for giving me the opportunity to do my Summer
Internship Project in this esteemed organization.

I articulate my sincere gratitude to my project guide Mr. Kamal Thakur,
RSO Indian Oil Corporation Ltd. who has spent his valuable time and guided me
Throughout the training process in spite his busy schedule and provide, information about Indian Oil.
I have seen the area of Finance activities like: E-payments, Service tax,Sales tax, Capital assets etc.
I also like to thank Sharad Rakesh, Manager-Finance, who helped to
Provide me the opportunity to undergo my summer Internship Project in Indian Oil.
But last not the least I am thankful to my parents, friends and all well wishers for blessing me for
my success.
Pawan kumar meena
MBA(Finance)
,
TABLE OF CONTENTS
Particulars
Sl. No. Introduction to Oil Industry in India
Company Profile of IOCL
1.
Introduction
Location, Salient Features
2.
Vision, Mission and Values
2.1
2.2
Objectives and Obligations
2.3
Product Profile, Markets, Organizational Structure of IOCL
2.4
Business of IOCL
Literature Review
2.5
Objectives
2.6
3.
Methodology
4.
Receivable Management
Introduction
5.
Ways to Manage Debtors
6
6.1
Reasons for Incurring Debts
6.2
Confirmation of the Debts
6.3
Non Recovery of the debts
Various modes of Debt Collection with special emphasis on e-Collection
6.4
Role of SAP in Receivable Management
6.5
6.6
Impact of debtors in the Working Capital Management of the Company
6.7
Different Ratios related to Debtor Management and Profitability
6.8
6.9
6.10
6.11
7
7.1
7.2
7.3
7.4
7.5
7.6
7.7
8.
9.
10.
11.
Cash Conversion Cycle

Credit Policies of IOCL and RTGS mode of Payment
Analysis
Turnover Ratio
Liquidity Ratio
Working Capital Analysis
Analysis of Debtors in Eastern Region (DGS&D and Non DGS&D)
Comparative analysis of IOCL with BPCL and HPCL
Analysis of Debtors under RSO
Case Study
Conclusion and Recomendations
Limitations
Bibliography
and Reference
OIL INDUSTRY OVERVIEW

Background
After the Indian Independence, the Oil Industry in India was a very small one in size and Oil was
produced mainly from Assam and the total amount of Oil production was not more than 250,000
tones per year.

This small amount of production made the oil experts from different countries predict the future
of the oil industry as a dull one and also doubted India's ability to search for new oil reserves.
But the Government of India declared the Oil industry in India as the core sector industry under
the Industrial Policy Resolution bill in the year 1954, which helped the Oil Industry in India
vastly.
Oil exploration and production in India is done by companies like NOC or National Oil
Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil
companies in India that are owned by the government under the Industrial Policy Rule. The
National Oil Corporation during the 1970s used to produce and supply more than 70 percent of
the domestic need for the petroleum but by the end of this amount dropped to near
about
35
percent.
This
was
because
the
demand
on
the
one
hand
increasing at a good rate and the production was declining in a steady rate.
Oil Industry in India during the year 2004-2005 fulfilled most of demand through importing oil
from multiple oil producing countries. The Oil Industry in India itself produced nearly 35 million
metric tons of Oil from the year 2001 to 2005. The Import that is done by the Oil Industry in
India comes mostly from the Middle East Asia.
The Oil that is produced by the Oil Industry in India provides more than 35 percent of the energy
that is primarily consumed by the people of India. This amount is expected to grow further with
both economic and overall growth in terms of production as well as percentage. The demand for
oil is predicted to go higher and higher with every passing decade and is expected to reach an
amount of nearly 250 million metric ton by the year 2024.
OIL INDUSTRY STRUCTURE
UPSTREAM
Exploration&
Production
DOWNSTREAM
Refining&
Marketing
IOCL
ONGC
INDUSTRY
BODIES/
OTHERS
Petroleum
Planning&
(Refining&
Marketing)
AnalysisCell
PetroleumIndia
International
HPCL
(Refining&
OilIndia
Marketing)
CentreforHigh
Technology
Limited
BPCL
(Refining&
Marketing)
PrivateE&P
GAIL
Companies
(GasTransport&
Cairo,RIL,NIKO
Petrochemicals)
Petroleum
Conversation
ResearchAssociation
PetroFed
OilIndustry
RIL
Safety
Directoriate
(Refining&
Marketing)
EngineersIndia
Ltd.(Project
Consultant)
Fig.1: Structure of Oil Industry in India
Oil Industry Dynamics in India

At present, there are four PSUs namely, IOC, HPC, BPC and IBP (subsidiary of IOC) marketing
oil products in the country. In addition, certain private players like Reliance, Essar and Shell
have also in marketing rights for transportation fuels. Their marketing presence today, however,
is not significant and is limited to about 1370 outlets out of total retail outlet strength of about
29,380 . Some additional players like ONGC, who have also been granted marketing rights for
transportation fuels, are in the process of setting up retail outlets to integrate across the entire
hydrocarbon value chain. The company wise market share in sales is tabled below:
It is evident that the share of the private sector in meeting total consumption of refined petroleum
products presently stands at around 15%. This proportion is however, expected to grow
significantly in the coming years
IOC Group
BPCL
HPCL
Other PSUs
Total PSUs
Private
Company Market Share (%)

46.2
18.6
16.5
2.2
83.5
16.5
Total
Table 1: Retail Market Share (as on Nov-2011)
Fig. 2: Market Share of Different Companies in India

9
100
COMPANY PROFILE
INTRODUCTION
In order to ensure greater efficiency and smoothe working in the petroleum sector , Government
of India decided to merge the refineneries and the distribution activities.
The Indian Refineries and Indian Oil Company were combined to form the giant Indian Oil
Corporation (IOCL) on 1st September 1964, with its registered office at Bombay. In 1967, the
pipeline division of the corporation was merged with the refineries division. Research &
Development of Indian Oil Came into Existence in 1972. In October 1981 Assam Oil Company
was nationalized and has been amalgamated with IOCL as Assam Oil Division(AOD).
10
Fig.3: Formation of Indian Oil Corporation Ltd.
Beginning in 1959 as Indian Oil

Company Ltd., Indian Oil Corporation
Ltd. was formed in 1964 with the
merger of Indian Refineries Ltd.
(established 1958). Indian Oil and its
subsidiaries account for 49% petroleum
products market share, 40.4% refining
capacity and 69% downstream sector
pipelines capacity in India
11
As the flagship national oil company in
downstream
ious petroleum
sector,
products to
Indian Oil
millions of
reaches
people
everyday through a
countrywide network of about 34,000
sales points. They are backed for
supplies by 166 bulk storage terminals
and depots, 101 aviation fuel stations
and 89 Indane (LPGas) bottling plants.
About 7,100 bulk consumer pumps are
also in operation for the convenience of
large
consumers,
ensuring
products
and
inventory
at
their
doorstep.
Indian Oil operates the largest and the widest network of petrol & diesel stations in the country,
numbering over 17,600. It reaches
Indane cooking gas to the doorsteps of over 50 million
households in nearly 2,700 markets through a network of about 5,000
Indane distributors.
Indian Oils ISO-9002 certified Aviation Service commands over 62% market share in aviation
fuel business, meeting the fuel needs of domestic and international flag carriers, private airlines
and the Indian Defense Services. The Corporation also enjoys a do4
minant share of the bulk consumer business, including that of railways, state transport
undertakings, and industrial, agricultural and marine sectors.
12
18
PRODUCTS PROFILE (IOCL)
The Products produced by IOCL are broadly classified into the following cases:
Class A:
1. Liquid Petroleum Gas (L.P.G)
Class B:
2. Motor Spirit (M.S.)/Gasoline
3. Super Kerosene Oil (S.K.O)
4. High Speed Diesel Oil (H.S.D)
Class C :
5. High Speed Diesel Oil (H.S.D)
6.
7.
8.
9.
Class D :
Furnace Oil (F.O.)

Bitumen
Naphtha
Aviation Turbine Fuel (A.T.F)
10. Mineral Turpentine Oil (M.T.O)

11. Jute Batching Oil (J.B.O)
12. Light Diesel Oil (L.D.O)
13. Unleaded petroleum
14. Lubes & Greases
15. Fuel & Feedstock
16. Super Kerosene Oil
13
MARKETS
IndianOil has one of the largest petroleum marketing and distribution networks in Asia, with
over 34,000 marketing touch points. Its ubiquitous petrol/diesel stations are located across
different terrains and regions of the Indian subcontinent.

From the icy heights of the Himalayas to the sun-soaked shores of Kerala, from Kutch on India's
western tip to Kohima in the verdant North East, IndianOil is truly 'in every heart, in every part'.
IndianOil's vast marketing infrastructure of petrol/diesel stations, Indane (LPG) distributorships,
SERVO lubricants & greases outlets and large volume consumer pumps are backed by bulk
storage terminals and installations, inland depots, aviation fuel stations, LPG bottling plants and
lube blending plants amongst others. The countrywide marketing operations are coordinated by
16 State Offices and over 100 decentralised administrative offices.

Several landmark surveys continue to rate IndianOil as the dominant energy brand in the country
and an enduring symbol for high quality petroleum products and services. The heritage and
iconic association that the brand invokes has been built over four decades of commitment to
uninterrupted supply line of petroleum products to every part of the country, and unique products
that cater not only to the functional requirements but also the aspirationalneeds of millions of
customers.
IndianOil has been adjudged India's No. 1 brand by UK-based Brand Finance, an independent
consultancy that deals with valuation of brands. It was also listed as India's 'Most Trusted Brand'
in the 'Gasoline' category in a Readers' Digest - AC Nielsen survey. In addition, IndianOil topped
The Hindu Businessline's "India's Most Valuable Brands" list. However, the value of the
IndianOil brand is not just limited to its commercial role as an energy provider but straddles the
entire value chain of gamut of exploration & production, refining, transportation & marketing,
petrochemicals & natural gas and downstream marketing operations abroad. IndianOil is a
national brand owned by over a billion Indians and that is a priceless value.
14 INDIANOILCORPORATIONLIMITED(IOCL)
BUSINESS OF IOCL
REFINING:
Born from the vision of achieving self-reliance in oil refining and marketing for the nation,
IndianOil has gathered a luminous legacy of more than 100 years of accumulated experiences in
all areas of petroleum refining by taking into its fold, the Digboi Refinery commissioned in
1901.
IndianOil controls 10 of Indias 20 refineries. The group refining capacity is 60.2 million metric
tonnes per annum (MMTPA) or 1.2 million barrels per day -the largest share among refining
companies in India. It accounts for 33.8% share of national refining capacity.

The strength of IndianOil springs from its experience of operating the largest number of
refineries in India and adapting to a variety of refining processes along the way. The basket of
technologies, which are in operation in IndianOil refineries include: Atmospheric/Vacuum
Distillation; Distillate FCC/Resid FCC; Hydrocracking; Catalytic Reforming, Hydrogen
Generation; Delayed Coking; Lube Processing Units; Visbreaking; Merox Treatment; HydroDesulphirisation of Kerosene&Gasoil streams; Sulphur recovery; Dewaxing, Wax Hydro
finishing; Coke Calcining, etc.

The Corporation has commissioned several grassroot refineries and modern process units.
Procedures for commissioning and start-up of individual units and the refinery have been well
laid out and enshrined in various customized operating manuals, which are continually updated.
IndianOil refineries have an ambitious growth plan with an outlay of about Rs. 55,000 crore for
capacity augmentation, de-bottlenecking, bottom upgradation and quality upgradation. Major
projects under implementation include a 15 MMTPA grassroots refinery at Paradip, Orissa,
Naphtha Cracker and Polymer Complex at Panipat, Panipat Refinery expansion from 12
MMTPA to 15 MMTPA, among others.

In addition, petrol quality upgradation projects are under implementation at Panipat, Mathura,
Barauni, Guwahati and Digboi refineries proposed to be completed by the end of 2011.
On the environment front, all IndianOil refineries fully comply with the statutory requirements.
Several Clean Development Mechanism projects have also been initiated. To address concerns
on safety at the work place, a number of steps were taken during the year, resulting in reduction
of the frequency of accidents.
15
Innovative strategies and knowledge-sharing are the tools available for converting challenges
into opportunities for sustained organisational growth. With strategies and plans for several
value-added projects in place, IndianOil refineries will continue to play a leading role in the
downstream hydrocarbon sector for meeting the rising energy needs of our country.
PIPELINES:
Fig. 5: Pipeline Network of IOCL in India

Indian Oil Corporation Ltd. operates a network of 10329 km long crude oil and petroleum
product pipelines with a capacity of 71.60 million metric tonnes per annum. Cross-country
pipelines are globally recognised as the safest, cost-effective, energy-efficient and environment-
friendly mode for transportation of crude oil and petroleum products.
During the year 2010-11 IndianOils crude oil pipelines registered the throughput
of 38.46 million metric tonnes. Corporations largest crude oil handling facility at Vadinar
marked the berthing of 4000th tanker since inception. The terminal operates two offshore Single
Point Mooring (SPM) systems, to feed Koyali, Mathura and Panipat refineries.
Raising efficiency and emerging as the least-cost supplier, IndianOil has added the 330-km
Paradip-Haldia crude oil pipeline (PHCPL) to its bustling pipeline network during the year. The
PHCPL system has a Single Point Mooring installed 20-km off the Paradip coast. With this, it is
now able to pump crude oil from Very Large Crude Carriers to the tank-farm set up onshore and
onward to Haldia through the pipeline. The Pipeline has replaced the earlier system of receipt of
crude oil at Haldia port through smaller tankers.

On the west coast, the Mundra-Panipat pipeline is being further augmented to transport an
additional 3 Million Metric Tonne Per Annum (MMTPA) of crude oil to Panipat Refinery, under
expansion from 12 to 15 MMTPA. Additional requirement of crude oil for Koyali, Mathura and
Panipat refineries is planned to be met by de-bottlenecking and augmenting Salaya-Mathura
Pipeline system.
IndianOils product pipelines, connecting its refineries directly to high-consumption centres,
achieved a throughput of 20.92 million tonnes during 2010-11. IndianOil has now joined the
select group of companies in India which owns and operates LPG pipelines by building its first
such cross-country facility linking Panipat with Jalandhar. Apart from providing better logistics,
this pipeline can transport 700,000 tonnes of LPG from Kohand near Panipat refinery to
IndianOils bottling plants at Jalandhar and Nabha in Punjab. The pipeline will also
simultaneously to meet the requirement of LPG at Una and Baddi in Himachal Pradesh and at
Jammu and Leh in J&K.

Two pipelines linking the major airports of India have been commissioned during the year to
transport Aviation Turbine Fuel to these airports. The 36 km long pipeline from existing
Devangonthi terminal to New Bengaluru International Airport, Devanhalli, Bengaluru was
commissioned in October 2008. The 95 km long ATF pipeline from CPCL to Chennai AFS was
commissioned in December 2008.

In its continuous efforts of expanding the network IndianOil is implementing 290 km long
product pipeline from Chennai to Bengaluru to facilitate cost effective positioning of products at
consumption centre located in and around Bengaluru and to strengthen product positioning
17
capabilities of CPCL Refinery. IndianOil is also implementing a 217 km long branch pipeline
from Koyali-Sanganer Pipeline at Viramgam to existing scrapper station at Churwa along with
use of a 14 km long existing pipeline from Churwa to Kandla.

One of the major product pipelines currently under execution is 290 km long Chennai-Bengaluru
Pipeline. A 21-km spur line from Mathura to Bharatpur and a 94-km branch line to Hazira on the
Koyali-Dahej pipeline are also under implementation. A grassroots terminal facility is being set
up at Ratlam to feed the local markets. A 118-km pipeline is being laid from Bijwasan to Panipat
for transporting Naphtha from Mathura Refinery to the upcoming Naphtha Cracker unit at
Panipat.
IndianOil sees gas pipelines as a major growth area in the future. The gas market in India is
expanding fast, thanks to enhanced availability of the product from indigenous sources and
through imports. The Corporation will commission its first regassified LNG pipeline from Dadri
to Panipat (132 km) to synchronise with the completion of the first phase of the power plant
coming up under the Naphtha Cracker project at Panipat.

IndianOil has translated the expertise of its personnel in pipeline operations into a business
opportunity, by offering training and consultancy to several Indian and overseas companies.
Currently, the Corporation is imparting training for personnel of the Greater Nile Petroleum
Company, Sudan.
MARKETING
Reaching out to a Billion Hearts
IndianOil has one of the largest petroleum marketing and distribution networks in Asia, with
over 35,000 marketing touch points. Its ubiquitous petrol/diesel stations are located across
different terrains and regions of the Indian sub-continent. From the icy heights of the Himalayas
to the sun-soaked shores of Kerala, from Kutch on India's western tip to Kohima in the verdant
North East, IndianOil is truly 'in every heart, in every part'. IndianOil's vast marketing
infrastructure of petrol/diesel stations, Indane (LPG) distributorships, SERVO lubricants &
greases outlets and large volume consumer pumps are backed by bulk storage terminals and
installations, inland depots, aviation fuel stations, LPG bottling plants and lube blending plants
amongst others. The countrywide marketing operations are coordinated by 16 State

Offices and over 100 decentralised administrative offices.
Several l and mark surveys continue to rate IndianOil as the dominant energy brand in the
country and an enduring symbol for high quality petroleum products and services. The heritage
and iconic association that the brand invokes has been built over four decades of commitment to
uninterrupted supply line of petroleum products to every part of the country, and unique products
that cater not only to the functional requirements but also the aspirational needs of millions of
customers.
IndianOil has been adjudged India's No. 1 brand by UK-based Brand Finance, an independent
consultancy that deals with valuation of brands. It was also listed as India's 'Most Trusted Brand'
in the 'Gasoline' category in a Readers' Digest - AC Nielsen survey. In addition, IndianOil topped
The Hindu Businessline's "India's Most Valuable Brands" list. However, the value of the
IndianOil brand is not just limited to its commercial role as an energy provider but straddles the
entire value chain of gamut of exploration & production, refining, transportation & marketing,
petrochemicals & natural gas and downstream marketing operations abroad. IndianOil is a
national brand owned by over a billion Indians and that is a priceless value.
19
LITERATURE REVIEW:
A Prescription for Debt Recovery Management, Towards Reducing

Costs and Increasing Recovery of Receivables
Author: David Coyle, President,
Published by: SeeWind Design 2008
Debt recovery and collections managers are always looking for less costly and more efficient
ways of collecting on bad debt. This is especially true in todays business climate of diminished
budgets and pressures from restructuring. This paper reviews six debt recovery management
best practices that ensure swift and accurate recuperation of receivables for less operational cost
than is usual within a typical collections process. As well the workflow that enables the
application of these best practices is described. Finally this paper outlines the features and
benefits of FORCE, a business analysis and collections management software solution that
incorporates the fully automated workflow and best practices discussed. The prescription
suggested here focuses on the ability to uncover and see
the business reality along with the
capability to detect, diagnose and action opportunities that center on TIME and MONEY:
OBJECTIVES:
To find the Trend of the Sales and Debtors of the Company and to find a relation
between the two.
To find out the Average Collection Preriod of Various Customers, DGS&D and Non
DGS&D.
To analyze the Cash Conversion Cycle and the Liquidity of the Company.
To analyse the Working Capital of the Comapany and how it can be regulated.
To find out the different Ratios related to Liquidity and Profitability of the Company
and compare them with the competitors like HPCL and BPCL
To know the Credit Policies of IOCL for different Customers.
Analyse the efficiency of different Collection Procedures with special emphasis on
the e-Collection Mode like RTGS and Core-to-Core banking.
21
METHODOLOGY
The methodology followed in this project involved the following Phases:
Collection of Data
Type of the project
Analysis of Data
Conclusion & Recommendation
Collection of Data:
Data required for the project e.g. Balance Sheet, statement of Profit & Loss Account etc. were
collected from the annual reports of IOCL, for the period of 2009-10 to 2011-12. Besides for
Explanation of several issues, different articles, Internet datas, books etc were consulted. The
data collected are Secondary & Published Data. Few data have been collected from the SAP
module used in IOCL
Type of the project:
The project is descriptive and analytical in nature.
Analysis:
For the comparative analysis ratios were used along with graphs, charts, and necessary
diagrams. The current year i.e., 2011-12 has not been taken into calculation in many ratios
because, at that time of preparation of this report the Annual Report 2011-12 was not published.
Interpretation & Recommendation:
After completion of the entire analysis, interpretation & recommendation were made on the basis
of figures and diagrams. Statistical tools like Tables, Charts, Bar graphs Correlations are
used for representation of data.
RECEIVABLE MANAGEMENT
INTRODUCTION: A sound managerial control requires proper liquid management of
liquid assets and inventory. These assets are a part of working capital of the business. An
efficient use of financial resources is necessary to avoid financial distress. Receivables
result from credit sales. A concern is required to allow credit sales in order to expand its
sales volume; it is not always possible to sell goods on cash basis. Sometime other
concern in that line might established a practice of selling goods on credit basis. Under
these circumstances it is not possible to avoid credit sales without adversely affecting
sales. The increase in sales is also essential to increase profitability. After a certain level
of sales this increase in sales will not proportionately increase production costs. The
increase in sales will bring in more profits.
Receivables constitute a significant portion of current assets of a firm. But for investment
in receivable a firm has to incur certain costs. Further there is a risk of bad debts also. It
is therefore very necessary to proper control and management of receivables.
Cash is the most important component of current assets; therefore the firm basic
strategies are to reduce the operating cash requirement. The companys aim is to
accelerate the collection of receivables so as to reduce the average collection period. The
receivables represent an important component of current assets of a firm. The purpose of
this analysis is the important dimension of efficient management of receivables within the
framework of a firm objective of value maximization.
OBJECTIVES: The term receivables are defined as debt owed to the firm by customer
arising from sale of goods or services in the ordinary courses of business. Receivable
management is also called trade credit management. Thus account receivables represent
an extension of credit to customers allowing them a reasonable period of time in which to
pay for the good received.
The objective of receivable management is to promote sales and profit until that point is
reached where return on investment in further funding receivables is less than cost of
funds raised to finance that an additional credit, i.e. cost of capital. The specific costs and
benefits which relevant to the determination of receivables management are examined
below.
23
The major categories of cost associated with the extension of credit and account
receivables are:
COLLECTION COST:
These are administrative cost incurred in collecting the receivables from the customer to
whom credit sales have been made.

CAPITAL COST:
The increased level of accounts receivables is an investment in assets. There is time lag
between the sale of goods to, and payment by the customer. Meanwhile the firm has to
pay employees and suppliers of raw materials. Thereby implying that firm should arrange
for additional funds to meets its own obligation while waiting for payments from its
customers. The cost on the use of additional capital to support credit sales, which
alternatively could be profitability employed elsewhere, is , therefore a part of extending
credit or receivables or capital cost.

DELIQUENCY COST:
This cost arise out of the failure of the customers to meet their obligation when payment
of credit sales become due after the expiry of credit period, the cost are (i) blocking of
funds for extending period, (ii) cost associated with steps that have to be initiated to
collect the overdue, such as reminders and other collection efforts, legal charges etc.
DEFAULT COST:
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 these cost associated with credit sales and
accounts receivables.
BENEFITS:
The benefits are increased sales and anticipated profits because of a more liberal policy.
When firm extended trade credit, i.e. invest in receivables they intend to increase sales.
The impact of liberal trade credit policy is likely to 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 customer. This motive for investment in receivables is
growth oriented. Secondly, the firm may extend credit to project its current sales against
emerging competition. Here the motive is sales retention. As a result of increased sales,
the profit of firm will increase.

What are Debtors?

Debtors are people or other firms who owe money to the firm. This will usually happen
where the firm has sold goods with a period of credit. The firm sells the good or service
but allows the purchaser a period of credit to pay - usually a month. During this month
the purchaser owes the firm the money and is therefore a debtor.If the firm has debts
these are considered an asset, because when the debtors pay the firm will have converted
the debt into cash in the bank. Because most debts are relatively short-term they are
considered current assets. The other current assets are stocks and cash.The amount of
debtors a firm has depends on the line of business they are in. If most of their business is
with trade customers where they have to offer credit then the level of debtors may be
high. For many retail businesses, however, the level of debtors will tend to be relatively
low as most of their sales are cash sales.
Ways to manage debtors - credit policy and collection procedure

A sale is not a sale until the money is in your bank account. Having an effective credit
policy and collection procedure in place is one of the most important facets of owning
your own business. When it comes to dealing with customers who seem unwilling to pay
on time it can mean the difference between prosperity and failure.

Credit policy
Credit policy effects debtor management because it guides management about how to
control debtors and how to make balance between liberal and strict credit. If company
does not restrict to sell the products on credit after a given limit of sale. This liberated
credit policy will increase the amount of sale and profitability. But risk will also increase
with increasing of sale. If we sell the good to those debtors whose capability to pay is not
good, then it is possible that some amount will become bad debts. Company can increase
the time limit for paying by such debtors. On the other hand, if companys credit policy is
strict, then it will increase liquidity and security, but decrease the profitability. So,
finance manager should make credit policy at optimum level where profitability and
liquidity will be equal. We can show it graphically.
25
Fig. 6: Relation between Profitability and Liquidity

Mode of payment: Any type of payment is acceptable, but the costs involved with such
things as credit card transactions as you may need to add a surcharge to cover them must
be seen.
Dealing late payments: The policy should appear on the credit application form, and
should clearly state the consequences of late payment. This may take the form of
withholding goods, not processing orders, and in some cases, legal action.
Sub part of credit policy
(a) Length of Credit period : Length of credit period is also an element that affects
decisions of finance manager relating to manage debtors. It is the time which allows to
debtor to pay his debt for purchasing goods on credit from vendor. Finance manager can
increase the length of credit period according to reputation of customers.

(b) Cash discount: Cash discount is technique to get money fastly from debtors. It is
cost of investment in credit sale.
Credit policy analysis
It means decision relating to analysis of credit policy. Evaluation and analysis of credit
policy is based on following factors.

a) Collection of debtors information

For analysis the financial position of debtors, we have to collect the information relating
to debtors. This information can be obtained from customers financial statements of
previous years, bank reports, and information given by credit rating agencies. These
information will be useful for deciding where debtors will our debt or not. It will also be
useful for knowing capability to pay the debt.

b) Credit Decisions
After collection and analysis the debtors information, manager has to decide whether
company should facilitate to sell goods on credit or not. If company sells the goods on
credit to particular debtor, then at what level it will be sold after seeing his position. For
this manager can fix the standard for providing goods on credit. If a particular debtor is
below than given standard, then he should not accept his proposal of buying goods on
credit.
Formulation Collection Policy : For getting fund fastly from debtor, the
following steps will be taken under formulation of collection policy.

a) Send reminding letter for paying debt
b) Take the help of debt collection agency for getting bad debt.
c) To do legal action against bad debtors.
d) To request personally to debtor to pay his dues on mobile or email.
e) Finance manager should monitor collection position through average collection period
from past sundry debtor and their turnover ratio.

f) To make ageing schedule. Sample of Ageing schedule is given below.
Credit application
To help you to decide which of your customers should be granted credit terms, it is
important to have a credit application form/agreement. This sets out all the conditions of
credit, as well as the rights and obligations of both parties.
Essential components of a credit application:

27
comprehensive details of all directors/partners/owners
at least three trade credit references
signature of the applicant to ensure that they have read and understood all the conditions
and have agreed to abide by them. A Deed of Indemnity and Guarantee for corporate
clients is optional, however it is an excellent safeguard against solvent clients.
the final decision should be based on all the data collected, in particular the references,
the length of time that the business has been operating and whether or not the guarantees
have been signed.

Collection procedure
Step 1: A statement asking for payment should be sent. Some 'Reminder' or 'Final Notice'
adhesive labels can be bought.
Step 2: Telephone the customer and remind them of the debt. Ask them if there is a
problem. If no barrier to payment exists, ask them to settle the debt by a specific date.
Step 3: If there is a cash flow problem, try to arrange a payment plan that accommodates
both parties.
Step 4: If the problem is recurrent then it is a good idea to review the customer's credit
terms.
Step 5: If the debt is not settled within the agreed timeframe, you may wish to take legal
action
To deal with situations as they occur so you don't contribute to any potential cash flow
problems resulting from delinquent payments. If you design an effective credit policy,
credit application and collection procedure, you are helping to ensure the financial
security and stability of your business venture.
CREDIT ANALYSIS:
Two basic steps are involved in the credit investigation Process.
A)OBTAINING CREDIT INFORMATION-The first step in credit analysis is
obtaining the information which form the basis for the evaluation of customers.The
sources of information may be internal such as the historical payment pattern of a
customers,or may be external such as :
I)FINANCIAL STATEMENTS-The published financial statements such as

balance sheet and profit and loss account.
28
II)BANK REFERENCES-The firms banker collects the necessary

information from the applicants Bank.
III)TRADE REFERENCES-Reputed Credit organization are approached about
the credit worthiness of proposed customers.
IV)CREDIT BUREAU REPORTS-Credit Bureau reports from organization
which specializes in supplying credit information can also be utilized.

B)ANALYSIS OF CREDIT INFORMATION-The information collected from
different sources are analyzed to determine the credit worthiness of the applicant.The
analysis should cover two aspects:
I)QUANTITATIVE-The quantitative aspects is based on the factual information
available from the financial statements,the past records of the firms and so on.
II)QUALITATIVE-The qualitative judgement would cover aspects relating to the
quality of management.
Customers Evaluation-The 5 Cs CHARACTER- Reputation, Track Record
CAPACITY- Ability to repay( earning capacity)
CAPITAL- Financial Position of the company.
COLLATERAL- The type and kind of assets pledged
CONDITIONS- Economic conditions & competitive factors that may affect the
profitability of the customer.
Effective accounts receivable management can help you in a variety ways:
It can cut and maintain your average collection delay or DSO
It can lessen your direct and indirect expenses
It can considerably reduce your bad debt
It can tell you various ways to take advantage of your cash-flow
It can help you capitalize on your internal resources
It can maximize interventions on sales, service and market share
29
Fig 7: Debt Collection Procedure.
Reasons for incurring Debts?

1.Debtors are the current assets for a company and provide the liquidity for a company.So to
improve the liquidity position of a company it is important to incur debts. However if the
debtors are too high in comparison with the other Current assets then there will be a problem
of high working capital for the company which can hit the profitability badly.
2. Secondly, most of the sales are credit sales in every organization. Cash sales constitutes
insignificant amount of the sales of a company. So to maintain the sales revenue company
has to incur debts.
3. It is important to reach the sales potential of a company in this growing

market. So if the company doesnot allow the credit to the customers then the market will be
untouched.
4. To Optimize the return on investments on the assets.
5. To get a competitive advantage over the competitors and to stay in the competition it is
important to give the customers to credit period so the can utilize the extra advantage.
Confirmation of debt(How to establish correctness of debtors):

These are some points to establish the correctness of the Debtors.
One must be sure to know who he is doing business with. Always obtain a signed Credit
Application from new customers and check them out thoroughly.
Only three trade references cannot always be relied upon. Some organisations only pay
three customers on time just so that they can use them as references.
Always a mercantile report must be obtained and checked for previous legal actions and
directors that have been associated with previously failed businesses. If one find either,
credit should not be extended. COD facility may be offered instead.
A credit limit must be set. Whilst a credit limit should always be seen as a guide, if a
customer is going to exceed that limit by a considerable margin (say 20%), one must
always recheck their credit worthiness and reset the limit accordingly.
Every Company should have a written policy that clearly sets out when, and under what
circumstances, the organisation offers credit. This should be distributed to all interested
parties (especially the sales force).
Customers must not be given any excuse not to pay you on time. Make sure all your
paperwork is easy to read and understand.
Company should give their customers plenty of payment methods to use (i.e. cheque,
EFT, bankcard, Mastercard, Visa, Diners and American Express).
If cla and disputes are unavoidable, it must be made sure that he have an effective
dispute resolution procedure that always results in effective corrective action.
43
Sales personnel should play an active role in ensuring that all invoices are paid on time.
Terms and Conditions of Sale should include retention of title clause and should be sent
to the customer with a new account welcome letter. This letter is an opportunity to advise
the customer of their credit limit and your payment terms.
Customers must be asked to sign personal guarantees, if he is unable to justify the level
of credit that they require.
Personal guarantees must not be used as a reason to open an account for a customer with
a poor payment history. Stick to COD.
Ring all new accounts before the first payment is due. Make sure that they are happy with
the service / goods and confirm that payment will be made on the due date.
Once customers are five days overdue with their payment, ring them and ask for YOUR
money. Do not be shy or embarrassed. They arent.
If Company have provided a good product or service and the customer still will not pay,
the account should be closed and handover the debt over to a professional collection
agency and never trade on a credit basis with these people again.
Analyse the financial status of the company you are lending to by checking their previous
financial accounts history or analysing the previous Legal Cases the customer have
Seek for the credit rating the company have. The higher arted comapanies are
comparative risk free and credit can be extended in that cases.
Non Recovery of debts

A company that extends credit to a customer faces the risk of not collecting the account
receivable. If a loss does occur from extending credit, it is reported as an operating expense,
such as bad debts expense.

There are two ways of reporting losses from credit sales. One is the direct write-off method.
Under this approach, the company does not anticipate any loss. The asset Accounts
Receivable is reported at its full amount and no expense is reported until it is known with
certainty that a customer will not pay the amount owed. This method is not encouraged by
accountants, because it may be overstating assets and net income.
The preferred way to report losses from credit sales is to anticipate that some
receivables will not be collected. This approach is the allowance method. It gets it name
because of the contra account to Accounts Receivable entitled Allowance for Doubtful
Accounts. The credit balance in the allowance account works to value the accounts
receivable at their approximate net realizable amount. Under the allowance method, the bad
debts expense and the credit to the allowance account is reported closer to the time of the
salethus providing a better matching with revenues. Under the allowance method the
accounts receivable are reported at a more realistic and conservative amount.

To assist in the managing of accounts receivables, an aging of the accounts receivable is
prepared. An aging sorts the customers' balances by how long the customers have owed the
open invoice amounts.
Ways to collect Bad Debts:

Recovering bad debts is not an easy or pleasant task, and it is advisable for businesses to
take measures to avoid or at least minimize bad debt. This can be done by having a credit
management system in place. Credit management strategies may include:

* clearly stating terms and conditions in the credit contract
* ensuring all credit transactions are documented and signed
* maintaining records accurately
* keeping track of due and overdue payments
* checking the credit rating of debtors before extending credit
* checking the credit rating of the debtor on a regular basis after giving credit
* collecting a deposit from the customer before delivering goods or services
* collecting portions of the payment as a project progresses
* reminding customers of payments through phone, letters or visits
In spite of having an efficient credit management strategy, it is still possible to incur bad
debts. All businesses will have some percentage of customers who delay payments or even
avoid them. Businesses have many options to deal with delinquent customers. Some of these
are discussed below.
45
Consultation
Businesses can try to recover bad debt from customers through consultation. The
consultation can bring about an agreement between the creditor and debtor regarding the
payment. In case of any disputes over the debt, the Community Justice Center can be called
upon to intervene and resolve the issue.

Demand letter
A demand letter can be sent to the company or individual in debt, if the consultation does not
give satisfactory results. A demand letter must clearly state the details of the debt, along with
the total amount of debt involved and the date by which the debt must be settled. The demand
letter can also include a warning of legal action in case the debt is not paid by the specified
date.
Statutory letter
The credit company may choose to send a statutory letter instead of a demand letter. A
statutory letter will also give details of the debt, total amount of debt and expected date of
debt settlement. Statutory letters are sent out like court documents and hold greater clout than
demand letters. The statutory letter warns the debtors of legal action, within 21 days of the
specified date, if they fail to make the payment.

Litigation
A business may have to file a lawsuit against the debtor to recover the debt. All other debt
recovery strategies, within legal boundaries, must be tried before reaching this stage.
Litigation is always the last option. Taking legal action is a time-consuming and costly
business. It is advisable to get some idea of the potential cost involved before proceeding
with the litigation.

Bad debts are an unavoidable side effect of extending credit. Though there are many avenues
to collect debts, they are by no means easy and can cost the business a good amount of time
and money. Therefore, it is better to develop an effective credit management strategy to
minimize bad debts. Also, consider a partnership with a good collection agency that can take
over the task of collection if your in-house resources and expertise is inadequate to resolve
the situation.
Fig.8: Flow chart showing Debt Recovery Process
Varoius modes of Debt Collection(How to collect debts?)

Payment options include estimated annual fees paid in periodic instalments (preferably by
debit authority); cheque; direct deposits; Electronic Fund Transfer(EFT) ; BPay; Credit or
Debit Card (via phone or website); direct debit; or Professional Fee Funding.Others include:
Online Credit Card Payment System
Electronic Cheque System
Electronic Cash System and
Smart Card based Electronic Payment System
Real time Gross Settlement (RTGS) System
NationalElectronic Fund Transfer (NEFT) System and
Electronic Clearing Service (ECS).
Electronic funds transfer or
EFT refers to the computer-based systems used to perform
financial transactions electronically.

The term is used for a number of different concepts:
30
Cardholder-initiated transactions, where a cardholder makes use of a payment card
Direct deposit payroll payments for a business to its employees, possibly via a payroll
services company
Direct debit payments, sometimes called electronic checks, for which a business debits
the consumer's bank accounts for payment for goods or services
Electronic bill payment in online banking, which may be delivered by EFT or paper
check
Transactions involving stored value of electronic money, possibly in a private currency
Wire transfer via an international banking network (generally carries a higher fee)
Electronic Benefit Transfer
RBI Control:
Recognising the importance of ensuring the safety, security of the paymentsystems, the
Reserve Bank of India (RBI) has put in place three modes ofelectronic payments i.e. Real
time Gross Settlement (RTGS) System, NationalElectronic Fund Transfer (NEFT) System
and Electronic Clearing Service (ECS).Payments by these modes have been steadily growing
in the last few years. Aninternal Working Group set up by the Reserve Bank to examine the
variousissues
related
to
migration
from
paper-based
systems
to
electronic
systemsrecommended a phased approach of encouraging, monitoring and mandating for this

migration. The Reserve Bank has been using the approach of encouragingand monitoring
resulting in almost 40,000 bank branches spanning over 9773 centres being covered by the
RTGS and NEFT systems. A study conducted by the Reserve Bank revealed that during a
three month period about 2,100 cheques each valued at Rs.1 crore and above were processed
in the clearing houses in the four metros. It is proposed that with effect from
April 1, 2008 all payment transactions of Rs. 1 crore and above between RBI regulated
entities i.e. banks, primary dealers and NBFCs as well as in RBI regulated markets i.e.
money market, Government Securities market and foreign exchange market may be
mandated to be undertaken through electronic mode only. This move will not only reduce
risk from moving large paper-based value retail payments to safer electronic modes, but will
also bring greater efficiency and customer convenience to the payment systems.
Recognising the importance of electronic payment systems in ensuring safe, secure and fast
payment and settlements RBI has put in place three modes of payments:
Sl. No.
PaymentSystems
Features
RTGS (Real Time Gross
Settlement)
For online real time settlement of systemically

important payments. Minimum transaction value
Rs.1.00 lakh. Transaction window from 9.00 a.m.
to 4.00 p.m. Amount is credited to the beneficiary's
account within a maximum time of 2 hours.
NEFT (National Electronic
Funds Transfer)
For settlement in batch process 6 settlements a

day on week days and 3 settlements on Saturday.
Customers accounts credited on the same day for
first four settlements and by the next day for the
last two settlements
ECS (Electronic Clearing
System)
Netted settlement for bulk transactions of repetitive

nature (dividend, salary, pension payments,refunds,
vendor payments).
Efficiency Of e-Collection:
By migrating away from the paper check, businesses have the ability to increase
efficiency and realize numerous hard and soft benefits, both in their bottom lines and to
their corporate citizenry.
Cost Reduction
Cost reduction is among the key drivers for making the organizational move to electronic
payments. Cost savings come from a variety of areas related to electronic payments
among the most readily quantifiable are reduced head count, lower administration costs
and decreased paper usage. The reduced amount of paper consumption can have a drastic
and far reaching effect. By making the switch from paper check printing to electronic
32
payments, businesses can eliminate enormous amounts of check, forms and approval
documents and envelopes. These savings also cascade into postage reduction.
Stremlined Payment Processing
For organizations of all sizes, the move to electronic payment processing can bring
additional challenges, however. Although cost savings can be found by replacing paper
checks with electronic payments, many organizations are finding that in order to execute
electronic payments they must log in to several proprietary vendor systems. This can add
operational complexity to an already inefficient accounting process. A simpler approach
is to consider working with a payment processor that can execute all payment types on
your behalf. Some of these vendors, such as SunGard, can accept payment files directly
from your accounting/ERP applications, and even provide least cost routing of payments,
dramatically increasing payment processing efficiencies without requiring process
change. The speed with which electronic payments can be received and delivered can
have even further reaching effects on the bottom line when considering the effort to attain
early payment discounts (generally the 2 percent 10 net 30 terms). the average business
organization is unable to capture anywhere between 50 percent-60 percent of discounts
offered, because their A/P departments are unable to process and pay the invoice using a
paper check within the 10-day window that applies to the discount. According to statistics
from PayStream Advisors, the average paper check approval and disbursement cycle
can take between 30-40 days or more, placing the 10-day discount opportunity well out
of reach. Aside from the standard discount practices among businesses, electronic, faster
payments also means fewer late fees. If the average payment and approval cycle is
around 30-40 days, with variances going even higher, then the likelihood of incurring late
fees and other penalties must increase dramatically, again impacting the bottom line.
Improved Visibility to cash, taking advantage of Error Detection and
Increased Fraud Detection

The most widely selected benefit of electronic payments is improved cash forecasting,
selected by 41 percent of the organizations polled. Improved cash forecasting is directly
related to the improved visibility to cash made possible by automating the payment
process. 60 to 70 percent of all enterprises note a lack of visibility across

many key aspects of the A/P process, making it increasingly difficult to mitigate risk. In
the middle office, an electronic payments process also creates faster cycling times and
payments processing assists the detection of fraud in a timelier manner. Electronic
payments are subject to more immediate methods of payment verifications and more
accurate matching without being exposed to as much chance for human error
Going green and improving corporat e citizenry in addition to the bottom
line
The green movement plays an important role in todays business landscape. Not only is
there the environmental impact many companies are reducing, but the positive effect on
their corporate culture and the way they are viewed by other organizations and consumers
can also have a beneficial effect on bottom lines. According to statistics found on the
non-profit PayItGreen Alliance Web site, paper checks require more than 674 million
gallons of fuel and produce over 3,628,200 tons of greenhouse gases over the course of
their lifetime.
Fig. 9: Comparison of Conventional Method and Electronic Payment System
34
Role of SAP in Receivable Management in IOCL

Indian Oil Corporation Ltd. (IOCL) is the 18th-largest petroleum company in the world. As
the flagship national oil company in the downstream sector, IOCL delivers petroleum
products to millions of consumers via 10 refineries, 34,000 sales points, and a country-wide
network of 9,300 kilometers of pipeline. To integrate business processes and establish a
standard communication platform, IOCL deployed SAP NetWeaver Process Integration
technology and the SAP NetWeaver technology platform.
Key Challenges
Why SAP Was Selected
Ensure accounting of correct quantities in
Support for open XML Java standard
business transactions
Integration with the existing SAP ERP
Ensure on-time update of end-product rates
application
Prevent delays in signing of joint
Harmonized with all other components
certificates (JCs)
of the SAP NetWeaver technology
Prevent mismatch between JC and system

quantities to prevent disputes in transactions
Use correct valuation for transactions
platform
Integration tool for all SAP solutions
Support for industry-standard adapters
such as RosettaNet and chemical industry
data exchange (CIDX)
Implementation Best Practices
Low Total Cost of Ownership
Embraced open source software the
Linux operating system supported by SAP
resource planning (ERP) deployment for
Completed
implementation
through
Leveraged
funding
for
enterprise
this project too

Deployed more economical option of
using open source software
inhouse consultants
Deployed open-standard-based hypertext
transfer protocol (HTTP) over secure
between
with other oil companies by accelerating

the frequency of settlements from monthly
sockets layer (SSL) for securing data

communication
Reduced cost of business transactions
participating
to daily
Completed deployment in 9 months, on
partners
time and within budget

Operational Benefits
Financial and Strategic Benefits

Achieved transparency of intercompany
frequency from monthly to daily

Improved
planning
error-free
quantity
Streamlined supply chain performance

for
exchangetransactions
Exercised better control over placement
and operating costs
Promoted
reconciliation at the plant level
settlements and accelerated their processing
Improved data accuracy by 99%

Minimized inventory levels
Eliminated paper-based JC exchange
process
Replaced old system with reconciled
data flow
Reduced cost of exchanges by as much
as 95%
Table 2: Salient Features of Implementation of SAP
36
Impact of debtors in the Working Capital Management of
the
Company
Working capital, also known as "WC", is a financial metric which represents operating
liquidity available to a business. Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. It is calculated as current assets
minus current liabilities.
Investment in fixed assets only is not sufficient to run the business. Working capital or
investment in current assets, howsoever small it is, is a must for purchase of raw materials,
and for meeting the day-to-day expenditure on salaries, wages, rents, advertising etc., and for
maintaining the fixed assets. The fate of large scale investment in fixed capital is often
determined by a relatively small amount of current assets. Working capital is just like a
heart of industry if it is weak, the business cannot prosper and survive, although there is a
large body (investment) of fixed assets. Moreover, not only the existence of working capital
is a must for the industry, but it must be adequate also. Adequacy of the working capital is
the lifeblood and controlling nerve center of a business. Inadequate as well as redundant
working capital is dangerous for the health of industry. It is said, Inadequate working capital
is disastrous; whereas redundant working capital is a criminal waste. Both situations are not
warranted in a sound organization.
The advantages of working capital or adequate working capital may be enumerated as below:
1. Cash Discount:
If a proper cash balance is maintained, the business can avail the advantage of cash
discount by paying cash for the purchase of raw materials and merchandise. It will result
in reducing the cost of production.
2. It creates a Feeling of Security and Confidence:
The proprietor or officials or management of a concern are quite carefree, if they have
proper working capital arrangements because they need not worry for the payment of
business expenditure or creditors. Adequate working capital creates a sense of security,
confidence and loyalty, not only throughout the business itself, but also among its
customers, creditors and business associates.
3. Must for Maintaining Solvency and Continuing Production:

In order to maintain the solvency of the business, it is but essential that the sufficient
amount t of fund is available to make all the payments in time as and when they are due.
Without ample working capital, production will suffer, particularly in the era of cut throat
competition, and a business can never flourish in the absence of adequate working
capital.
4. Sound Goodwill and Debt Capacity:
It is common experience of all prudent businessmen that promptness of payment in
business creates goodwill and increases the debt of the capacity of the business. A firm
can raise funds from the market, purchase goods on credit and borrow short-term funds
from bank, etc. If the investor and borrowers are confident that they will get their due
interest and payment of principal in time.

5. Easy Loans from the Banks:
An adequate working capital i.e. excess of current assets over current liabilities helps the
company to borrow unsecured loans from the bank because the excess provides a good
security to the unsecured loans, Banks favor in granting seasonal loans, if business has a
good credit standing and trade reputation.

6. Distribution of Dividend:
If company is short of working capital, it cannot distribute the good dividend to its
shareholders inspite of sufficient profits. Profits are to be retained in the business to make
up the deficiency of working capital. On the other contrary, if working capital is
sufficient, ample dividend can be declared and distributed. It increases the market value
of shares.
7. Exploitation of Good Opportunity:
In case of adequacy of capital in a concern, good opportunities can be exploited e.g.,
company may make off-season purchases resulting in substantial savings or it can fetch
big supply orders resulting in good profits.

8. Meeting Unseen Contingency:
Depression shoots the demand of working capital because sock piling of finished goods
become necessary. Certain other unseen contingencies e.g., financial crisis due to heavy
55
losses, business oscillations, etc. can easily be overcome, if company maintains adequate
working capital.
9. High Morale:
The provision of adequate working capital improves the morale of the executive because
they have an environment of certainty, security and confidence, which is a great
psychological, factor in improving the overall efficiency of the business and of the person
who is at the hell of fairs in the company.

10. Increased Production Efficiency:
A continuous supply of raw material, research programme, innovations and technical
development and expansion programmes can successfully be carried out if adequate
working capital is maintained in the business. It will increase the production efficiency,
which will, in turn increases the efficiency and morale of the employees and lower costs
and create image among the community.
ASSETS
S
BALANCE SHEET
CAPITAL SUPPLIED
LIABLITIE
-Current(ShortTerm)
-Current
-Long Term
DEBT
-Fixed (Long
Term)
-Others
Shareholder`s
EQUITY
STOCK
CASH FLOW
SELL EQUITY
ISSUE DEBT
<BUY ASSETS> <BUY
INVENTORY>
MAKE SALES
<PAY TAXES>
<PAY COSTS>
Retain profits or
repay Debt
holders (with
Interest) and Stock
Holders (with
Dividends)
<PAY INTEREST>
<PAY DIVIDENDS>
Fig. 10: Working Capital Cycle and Sources of Cash

Debtors have the following effect on the working capital of a company:
1. Provides high liqidity position for the company
2. The business depends more on the external sources for financing the day-to-day activity
because payment by the debtors depends on their will. Though the company have the
definite credit terms laid down for the debtors but it depends on them and the efficiency
of the collection procedure for the rules to get implemented.

3. If debtor Collection period is moderate or low then it increses the working capital
37
4. Viceverse, If debtor Collection period is high then decreases the working capital
5. If bad debts are frequently occuring then there is a loss for the company which decreases
the working capital of the company
6. Provide better investment opportunities in short term basis which can earn get some
profit for the comapany

7. High Return on Investment
Different Ratios related to Debtor Management and Profitability

Liquidity Ratios
Liquidity means ability of a firm to meet its current obligations. The liquidity ratios,
therefore, try to establish a relationship between current liabilities, which are the obligations
soon becoming due and current assets, which presumably provide the source from which
theseobligations will be met. The failure of a company to meet its obligations due to lack of
adequate liquidity will result in bad credit ratings, loss of creditors confidence or even in law
suits against the company. The following ratio are commonly used to indicate the liquidity of
business:
i) Current Ratio- This ratio is most commonly used to perform the shortterm financial
analysis. Also known as the working capital ratio, this ratio matches the current assets of the
firm to its current liabilities.
Current ratio = Current Assets /Current liabilities
ii) Acid Test Ratio/ Quick Ratio- One defect of of Current Ratio is that it fails to convey
any information of the composition of the current assets of the firm
. A rupee of Cash is
considered as equivalent to a rupee of Inventory which is not the same as the cash is more
readily available to the Business. So it is called the Quick Ratio which measures the firm`s
ability to convert current assets quickly into cash. The Acid Test Ratio is the ratio between
Quick Current Assets and Current Liabilities.
Acid Test Ratio = Quick Assets / Current Liabilities
iii) Cash Ratio- It is a measure of the absolute liquidity of the firm where only
cash and bank balances in hand is considered. It is the indicators which shows how
immediately a firm can meet its liability obligations. It the Ratio between the Cash and Bank
Balances and Current Liabilities.

Cash Ratio = Cash and Bank Balances / Current Liabilities
Turnover Ratios
Turnover ratios are used to indicate the efficiency with which assets and resources of the firm
are being utilized. These ratios are known as turnover ratios because they indicate the speed
with which assets are being converted or turned into sales. These ratios, thus, express the
relationship between sales and various assets. A higher turnover ratio generally indicates
better use of capital resources which in turn as a favorable effect on the profitability of the
firm.
i) Debtors Turnover Ratio This ratio indicates the relationship between net credit sales
and trade debtors. It shows the rate which cash is generated by the turnover of debtors. It is
computed as follows:
Debtors Turnover Ratio = Credit sales /Average debtors
Where,
Average debtors = Opening debtors + Closing debtors

2
Average Collection Period The debtors turnover ratio is usually supplemented by average
collection period. The debtors turnover ratio together with average collection period involves
the following steps:

a) Calculation of daily sales This is computed as follows:
Sales per day = Net sales/No. of working days in a year
b) Calculation of average collection period This is calculated as follows:
Average collection period = Days in the year / Debtors turnover ratio
39
CASH CONVERSION CYCLE:

In management accounting, the Cash Conversion Cycle (CCC) measures how long a
firm will be deprived of cash if it increases its investment in resources in order to expand
customer sales. It is thus a measure of the liquidity risk entailed by growth. However,
shortening the CCC creates its own risks: while a firm could even achieve a negative
CCC by collecting from customers before paying suppliers, a policy of strict collections
and lax payments is not always sustainable.
CCC = Days between disbursing cash and collecting cash in connection with undertaking a
discrete unit of operations.
+ Receivables conversion
Payables conversion
= Inventory conversion
period
period
period
Avg. Inventory
Avg. Accounts
Receivable
Avg. Accounts
Payable
=
COGS / 365
Revenue / 365
Fig. 11: Operating Cycle
COGS / 365
Cashflows insufficient. The term "cash conversion cycle" refers to the

timespan between a firm's disbursing and collecting cash. However, the CCC cannot be
directly observed in cashflows, because these are also influenced by investment and
financing activities; it must be derived from Statement of Financial Position data
associated with the firm's operations.

Equation describes retailer. Although the term "cash conversion cycle" technically
applies to a firm in any industry, the equation is generically formulated to apply
specifically to a retailer. Since a retailer's operations consist in buying and selling
inventory, the equation models the time between

(1) disbursing cash to satisfy the accounts payable created by sale of a unit of inventory,
and
(2) collecting cash to satisfy the accounts receivable generated by that sale.
Equation describes a firm that buys & sells on account. Also, the equation is written
to accommodate a firm that buys and sells on account. For a cash-only firm, the equation
would only need data from sales operations (e.g. changes in inventory), because
disbursing cash would be directly measurable as purchase of inventory, and collecting
cash would be directly measurable as sale of inventory. However, no such 1:1
correspondence exists for a firm that buys and sells on account: Increases and decreases
in inventory do not occasion cashflows but accounting vehicles (receivables and
payables, respectively); increases and decreases in cash will remove these accounting
vehicles (receivables and payables, respectively) from the books. Thus, the CCC must be
calculated by tracing a change in cash through its effect upon receivables, inventory,
payables, and finally back to cashthus, the term cash conversion
cycle, and the
observation that these four accounts "articulate" with one another.

five important intervals, referred to as conversion cycles (or conversion periods):
the Cash Conversion Cycle emerges as interval between disbursing cashcollecting
cash
the payables conversion period (or "Days payables outstanding") emerges as
interval of owing cashdisbursing cash
41
the operating cycle emerges as interval due to owing cashcollecting cash
the inventory conversion period or "Days inventory outstanding" emerges as

interval between owing cashbeing owed cash
the receivables conversion period (or "Days sales outstanding") emerges as interval
between being owed cashcollecting cash
Credit Policies of IOCL:

A firms objective with respect to receivabes management is not merely to collect the receivables
quickly but attention should also be given to the benefit cost trade-off involved in the various
areas of accounts receivables management. IOCL has the same objective like other firms. Therefore the first decision area is credit policies.The credit policy of a firm provides the framework to
determine :
a) Whether or not to extend credit to a customer considering market demand and how much
credit to be extended
b) Peroid of credit
c) Whether not to change interest rate and if so at what rate
d) Analyse the acceptable mode of security
e) Firms credit evaluation
f) What would be the net margin after credit outgo
g) Consider the performance of the party in past 5 years or so
h) Bank`s evaluating data of party`s performance
Therefore the credit policy decision of firm has two broad diamensions :
1. Credit Standard
&
2.Credit Analysis
DGS&D Sector:
Most of the customers in IOCL`s DGS&D Sector are government Companies and they make
payment on boll basis, means when bills are submitted the bills are paid within 2-3 days. These
credit poplicies are determined by the Central Goverment itself at the time of determining
Budget. These credit terms are also determined by them on individual customer requirement
basis. Therefore these customers cannot be treated as credit customers. But it is true that IOCL
has given credit to them but all are determined and controlled by the government.
Payment Procedure:
Generally all the Para- Military forces give their requirement to MCO New Delhi. Then MCO
Places the order to IOCL in favour of these customers.After supplying the required materials,
IOCL sent the bill to MCO office and MCO has paid the billing amount to IOCL. Government of
India constructs this MCO Office.

Other customers like Indian Railways, Army, Border Roadways, and Air Forces have their own
supplying and paying authority.

Credit Ananlysis:
Besides established credit standards , a firm has developed procedure for evaluating credit
applications. The second aspect of credit policies is credit analysis and investigation. Two Basic
steps are involved in this process:
a) Obtaining credit information
b) Analysis of credit information
After analysing the information, the decision is taken for granting credit to customers. IOCL has
been obtaining this information from various sources like Internal & External.
Internal Sources: Various Forms, Documents, Trade Reference and the contacts of firm`s to
judge the suitability of the customer`s for credit.
External Sources: Financial Statements, Bnaks Reference, Trade Refernce and Credit Bureau
Reports. Generally IOCL take bank gurranty and all required documents for credit supply to their
Non DGS&D customers. But in case of DGS&D customers Govt. takes responsibility.
CREDIT TERMS:
Credit terms have components Credit Period, Cash Discount, Interest, Security, Volume of Sales.
For IOCL the customer especially the DGS&D customers are Govt. customers and they paid
their dues immediately after submitting the bill. This whole procedure takes hardly takes 4 to 8
days. Cash discount is generally given to Railways and to DGBR units @ Rs. 150/Kl.
36
CASH DISCOUNT:
The cash discount has implecations for the sales volume, avarage collection period, average in
investments receivables and profit per unit. The chages in discount rate would have both positive
and negative effects. The implications are:
The sales volume will increase. Due to the reduced price factor the debtors will try to
purcahse more to get the maximum benefit and the debtors decreases drastically
Since the customers would likely to pay within the discount period, the average collection
period would be reduced. The reduction in the collection period would lead to reduction
in the investment in the receivables as also the cost.
The discount would have negative effects on the profits. This is because the decrease in
price would effect the profit margin per unit of sales. IOCL has always given a good
discount rate. In this fluctuating oil market it is quite hard to maintain a good discount
rate but IOCL has efficinctly maintained that. When the crude oil price was 142$ per
barrel, the discount rate was Rs.150/Kl. A well maintained customer beneficial process is
the key mantra of IOCL`s success.

Due to all these policies two aspects are covered:
Degree of effort to collect the overdues: A very rigorous collection strategy would
involve increased collection costs as a result the average collection period will be reduced
and profit will be decreased for that reason IOCL has a very strict Collection Policy
Type of collection effort: The second aspect of collection policy relates to the steps taht
should be taken to collect overdues from the customers. A well-established collection
policy should have clearcut guidlines as to the sequency of collection efforts. IOCL`s
collect effort is in the beginning is very polite and moderate, but, with the passage of
time, it gradually become strict. The steps which are usually taken by IOCL are
a) Letters, including reminders, to expedite payment
b) Telephonic calls for personal contact
c) Personal visits
d) Help from collection Agencies like MCO
e) Legal Action
Checklist for Concurring the Credit Proposal:

Whether proposed credit is as per latest approved Credit Policy of the Corporation in
terms of:
Period of Credit
Credit Cap for the individual customers and Supply location
Credit Cap for the State Office/ Region.
Approving Authority
Whether the Party is already enjoying the Credit Fecility with IOC and if so, whether
there is any beyond credit Outstanding

Reasons for beyond credit Outstanding and Action Plan for collecting the same.
Past payment track record of the customer with specific instance of default. if any, with
reasons for extending credit inspite of above

The nature of business envisaged ie. Whether additional volume/ Customer pertaining to
OMCs/ retentions of existing business etc.

Whether the credit is secured and if so what is the security
Assesment of Creditworthiness of the Customer through CRISIL module in line with
existing guideline duely signed

Whether the credit is interest bearing and if not the reason for the same
Whether the Retained margin as per unit basis after reckoning the cost of credit at IOC`s
current borrowing rate and all the other costs for positioning the product at the intended
supply locations and any other incentives like discount, free delivery etc. but before
reckoning the marketing cost is positive.

Whether it is a one time credit or for a specific period.
If existing customer the sale of product upto the date of the proposal for the Current
Financial Year and the Volume of Sale of the Customer during the cirresponding period
of the previous year to access incremental volume/ incremental earnings of retained
margins
Whether the customer enjoys similar fecilities from other Sate Offices/ Region if product
is uplifted from there.
65
Checklist for Concurring Discount Proposals:

Whether the proposed Credit is as per lastest approved Credit Policy for the Corporation
in terms of:
Ceiling of discount of individual products
Approving Authority
Whether the Party is already enjoying the Discount Facility with IOC and if so, whether
any enhancement sought in this within the policy and reason for the same.
If exixting customer to whom discount is sought to be enhanced or to be extended for
further period , the sale of products upto the date of proposal for the current financial year
and the volume of sale of the customer during the corresponding period of the previous
year to access the incremental volume/ earnings of retained of retained margin

The sale of the customer upto the date of proposal of existing financial year and the
projected volume arising out of the discount proposal for the balance period of the
exixting financial year.

The nature of the business envisaged i.e. additional volume / customer pertaining to
OMC`s etc.
Proof of similar facility by customer with OMC`s if any.
Whether the retained margin as per unit basis after reckoning the discount and other costs
for positioning the product at the intended supply location and any other incentive like
Interest free Credit, free delivery etc. but before reckoning the marketing cost is positive.
Whether there is a growth in the profitability of the margin level for the existing year as
compared to the previous year for the particular product.

Whether the customer enjoys similar fecilities from other Sate Offices/ Region if product
is uplifted from there.

Whether it is a one time basis or for a specific period.
Whether the proposal is only for the purpose of quoting in a tender.
Launching of RTGS mode of collections in IOCL:

IOCL announced that RTGS mode of collection of fund is was launched after successful trails.
Under this system, the funds can be transferred by our customers from any of their bank to
IOCL`s bank (SBI) on Real Timeand on Gross basis.

Major features of this system as follows:
1.This network is provided by RBI across the country among all the banks.
2.The RTGS service window for customers transactions are available from 9.00 hours to
15.30 hours during week days (Monday to Friday) and 9.00 hours to 11.30 hours on
Saturdays.
3.While remitting the amount, IOCL customers have to give following details to his
bank:
a. Amount to be remitted
b. Their own A/c. No. With the bank which is to be debited
c. Name of the beneficiary bank (i.e. SBI in our case)
d.Name of the beneficiary customer (i.e. IOC)
e.A/c. No. Of IOC with SBI (18 digit)
f.The IFSC (Indian Financial System Code) of receiving branch
In the proposed system, every payment will be accompanied by an 18 digit code
(which is mandatory) to enable data downloading into SAP and uploading into the
individual customers a/cs in their Specific Credit Control Areas (CCAs).

1. As a precaution, an enrolment form is designed which is to be filled up before allowing
any of our customers using RTGS mode of payment. This format should be signed by
state finance & by the field officer under seal and stamp and acknowledgement of
customer along with customer contact detail should be obtain on the form. One copy of
sign format be sent to HO banking as scanned copy for control purpose.
2. The data of RTGS collection received in SBI A/c will be downloaded centrally by HO
banking at frequent intervals and uploaded into the Customers A/cs through SAP.
67
Other important points / features to be noted are given below:

1.Besides the details to be given as mentioned in points a-f above, every payment must
bear an 18 digit code as a mandatory requirement to enable downloading the payment
data into SAP and uploading into the Customers A/cs.

2.The 18 digit customer is unique for every customer and foe every Credit Control Area.
The logic and structure of this 18 digit code is explained below:

First 11 digits reflects IOCs RTGS A/c No. With SBI.
12th is an alphabet field where each alphabet relates to Specific Credit Control Area in
our SAP.
Last 6 digits indicate SAP Customer Code of the party remitting the payment.
With the above structure, every payment is taken not only to the customer code but also
taken up to specific credit control area.
1.A table showing the mapping of each alpha to specific CCA is given in Annexure-B.
Alphabets like B I O are deliberately ignored to avoid confusion in mistaking as
numeric which may be noted.
2.All RTGS payments will be posted in Owning state of Customer. In all such cases
where customers are taking supplies from other states, the above feature must be borne in
mind the supplying location and supplies should be effected against available overall
credit balance in the account irrespective of the company code. Owning state of the
customer should take full responsibility in monitoring the a/c and ensuring credit limits or
payment against supplies.
3.Every payment through RTGS is identified with a Unique Transaction Number (UTR)
which will be captured while posting collections in SAP and the same will be reflecting
in the PAD also.
4.From the time the customer remits the payment to the tome his a/c in IOC receives the
credit, the process takes about 2/3 hrs. which may be appraised to the customer while
enrolling.
5.The posted RTGS transaction can be viewed in SAP vide t-code: FBL5N in GL Code
6010100061 in Co Code 0100
Precautions
1. Customer should strictly adhere to filling up 18 digit code for each payment which
only enables proper accounting of the payment.
2.Any payment transfer not complying the 18 digit structure will get rejected and result in
infructuous interactions between banks, IOC, State Offices and customers which should
be totally avoided.
3.SV/TV remittances by LPG distributors are not permitted under RTGS system since the
SAP code for SV/TV customers is 7 digit and the 18 digit code structure will
accommodate only 6 digit SAP code.

4.Security Deposit / EMD / any other payments by vendors are not permitted under
RTGS system covered by subject circular.

5.NEFT payments by customers is not permitted. Only RTGS collections shall be
allowed from customers.

6.SOs/Field locations should closely monitor the successful operation of the system and
ensure smooth functioning of the process.

Benefits1.Enormous manual work of handling instruments, preparation of cash receipts,
DCRs etc. gets eliminated.

2.RTGS payments by customers will enable savings in float of funds to IOCL since in
cash of DD/Pay Order/Cheque funds are credited in IOCL account after 2-3days.
3.Administrative convenience to customers since they are required to advice their
own banker to transfer funds to IOCL account without any further botheration of
ensuring that instrument reaches the supply location.

4.RTGS charges levied by various banks are very nominal or nil in comparison to
DD/ Pay Order making charges.

5.RTGS collections received in IOCL bank account at SBI CAG Mumbai will be
accounted for in sap centrally from HO banking thru file upload option thereby
reducing work at various supply locations as no cash receipts & DCR will be
generated and further bank reconciliation entries will drastically reduce.
69
ANALYSIS
DEBTOR
TURNOVER
RATIO ANALYSIS:
Particulars
Sales of Products & Crude
Rs.(in Crores)
2007-08
2008-09
2009-10
2010-11
2011-12
183,172.91 220,779.52 249,782.34 287,759.72 271,073.62
Sundry Debtors
Sundry Debtors As a % Of Sales
Particulars
Debtor Turnover Ratio

Average Collection Period(Days)
6,698.03
6,736.06
3.66
6,819.23
3.05
5,937.86
2.73
2.06
5,799.28
2.14
2007-08
2008-09
2009-10
2010-11
2011-12
27.35
32.78
36.63
48.46
46.74
13.35
11.14
9.96
7.53
7.81
Table 3: DTR and ACP of IOCL from 2007-08 to 2011-12

From the table it is seen that Debtors turnover ratio of IOCL shows an increasing trend
with the exception of the year 2011-12 and it indicates that the debts are being collected
more quickly. The changes of the ratio shows that the efficiency in the companys credit
policy or better performance in its ability to collect from its debtors. For the Year 201110 the sales has decreased for the company by 5.79%. Though the Debtors has also
decreased but not that the same ratio, so the ratio has jumped up. The reasons cannot be
sited due to non availability of sufficient data.

From the table it is seen that the Debtors Collection Period of IOCL is decreasing year by
year except 2011-12 which is a positive trend and it indicates efficient debtor
management of IOCL. Effective debtor management is minimizing the collection period
and also the bad debts incurred by the company. In 2011-12 the ACP has slightly
increased thsn the previous year

Moreover as we can see from Table 3 the Sales of IOCL is increasing year by year but
the the Sundry Debtors are more or less constant and it has actually decreased in the year
2010-11 by 12.9% when the Sales had increased by 15.2%. This shows the efficiency of
collection procedure and the credit policies of the company.
39
Schedule for Debtors:

Rs.(in Crores)
2008-09
2009-10
2010-11
24.28
197.39
Unsecured, Considered Good
From Others
0.00
0.00
Secured, Considered Good
62.44
28.13
255.04
247.24
Unsecured, Considered Doubtful
341.76
472.76
Subtotal
Other Debts
From Subsidiary Companies
2,145.40
1,790.77
From Others
0.00
0.00
Secured, Considered Good
4,465.91
4,719.77
0.70
2.47
Unsecured, Considered Doubtful
6,953.77
6,985.77
TOTAL
255.74
249.71
Less: Provision for Doubtful Debts
6,698.03
6,736.06
Consolidated Total
Table 4: Schedule for Sundry Debtors from 2007-08 to 2010-11
162.19
28.69
0.00
8.18
43.70
540.30
746.19
53.77
537.98
628.62
1,950.22
1,553.15
138.31
4,526.12
3.07
7,363.91
543.37
6,819.23
139.93
4,154.14
3.44
6,479.28
541.42
5,937.86
Sundry Debtors
Over Six Months
From Subsidiary Companies
2007-08
ANALYSIS:
Fig.12: Classification of Debts considered Unsecured & Good and Unsecured & Doubtful
Fig. 13: Classification of Debts from Subsidiary Companies and Other Companies
Table 4 shows the Breakup of the Total Sundry Debtors under different heads like Over
Six Months and Other Debts.
Among the debts over 6 months 71.23% has been proposed to be doubtful on an average.
And the whole of it from Other Companies. The Debts over 6 months for subsidiary
companies has been considered as good.

Among the Other Debts, the debts considered Good and Unsecured by other companies
contribute a significant part like 69.85% on an average

From the Fig.12 it can be seen that even though the Debts considered good and
Unsecured has decreased in 2010-11 but the debts considered doubtful has been
increasing over the years and this whole part is contributed by the Other Companies.
From the Fig.13 it can bee seen that the Debts from Subsidiary Companies has fluctuated
over the years but in case of Other Companies the debts has increased round the years
expect in the year 2010-11 when there was fall of 6.74%.

So in Conslusion, IOCL should focus more on the Older debts and the debts from other
companies to reduce the Bad Debts which has incresed over the years. Though the debts
from other companies is incresing year-wise it is not an alarming situation because the
Sales as-well-as Customers has also increased over the years.
41
LIQU
IDITY
RATIO ANALYSIS:
RATIO
2007-08
CURRENT RATIO
QUICK RATIO
CASH RATIO
2008-09
2009-10
2010-11
2011-12
1.42 : 1
1.31 : 1
1.5 : 1
1.25 : 1
1.32:1
0.48 : 1
0.48 : 1
0.6 : 1
0.55 : 1
0.51:1
0.02 : 1
0.031 : 1
0.023 : 1
0.022 : 1
0.029:1
Table 5: Liquidity Ratios of IOCL
Fig. 14 : Line Graph showing the different Liquidity Ratios of IOCL

From the above Table 5 it can be seen that the current ratio is getting decreased in the
year 2008-09 and in 2010-11, whereas it is considerably high in the year 2009-10.
The Quick Ratio is keeping constant in 2007-08 & 2008-09 but in 2009-10 it is climbing
up and then it is getting decreased in 2010-11

The Cash Ratio is remaining almost constant except in 2008-09 when it is getting
increased slightly.
In the case of 2008-09 the decrease in current ratio is mainly due to the the following:
The current liabilities and provisions has increased at a higher rate than the
current assets. Thus there has been an decrease in the working capital of the
company and the liquidity had decreased.

In the case of 2009-10 the current ratio had increased drastically to 1.5 along with the
quick ratio while the Cash Ratio decreased.
The main reason behind this is the soring rise the fuel prices and the recessionary
period which had hit the world.
There has been a steep rise in the inventory level along with the
loans and advances but along with this the current liabilities also increased. The
cash demand was met due to this.
But this effect was not shown in the Cash & Bank balance as it maintained a
steady Cash Ratio.
The rise in the inventory level was mainly due to the fall in the demand of the
petroleum products due to rise in the prise which is according to the Laws of
Demand saying that as the Price increases the demand decreases.
But the company`s management must be given the credit to maintain such good
Financial condition amidst the odd which every industry faced during this period
as the ratio is within the threshhold limit of 2:1. Moreover the company took
strict control on the Debtor position and never allowed the Debtors to rise up
abruptly thus minimising the bad debts.

In 2010-11 as the situation normalised, the Current Ratio decreased to 1.25:1 and the
Quick Ratio decreased as well. The main reason behind this are the following:
There has been a steep fall in the Inventory Level as the excess stock was
liquidated.
More strict control was implemented on the Loans & Advances.
The debtors came down even further to Rs. 5937.86 Crores.
In 2011-12, the Inventory has increased by 44.75% , which has resulted in the increase of
the Current Ratio, when actually the Quick Ratio has decreased to 0.51:1. But the Cash
Ratio has increased also which shows the Absolute Liquidity has increased for the
Comapany.
CONCLUSION:
All the Liquidity Ratio are well within the alarming limits of the Industry. But the Current Ratio
is highly fluctuating for the Company whereas the Acid Test Ratio is more or less stable. This
shows that the fluctuation is due to the Inventory level. So company should try to maintain an
even inventory level by following a proper Inventory Control Technique/Model like EOQ Model
or ABC Model.
43
Working
Capital
Analysis Of IOCL
Rs.(In Crores)
Particulars
Current Assets, Loans &
Advances
2007-08
2008-09
2009-10
2010-11
2011-12
24277.79
24702.69
30941.48
25149.60
36404.08
6699.48
6736.06
6819.23
5937.86
5799.28
c)Cash & Bank Balance
744.17
925.97
824.43
798.02
1315.11
d)Other Current Assets
31.55
775.35
790.14
1051.58
1141.50
4730.10
5917.11
13556.02
11598.13
14728.83
36483.09
39057.18
52931.3
44535.19
59388.8
23697.85
26576.76
33407.99
32754.58
34480.17
1978.51
3129.11
1172.99
2603.46
10271.56
25676.36
29705.87
34580.98
35358.04
44751.73
10806.73
9351.31
18350.32
9177.15
14637.07
a) Inventory
b)Sundry Debtors
e)Loans & Advances

Total Current Assets(A)
Current Liabilities &
Provisions
a)Current Liabilities
b)Provisions
Total Current Liabilities(B)
Net Working Capital
Table 6 : Working Capital including Current Assets and Current Liabilities of IOCL
Fig. 15 : Bar Graph showing Working Capital including Current Assets and Current Liabilities of
IOCL
The Working Capital Requirement of IOCL as in most Public Sector Enterprises,

are met through cash credit and advances arranged mainly with the State Bank of India and other
Nationalized Banks.The excess over the margin money if required is usually covered by a
gurantee from the Central Government. Whenever the total requirements of working capital
cannot be met by Cash-Credit arrangements by SBI, IOCL can approach the Government for
term loans. On Such a request the Government ususally examines the validity of the request visa-vis the internal resources of the undertaking and makes the decision to grant the term loans.
This process of taking term loans is undertaken at the Head Office Level.
05-06 to 06-07 06-07 to 07-08 07-08 to 08-09 08-09 to 09-10
Year
Total Current Assets

Total Current Liabilities
Working Capital
7.05%
35.6%
-16.93%
33.35%
15.69%
16.41%
2.24%
26.56%
-13.46%
96.23%
-49.98%
59.49%
Table 7: Change of CA, CL and WC of IOCL from the previous years

From the above Tables and Figs. the following interpretation can be done:
The Company tries to maintain a stable working capital around Rs.10,000 Crores but has
failed to do so in the years 2009-10 and 2011-12. This is mainly because the company
could not maintain a stable Inventory Level in those years. As the inventory constitute
about 65% of IOCL`s Current Assets a strict regulation over it can largely affect the
Working Capital of the Company.
As Petroleum is an essential commodity it has an even demand in the market. So as there
is no huge fluctuations in the demand it helps in predicting the sales. But the main cause
of concern for the company is the availability of the fuel at international markets and the
rise in the International Fuel Prices over the years. As the major part of the requirement is
imported from South East Asian countries, the Ecomonic and Political scenario of these
countries also imporment from IOCL`s business point of view.
44
From Table 7 we can see that 2009-10 has been an year of huge turmoil when there was
a 36.6% increase of Current Assets which occured mainly due to increase in the
Inventory Level and Loans and Advances. The Loans and Advances increased as
Govenment issued Oil Bonds for IOCL in that year to Compensate the huge losses which
the company suffered during this year due to rise in the Crude Prices. Due to in increase
in the Fuel Prices there was a problem in the cash flow of the company. So to finance the
short term obligations the company had to go for the Short-Term Loans. Hence the
Current Liabilities had increased. The Net result was a 96.23% surge in the Working
Capital.
In 2010-11, the situation came back to normal when the Current Assets droped by
16.93% and Working Capital Decreased by 49.98%. This was mainly due to a strict
credit policy which brought down the Debtors and lowering of the inventory due to high
demand of fuels.
Breakup Of the Current Assets and Current Liabilities Under different Heads
like Cash & Bank, Debtors, Loans & Advances, Inventory
liabilities , Provisions(in CroresRs.):
Fig.16: Area Graph showing Breakup of Current Assets

& current
Fig. 17: Area Graph showing Breakup of Current Liabilities

From Fig. 16: it can be seen that :
Cash and Other Current Assets has increased at a constant rate and Sundry
Debtors has decreased at a constant rate when the Sales of the Company has
increased over the Years.
The controlling factor of Working Capital has been the Inventory which has
fluctuated over the Years along with the Loans & Advances which was geared up
from the year 2009-10 by receiving the Oil Bonds.

From Fig.17 : it can be seen that:
The provisions has drastically increased by about 294% in the year 2011-12.
The current liabilities had incresed in the year 2009-10 but after that IOCL has
maintained a stable current liability level which is good because it finances the
daily cash requirement of the Company.
46
CASH AND BANK BALANCES of IOCL( Rs.In Crores)

Cash & Bank balances
Particulars
1. Cash Balances:
a. Cash balances including
imprest
b. Cheques in hand
Total (1)
2. Bank Balances:
a) Current account
b) Fixed Deposit account
c) Blocked account
Years
2007-08
2008-09
2009-10
2010-11
2.7
3.75
2.48
85.37
698.83
701.53
726.43
730.18
746.96
749.44
712.65
798.02
27.85
185.02
64.57
123.98
14.63
0.16
42.64
9.73
0.16
194.91
9.38
0.16
74.11
10.14
0.16
134.28
0.88
0.88
0.88
744.17
925.97
824.43
798.02
Total (2)
3. Bank balances with Non

Scheduled Banks:
a) Current Account
Myanmar Economic Bank
Branch (5), Rangoon
[ Maximum balance during
the year- 0.88 crore]
TOTAL(1+2)
Table8: Cash & Bank Balances of IOCL
Fig.18 :Bar Graph showing the Cash and Bank Balance Trend of IOCL
ANALYSIS:
From the Table it can be seen that almost 92% of the Cash & Bank Balances comes from the
Cheque Balance. But it would be better if this Balance comes more from the Cash Balances or
the Balance in Current Account.

CASH CONVERSION CYCLE OF IOCL:

(in Days)
Particulars
2007-08
2008-09
2009-10
2010-11 Average
Days of Sales Outstanding
13.98
11.36
11.09
8.25
11.17
Days of Sales in Inventory
50.67
41.65
50.33
34.95
44.40
Days of Payable Outstanding
37.46
31.07
31.50
27.20
31.81

Table9: Cash Conversion Cycle
27.19
21.93
29.92
16.00
23.76
ANALYSIS:
Cash conversion cycle is likely to be negative as well as positive.
A positive result indicates the number of days a company must borrow or tie up capital
while awaiting payment from a customer. A negative result indicates the number of days a
company has received cash from sales before it must pay its suppliers.
Of course the ultimate goal is having low CCC, if possible negative. Because the shorter
the CCC, the more efficient the company in managing its cash flow.
It can be seen that the Cash Conversion Cycle for Indian Oil is on the higher side with an
average of 23.76 days. It means that IOCL have to borrow for 23.76 days to finance its
working capital requirement.

The main reason for this high CCC is a very high Inventory Holding Period. This is
because IOCL purchases Crude from the International Market and so have to maintain a high
Inventory to meet the unforeseen requirements.

The Days of Sales Outstanding is decreasing yearly which is a positive trend and is
Lowering the Cash Conversion Cycle

But the Days of Payable Outstanding is also decreasing yearly. This is mainly due to the
Circular by the Goverment of India which has restricted the payment period to be 30 days
from the receipt of the delivery of the crude.

The Year 2010-11 shows the lowest CCC of 16 days. The main reason behind this is the
lowest Inventory Holding Period of 34.95 days.

IOCL should try to get more credit period from its Creditors and lower the Inventory
Holding to lower this CCC even negative to better it Cash Flow position.
48
ANALYSIS OF THE DEBTORS IN THE EASTERN REGION:

Registration with DGS&D
Registration with DGS&D is a process by which firms can get enlisted as an approved
supplier to qualify for participation in DGS&D procurement programme.
DGS&D registers suppliers for specialized items after verification of their technical
capability, financial status and reliability as a supplier.

This registration is widely taken as a benchmark by other procurement agencies in India
both in the State & Central Sectors

20 Registration centres across the country deal with applications for registration for
registration on single window disposal basis.
Different Categories of Registration:

Indigenous Items:
Indian Manufacturers/ Assemblers/ Converters.
Authorized Agents/ Distributors of registered Indian Manufacturers
Stockist of certain specified indegenous stores
Imported Items:
Foreign Manufacturers with or without Indian Agents
Stockist of Imported Stores
Suppliers of Inported Stores
Advantages In Associating with DGS&D:

To Suppliers:
Its registration is held in high esteem by all Govt. Departments.
Award Of Contract lends respectability & Image enhancement.
Marketing effprt requires is nominal.
Consistent & Uniform purchases policies & procedures
Availability of Technical guidance for upgrading manufacturing process &

for building product quality
Uniform Quallity Assurance techniques lead to standardization
Registered Suppliers are given prior intimation about tenders.
To Buyers:
Facility of Bulk purchase of lowest competitive price.
Enables buying as & when required
Saves effort involved in tedious & frequent tendering
Just in Time availability of suppliers & inventory management
Availability of quality goods with full quality assurance back-up
Benefits of DGS&D Registration:

Rate contracts for Govt. Purchases concluded with registered firms.
Registered firms granted exemption from earnest money/ security deposit.
Tender enquiries are supplied free of cost to Small-scale Units
Issue of advance tender notices to concerned registered firms.
Quality Assurance Wing:
Quality Assurance wing of DGS&D(formally Known as Inspection Wing) is the
Inspection Agency of the Govt. Of India.
Consists of a team of professionally qualified experts, trained in India & abroad in
various disciplines of Engineering.

Renders inspection & technical services for Quality Assurance in procurements activities
Technical arm of DGS&D providing complete support in purchase activities by laying
down specifications, assessing the vendors, technical evaluation of bids & assuring
quality of stores for their conformity.

It has 35 centres covering all industrial locations in the country.
Provides third party inspection service for civil indentors.
83
Functions:
Quality assurance of products at various stages of manufacture, commissioning &
testing
Preparation of technical specifications for tender enquiry & technical evaluation
of bids
Vendor assesment for placement of contracts and registration
Testing & evaluation of stores
Failure investigation of stores
Development of small scale industries and KVIC units
Quality Audit of supplies at users end
Provides single window service by giving information about DGS&D functions to
the indentors & the industry

Assisting BIS in preparation and updating of National Standards.
Sales in DGS&D Sector for 2010-11 & 2011-12 in the Eastern

Region:
Amt.(in Crores)
Month
2010-11
2011-12
% Increase(Decrease)
April
123.84
176.48
42.51
May
143.04
199.98
39.81
June
149.02
192.26
29.02
July
143.08
243.59
70.25
August
147.71
222.28
50.48
September
166.80
242.80
45.56
October
138.15
219.22
58.68
November
178.70
202.12
13.11
December
193.01
214.90
11.34
January
167.24
166.47
-0.46
February
183.37
187.41
2.20
March
243.85
199.04
-18.38
Total
1977.81
2466.55
Table 10 : Sales in DGS&D Sector for 2010-11 & 2011-12
24.71
Fig.19 : Sales in DGS&D Sector for 2010-11 & 2011-12
85
ANALYSIS:
It can be seen from the above table that the Sales in the DGS&D Sector for Eastern
Region has seen a constant growth in 2011-12 over the previous year. For every month,
except January and March, the sales has increased from 70 to 2%. The overall growth of
sales for the year is also showing positive trend and has a stable growth of 24.71%.
This is mainly due to the excess demand of Lubes and MS/HSD in the Railways and
AirForce.
The drop in Sales in the month of March is due to the stricter credit policy due to the year
ending and more focus on the Credit Collection.
Sales Figure of DGS&D Customers on Month-wise basis in 2011-12(ER):

Rs.(in Crores)
Customers
DGS&D
Rly
Army
Air Force
DGBR
April
8.74
100.48
17.75
42.36
7.42
May
15.58
105.40
21.92
43.61
13.22
June
16.03
109.85
24.71
34.21
7.46
July
17.21
132.86
24.55
43.60
25.36
August
14.47
115.72
24.82
40.02
27.79
September
23.94
118.34
28.61
50.92
20.46
October
15.85
117.68
24.40
40.29
21.00
November
18.64
91.54
23.33
45.94
22.67
December
19.88
114.28
25.15
35.06
20.53
January
18.86
92.22
16.73
22.69
15.97
February
11.81
100.61
20.32
23.70
30.95
5.68
125.72
25.69
22.35
19.60
186.69
1,324.70
277.98
444.75
232.43
Month
March
Total
Table 11: Sales Figure of DGS&D Customers on Month-wise basis in 2011-12(ER)

Outstanding in DGS&D Sector as on 31 March 2010(ER):

Rs.(in Crores)
Particulars
Opening Balance
Current Months Sales
Total(A)
Collection(B)
Outstanding (A-B)
DGS&D
Rly
Army
Air Force
DGBR
Total
18.57
24.25
14.01
51.01
125.72
176.73
146.22
17.45
25.69
43.14
32.35
25.46
22.35
47.81
28.09
44.14
19.60
63.74
34.24
156.63
199.04
355.67
254.91
10.24
30.51
10.79
19.72
29.50
100.76
5.68
Table 12 :Outstanding from DGS&D as on 31.03.2010 (ER)

ANALYSIS:
From Table 12 it can be seen that Railways contribute about 53.07% in the total sales in
the DGS&D Sector but contributes only 30.27% in the outstanding in DGS&G Sector.
This signifies a very stable collection period and regulation over the outstanding despite
the huge transactions it gives ti IOCL.

On the other hand DGBR has contributed only 9.42% in the total sales in DGS&G Sector
but has 29.27% of the total oustanding in this sector. This is because of the negotiated
credit period with IOCL and it is regulated by the Central Government of India and IOCL
has no control over it.
Particulars
Sales
Outstanding
Outstanding as % of
Sales
DGS&D
Rly
Army Air Force
DGBR
Total
186.69
1324.7
277.98
444.75
232.43
2466.55
10.24
30.51
10.79
19.72
29.50
100.76
5.49
2.30
3.88
4.43
12.69
4.09
Table13:Showing Outstanding as a Percentage of Sales in DGS&D Sector as on

31.03.2010(ER)
87
Fig. 20 : Comparison of the Outstanding as a % of Sales in Eastern Region And Overall

for the Company.
ANALYSIS:
The above graph clearly depicts that the Outsatnding in DGS&G, Army, Airforce and
DGBR in the Eastern Region shows a sharp deviation from the Overall Outastanding
figure . Only the Railways has it near the overall Average.

Specially the DGBR shows a sharp deviation from the National Average of 2.14 and
stands at 12.69. But as already stated previously, that the Central Government fixes this
credit period in the Annual Budget with this Government Bodies and IOCL has to abide
by the Credit terms fixed by Government.

Even the Average of the DGS&G is which is 4.09 is much higher than the Overall
average of 2.06 and Army and the Railways all others have this figure higher than the
average.
From this it can be inferred that the Government has fixed different credit fecilities for
different Government Bodies.
The Average Collection Period for DGS&D can be calculated by the following
formula:
Average Collection Period= Total Outstanding / Daily Sales
Where, Daily Sales= Current Month Sales / Number of Working Days in a Month
Considering 26 days a month the Average Collection Period for Railways for month of March is
Daily Sales=125.72/26
= 4.835
Average Collection Period = 30.51/4.835

=6.31 Days
Similarly, the ACP is calculated for the other customers shown in the following table.
(In Days)
DGS&D
Rly
Army
Air
Force
31.37
14.57
20.51
13.55
132.49
20.68
24.88
10.83
22.33
37.94
91.41
20.31
33.66
12.77
23.18
21.49
88.42
20.34
27.68
13.68
22.08
16.66
39.50
18.74
40.82
16.23
29.83
19.55
20.22
20.47
32.58
10.16
18.40
13.66
25.50
15.38
21.15
16.13
22.14
14.89
28.81
22.63
42.21
14.03
23.47
15.21
34.42
20.28
33.58
11.87
23.33
16.27
31.79
17.84
38.04
16.05
26.08
27.57
50.59
24.44
40.85
13.18
22.33
27.93
37.08
21.73
March
46.87
6.31
10.92
22.96
39.13
13.16
Total
17.11
7.19
12.11
13.83
39.60
12.75
Customers
DGBR
Total
Month
April
May
June
July
August
September
October
November
December
January
February
Table 14 : IOCL`s Average Collection Period of DGS&D (ER) for 2011-12

89
Fig. 21: Comparison of IOCL`s ACP of DGS&D (ER) with Overall ACP for 2011-12
ANALYSIS:
From Table 14 , we can see that the Average Collection Period for the DGS&D customer
is 12.75 days, i.e. 13 days approximately which is much higher than the Overall average.
Fig. 21 shows the deviation of the ACP of different DGS&D customers from the Overall
Avearge of 7.53. This shows that there is a huge deviation for DGBR and Airforce and
other DGS&D. This has effected the liquidity of the Company and created a cash flow
problem.
For most of the DGS&D customers the negotiated credit period varies from 15, 30 to 60
days . so the ACP is high in their cases. From that perspective it can be said that the
Customers are following the Negotiated period of Credit.
Sales and Outstanding of Non DGS&D Customers till 31 March 2011 (ER):
Customer
Sales (in Crs)
Outstanding(in Crs)
%
Fertilizer
3908.78
56.85
1.45
Steel Plant
1523.74
20.40
1.34
Power House
1296.28
20.87
1.61
152.68
2.49
1.63
Shipping Comapny
31.10
0.63
2.03
LPG
31.89
0.51
1.60
292.67
4.84
1.65
21.91
0.27
1.23
4015.57
68.51
1.71
14372.75
140.65
0.98
Aviation
Export
Navy
R/O Agency
Others
Total
25647.37
316.02
Table 15 : Sales and Outstanding of Non DGS&D Customers till 31 March 2011 (ER)
ANALYSIS:
From the Table 15 it can be seen that about 56.03% of the Total Sales in the Non
DGS&D sector comes from the Other Customers but they contribute only 44.50% in the
total Oustanding in the same.So the Outstanding from the Non DGS&D sector from the
Other companies is only .98% of the Sales in the same which is a good indication.
Overall it can be seen that only 1.23% of the total Sales in this sector is Outstanding
amount which reduces the chances of bad dedt and indicates the efficient collection
procedure of IOCL.
91
1.23
Average Collection Period of Non DGS&D Customers in 2011-12:

Customer name
Period(Days)
Fertilizers
Steel Plant
Power House
Aviation
Shipping Co.
LPG
Export
Navy
RO/ Agency
Others
4.58
4.22
5.07
5.13
6.38
5.03
5.20
3.88
5.37
3.08
Table 16 :Average Collection Period of Non DGS&D Customers in 2011-12
Fig. 22 : Comparison ofAACP of Non DGS&D Customers with Overall in 2011-12

TheFig. 22 shows the Average Collection Period for IOCL and compares this ACP with
the ACP of the different Non DGS&G Customers.
The ACP for the Company is 7.81 in 2011-12 but the ACP for all of the Non DGS&D
Customers is much less than that. The Shipping Co. has the ACP of 6.38 which is
highest among the Non DGS&D Customers.
So it can be said that the Eastern Region has maintained a strong regulation of the
Oustanding for the Non DGS&D Customers.
Comparative Analysis of IOCL with BPCL & HPCL

DEBTORS TURNOVER RATIO AND DEBTOR DAYS (COLLECTION PERIOD)
It is a test of the liquidity of the debtors of a firm. The debtors turnover shows relationship
between credit sales and debtors of a firm.
Company Ratios
2007-08
2008-09 2009-10 2010-11 Average
27.35
32.78
36.63
48.46
36.31
13.35
11.14
9.96
7.53
10.50
53.18
57.96
60.70
51.96
55.95
6.86
6.30
6.01
7.03
6.55
64.71
70.75
75.65
101.98
78.27
Period(Days)
5.64
5.16
4.83
Table 17: Comparison DTR and ACP of IOCL with HPCL and BPCL
3.58
4.80
IOCL

Average Collection
Period(Days)
HPCL
Average Collection
Period(Days)
BPCL
Average Collection
ANALYSIS:
Fig. 23: Comparison DTR and ACP of IOCL with HPCL and BPCL
93
The Average Collection Period has continuously decreased for IOCL and BPCL over the
period of 2007-08 to 2010-11 whereas it has incresed for HPCL in the year 2010-11 after
a constant decrease over the previous 3 years.
Moreover the decrease in the Collection Period for IOCL is more acute than its
counterpart BPCL. For IOCL the ACP has decreased almost 43% which shows that
IOCL has a better collection procedure and credit policies than its competitors.
The situation is a little alarming for HPCL because the ACP has increased 17% in the
year 2010-11 after a slow decline over the previous.
However the average of ACP for IOCL is maximum among the chosen 3 comapanies
putting BPCL at rank1 followed by HPCL and IOCL. But the Average is definite going
to decrease over the years with the present collection procedure which IOCL is following.
2007-08
2008-09
IOCL
3.66
3.05
2.73
2.06
2.88
HPCL
1.88
1.73
1.65
1.92
1.79
BPCL
1.55
1.41
1.32
0.98
Table18 : Debtors as a percentage of Gross Sales for IOCL, HPCL and BPCL
1.32
Company
2009-10 2010-11 Average
Average Sales of the 3 Companies from 2006 to 2011:(Rs in Crores)

IOCL 2,35,373.62
HPCL 96,439.40
BPCL 1,14,919.51
The Debtors as a percentage of Gross Sales is seen in the above table which shows that
IOCL is definitely on the higher side in comparison to HPCL and BPCL. But the sales of
IOCL is almost double than the that of both the companies. So considering the size of the
business it is obvious that the inventory and the Debtors will be on the higher side. But
the positive side of it is that it is constantly coming down. Even in the year 2009-10
which was a year a great turmoil they maintained a low debtor percentage of 2.73.
LIQUIDITY ANALYSIS:
Company Ratios
IOCL
HPCL
BPCL
2007-08
2008-09 2009-10 2010-11 Average
Current Ratio
1.42
1.31
1.50
1.25
1.37
Quick Ratio
0.48
0.48
0.60
0.55
0.53
Cash Ratio
0.02
0.03
0.02
0.02
0.02
Current Ratio
1.38
1.13
1.55
1.36
1.36
Quick Ratio
0.40
0.33
0.38
0.45
0.39
Cash Ratio
0.01
0.01
0.02
0.05
0.02
Current Ratio
Quick Ratio
1.41
0.45
1.21
0.44
1.35
0.62
1.19
0.66
1.29
0.54
Cash Ratio
0.05
0.08
0.07
0.03
0.06
Table19 :Comparison of Liquidity Analysis of IOCL with HPCL and BPCL
ANALYSIS:
Fig.24 :Line graph comparing Current Ratio and Quick Ratios of IOCL, HPCL and BPCL
95
The Current Ratio and the Quick(Acid Test) Ratio for all the 3 Companies is
showing a fluctuating trend over the years.
The year 2008-09 had shown a decrease in the Current Ratios for all the
companies whereas the year 2009-10 showed a sharp increase in the same. But for
IOCL the increase was maximum in the year 2009-10.

This rise is a result of the sharp increase in the fuel prices in this year which
resulted in larger inventory for all the companies specially for IOCL.
For IOCL, though the Current Ratio increased sharply in the year 2009-10, the
Quick ratio rise was less. This indicates that the inventory has increased
drastically in this year. From the balance sheet it can be seen that the inventory
has increased by 25.25% in this year. Parallaly the loans and advances had also
increased by 129.1% in the same year. This abrupt rise is because IOCL received
the Oil Bonds issued by the Government of India.

Same is the case for HPCL as they also received the Oil Bonds and the rise of the
inventory, but the effect of rise of inventory was most pronounced because the
Quick ratio has incresed at a lesser rate in 2010-11.

For BPCL the rise in Current Ratio is lesser in comparison with the rise of the
Quick Ratio which had rised at a very rapid pace in 2009-10. The main reason
behind it is the rise in the grant of loans to other companies which was considered
as good.The Cash Ratio is more or less constant for the chosen companies and
among the 3 BPCL maintains a higher cash and bank balances which is a good
sign of liquidity of the company.

So in conclusion it can be said that though IOCL has highest value of for the
Current Ratio 1.37 but it is below 1.5 which is considered as good. The Quick
Ratio is also on the higher side. But in comparison with size of Sales of IOCL it
has maintained a stable ratio. But there is a chance of improvement in controlling
the Inventory and the Debtors for IOCL which can improve their liquidity
position more.
CASH CONVERSION CYCLE:
Particulars
(in Days)
2007-08
2008-09
2009-10
2010-11
Average
7.47
6.89
6.47
7.48
7.08
41.90
35.37
45.49
29.34
38.03
26.74
19.11
26.10
18.84
22.70
22.63
23.15
25.86
17.98
22.41
Table 20: CCC of HPCL
Particulars

2007-08
2008-09
2009-10
2010-11
(in Days)
Average
6.14
5.63
5.26
3.85
5.22
42.19
32.10
34.70
18.43
31.85
18.94
23.28
28.31
17.23
21.94
29.39
14.44
11.65
5.04
15.13
Table 21: CCC of BPCL

ANALYSIS:
Fig. 25: Comparison of CCC for IOCL, HPCL, BPCL
PROFITABILITY RATIO:
97
Company Ratios
IOCL
Gross Profit Ratio

Return on Capital
Employeed
Return On Fixed Assets
HPCL
Gross Profit Ratio

Return on Capital
Employeed
BPCL
Gross Profit Ratio

Return on Capital
Employeed
2007-08 2008-09 2009-10 2010-11 Average
4.47
5.00
4.51
1.50
3.87
16.89
25.78
24.53
9.84
19.26
11.26
13.69
12.32
4.78
10.51
0.42
2.35
1.17
0.65
1.15
3.26
20.49
10.50
6.64
10.22
5.53
17.81
9.51
4.93
9.45
1.82
4.27
3.92
3.14
3.29
4.45
25.79
22.24
8.28
15.19
2.64
15.27
12.41
5.26
8.89
Table 22: Profitability Ratios of IOCL, HPCL and BPCL
ANALYSIS:
Fig. 26: Area graph showing Profitability Ratios of IOCL, HPCL and BPCL
Fig.27: Line Graph showing Return on Capital Employedand Return on Fixed Assets
for all the companies, there has been a downward trend for the profit of
all the companies. For IOCL it can be said that there had been a huge fall in the
profitability and hence the Gross Profit Ratio. This is mainly due to a huge rise in the
Manufacturing, Administration, Selling and Other Expenses. This expense shot up to

Rs. 160352.58 Crores in 2010-11 from Rs. 115163.07 Crores in 2009-10. The Raw
Material consumption increased in this year which was due to the increase in the
purchase by 24.59% which decreased the Gross Profit of the Company.
The Return on Capital Employed is on the very higher side for all the 3 Companies. This
is because all these companies being PSU s a very small portion of the Capital is through
Equity Shares.
The Return on Fixed Assets has been on a comparatively higher position for IOCL than
From
the above
graph we
can see that
after the
year 2008
09 which
showed a
huge rise in
HPCL & BPCL. The main difference in the Fixed Assets of the other two Companies is
the
with IOCL is in the Plant & Machinery. The Plant & Machinery for IOCL is almost 3
times that of the other 2 Companies. This is due to the huge Refineries and Bottling
Plants which IOCL pocess.
So in conclusion it can be said that IOCL has maintained the highest average of Gross
Profit Ratio among the 3 Companies. Though there was a sharp decrease in the
Profitabilty in the Year 2010-11 the situation has completely changed in 2011-12 where
the company has registered a gross profit of 10000 Crores. So in terms of profitability
Gross
also IOCL is in a better situation than its PSU Competitors.
Profit
99
ANALYSIS OF DEBTORS UNDER RSO

Monitering and Control on Beyond Credit Outstanding:
Guidelines are issued from time to time underlining the need to moniter the outstanding and
control the incidents of beyond credit outstandings. Guidelines are also issued on the checks and
control to be exercised at supply locations to obviate the possibility of releasing supply beyond
authorised limit. The instructions are iterated below:
The copy of Credit Approval Note should beavailable with the location before
commening credit supply to any customer.
The credit approval, apart from other things must specifically contain the following:
Product to be supplied on credit
Monetary limit of credit. Where the product is to be supplied from more than one
location monetary limit for each of the supply location.

Number of days credit and Validity Period
Based on above, location/finance in-charge of location shall feed the required
details/limit in the Credit Master immidiately. Supply shall not be released beyond the
approved limits.
Following is ensured in TDM:
Password security to be maintained and password to be changed periodically.
TDM terminal to be installed in the rooms of the Location in-charge/finance incharge for authorizing exceptional cases instantly and over viewing of
functioning of S&D.
Only Finance in-charge/location in-charge to exersise financial authorization as
per TDM option.

Daily review of exceptional listing by Location in-charge/finance in-charge.
Review of one line PAD on Daily/ monthly basis by Location in-charge/finance
in-charge.
In case of Cash and Carry Customers, product to be supplied only against:

DDs or Pay Orders for the value of product or
Cheque, if cheque fecility have been approved for the party or
Fund Transfer Credit(FTC) covering the value of suply or
Adequete credit balance in the PAD
Customerwise Outstanding and Beyond Credit Outstanding for RSO:
Table 23:Customerwise Tabulation of Outstanding and Beyond Credit Outstanding under

RSO
ANALYSIS:
Fig.28: Bar chart showing Outstanding and Beyond Credit Outstanding under RSO
101
Fig.29:Line Graph showing the Beyond Credit Outstanding as a % of Outstanding
The Outstanding for the 6 Months from January to June in RSO is analysed in this
Section. It can be seen that the Outstanding in the month February is highest among the
chosen 6 months which had drastically decreased in the month of March.
The beyond credit oustanding for the first 3 months is also showing a downward trend
reaching the least in the month of March. This is because of the closing in the month of
March when the Debtors are pushed to make their due payments. All the lagging
outstandings are tried to be cleared in this month. The Private companies are focussed in
this month March and their Outstanding decreased drastically in this month by 42.63%
along with a more or less decrease from all other both Private and Goverment.
But what is alarming in this figures is that the beyond credit outstanding has jumped in
the Month of April to 6.19% from 4.56% in the previous month though the oustanding
has increased minimally by about 19.81%. This may be due to the negligence from the
administration in this month to collect the previous month`s outstanding which was
shown up in this month as beyond credit outstanding.
The situation normalized after April in the months of May and June when the outstanding
increased by 13.87% in May but decresed by 5.46% in the month of June, but for both the
months the beyond credit outstanding decreased to 5.32% and 5.12% repectively.
So in conclusion it can be said that Indian Oil RSO has a highly fluctuating trend of
Outstanding from debtors as well as the Beyond Credit Oustanding which can result into
the increase in the bad debts of the company.

Productwise Outstanding and Beyond Credit Outstanding for RSO:
Table24: Productwise Tabulation of Outstanding and Beyond Credit Outstanding under

RSO
ANALYSIS:
Fig.30:Graph showing Productwise Outstanding under RSO

103
From Fig. 30 it can be seen that among all the products, Naphtha and FO is showing the
highest Credit Outstanding. This due to the credit policy for this two products where the
Company allows 30 days of credit to the Customers. But the Beyond Credit Outstanding
for this two Products is almost nil for the considered 6 Months. This is a highly positive
sign becuase most of the Naphtha and FO customers belongs from Private-Others
Category.
Almost 99% beyond credit outstanding comes from the Lubes and MS/HSD but
relatively the outstanding figures for these two products are almost half that of FO and
one-third that of Naphtha. The Credit Period for the Lubes is 60 Days for Government
and 30 days for the Non- Government.

By analysing the actual data it can be seen that the maximum beyond credit outstanding
for the Lubes and the MS/HSD comes from the RO Agencies, Private as well as
Government Bodies. But the the Beyond Credit Outstanding comes mainly from the
Government Bodies. So the debts are secured in that sense.

But this extra fecility should not be given to the Government Companies because they are
already enjoying an extra 30 days fecility over the Private Companies.
Row Labels
POWER HOUSE-
Rs. (In Lacs)
Outstanding Amount Beyond Credit Amount

GOVT
LDO
LUBES
STEEL PLANTSGOVT
BITUMEN
LUBES
MS/HSD
P&S OTHERS
GOVT-OTHERS
BITUMEN
FO
LDO
LPG
LUBES
MS/HSD
P&S OTHERS
72.65
44.54
28.12
6.75
0.00
6.75
9.29
0.00
24.00
362.65
174.37
48.08
50.23
0.00
0.00
153.38
140.15
137.43
89.60
26.36
18.89
0.00
147.37
13.60
18.37
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
312.08
147.37
47.22
43.15
7.02
0.00
0.00
0.00
0.00
1.47
1.47
0.04
0.04
2.73
2.73
STEEL PLANTS-PVT
LUBES
13.08
13.08
0.00
0.00
0.00
0.00
POWER HOUSE-PVT
LUBES
2.80
2.80
0.00
0.00
0.00
0.00
8,109.72
119.68
23.63
0.05
0.00
79.21
40.42
0.00
0.00
1.48
0.23
0.00
LPG-PVT
LPG
PRIVATE-OTHERS
BITUMEN
FO
LUBES
MS/HSD
NAPHTHA
P&S OTHERS
RO/AGENCIES
LPG
LUBES
MS/HSD
1,083.42
133.58
36.94
0.00
4.27
564.95
2,618.01
212.99
459.68
4,674.14
121.28
179.56
0.47
19.75
159.34
74.29
0.00
0.00
74.29
37.19
8.79
0.00
0.00
41.37
0.00
0.00
46.62
Grand Total
9,825.36
522.50
5.32
Table 25 :Pivot Table showing the outstanding status Customerwise and Productwise
105
CASE STUDY
Issuance of Credit Note against an Outstanding of Rs. 653319 on account of

Customer M/s Rifle Factory, Ishapore (SAP 138174) due to discounts not being
passed.
1. M/s Rifle Factory, Ishapore is IOCL`s major Customer under defence category in RSO.
IOCL has All India Rate Contract with Ordnance Factory Board for the supply of various
grades of Lubricants for their 39 Factories. M/s Rifle Factory, Ishapore is one such Unit.
2. IOCL had lodged a claim against their outstanding and M/s Rifle Factory have replied
back that they have no outstanding to IOCL for all the factories.
3. After detailed investigation of all the invoices IOCL have identified the following.
4. M/s Rifle Factory have placed various supply orders on IOCL according to the rate in the
Rate Contract and have made supplies accordingly. However there are certain cases in
which higher rates have been charged and hence those cases have resulted in generation
of non-claimable outstanding in their PAD with IOCL.
5. No Credit Note has been Issued till date for the cases mentioned in the Note.
(in Rs.)
Invoice No. Qty (in

Ltrs)
605163175
9450
608494467
840
840
3150
9450
9450
9450
9450
3360
9030
420
5040
8400
608494650
612522446
615999647
616000145
616000377
616015743
616159880
619510331
620557593
622284222
Charged
NTV
Applicable
LAV
Invoice
Value(actual)
Correct
Invoice
Difference
45.13
30.94
511009
348790
162219
55.88
42.21
61.04
60.40
59.26
34.66
27.71
37.95
56.96
55.82
56.96
57.37
53.40
38.55
38.55
40.15
44.35
61425
46398
251612
746923
732825
746923
751993
243148
520056
24189
290264
565720
38099
30460
156433
704383
690285
704383
709453
234794
456159
21217
265167
479543
23326
15938
95179
42540
42540
42540
42540
60.4
60.81
55.30
43.95
43.95
43.95
52.32
624393300
TOTAL
Table 26: Invoice Details of M/s Rifle Factory, Ishapore
107
8354
63897
2972
25097
86177
653319
Date
Invc. No.
Charged
Amt.
App.
Amt.
Diff.
Charged App
2.4.2004
605163175
511,009
348,790
162,219
68,237
16.7.2004
608494467
61,425
38,099
23,326
1,365
7,510
21.12.2004
608494650
46,398
30,460
15,938
5,673
150
113
251,612
11.3.2005
615999647
29.11.2005
21.2.2006
13.8.2006
616000145
616000377
616015743
21.5.2007
616159880
16.8.2007
619510331
19.1.2008
46,781 21,455
936
4,658
93
3,724
74
429
2,852
57
1,949
Diff.
19,654
13,415
6,239
6,825
4,233
2,592
5,155
3,384
1,771
39
19,127 11,637
27,957
17,381 10,575
620557593
615
383
233
704,383
42,540
91,325
1,827
86,124
1,722
5,201
104
82,991
78,265
4,727
732,825
690,285
42,540
89,601
84,400
5,201
81,425
76,698
4,727
1,792
1,688
104
91,325
86,124
5,201
82,991
78,265
4,727
1,827
1,722
104
91,945
86,743
5,201
83,555
78,828
4,727
1,839
1,735
104
29,729
28,708
1,021
27,016
26,088
928
595
574
20
63,499
55,697
7,802
57,784
50,684
7,100
1,905
1,671
234
2,953
363
11
2,688
2,357
330
89
2,591
78
35,441
32,377
3,064
32,252
29,463
2,789
1,063
971
92
86,177
61,528
52,156
9,373
62,858
53,283
9,575
653,319
1,846
684,556
1,565
281
602,421 82,134
573,152
746,923
751,993
243,148
24,189
290,264
TOTAL
30,764
Charged App
746,923
520,056
15.2.2011
95,179
Diff.
612522446
9.6.2005
30.8.2011
156,433
Sales Tax(12.5%)
ED(16%) & Cess(2%)
Bill Value
704,383
709,453
234,794
456,159
21,217
265,167
42,540
42,540
8,354
63,897
2,972
25,097
622284222
624393300
565,720
5,492,485
479,543
4,839,166
Table27:Breakup of the invoice of M/s Rifle Factory in ED, Sales Tax and Cess
512,346 60,806
ANALYSIS
SUGGESTION:
The difference in charged NTV and applicable LAV per invoice is having difference on account
of exise (Rs. 82134) and on account of Sales Tax (Rs.60806) ie. Total amount Rs.142940. The
same had been calculated on the basis of the breakup of the pricing. The charged NTV had been
checked with the SAP and found correct. The Applicable LAV had been checked with the
pricing agreement as per attached annexures and found to be correct.

FINAL DECISION:
ED , RSO approved the issuance of credit note for differential amount of price for mentioned
invoices except for ED and Cess differential. A Credit Note of Rs.571185 was issued for Rifle
Factory.
RATE CONTRACT FOR SUPPLY OF DIFFERENT TYPES OF LUBRICANTS BY

GOVERNMENT OF INDIA, MINISTRY OF DEFENCE, ORDANANCE FACTORY
BOARD
With refence to IOCL`s rate, a Rate Contract was placed on IOCL on behalf of President
of India for supply of 55 Items in various places of India.
The period of contract was for 12 months
The prices towards the supply of various grades of lubricants and greases was according
to the Annexure 1 & 2.
The prices were exclusive of Exice Duty@ 16% and Education Cess@ 2% on Exise
Duty.
Sales Tax and other Statutory Levels was paid applicable on the Date of Supply.
The Ordanance Factory was also entitled for an additional Discount of Rs.500 per Kl
except for the few items mentioned in the Annexure.
109
Conclusion :
The Debtors of IOCL are more or less well managed because though the Sales is
increasing every year the Sundry Debtors are decreasing. So is the Average Collection
Period which is also showing a downward trend every year.

But from the Schedules of Sundry Debtors it can be seen that Unsecured Debts are on the
Higher side in comparison to the Secured loans and almost 67% of the of the Total Debt
per year is unsecured. Another aspect is that almost 96% of this Unsecured Loans are
from the Other Companies which are not Subsidiaries of IOCL.

The debts from the Other Companies are almost 78% of the total Debt which should be
reduced to meet the Cash Flow of the Company.

The main problem of the Current Assets of IOCL is the Inventory Control which shows a
huge fluctuation every year from -16% to 35.6%. So a better Inventory Control
Procedure should be taken up by the company to regulate its Working Capital.

The Cash Conversion Cycle is on the higher side for IOCL whose basic cause in the
Inventory Holding Period only.

The debtors in the Eastern Region have a higher Average Collection Period than the
Overall for the Company. If this ACP can be reduced then the Overall Collection period
can also be reduced which will also help in reducing the CCC of the Company.
In comparison to the competitors like HPCL(6.55 days) and BPCL (4.80 days), IOCL gas
a much higher Average Collection Period of 10.5 days which can be brought down if the
Credit period in the DGS&D in decreased as the ACP of Non DGS&D is well below the
Overall Company average.
Recomendations:
1. Strict collection procedure should be implemented for the Beyond Credit outstanding
Customers for IOCL. In severe cases Debt Collection Agencies can be implemented to
collect the debts and reduce the Bad Debts.

2. IOCL restrict the credit period to the consumers specially the DGS&D Customers so
that the tax proceeds and the consequent equivalents interest amount can be enjoyed for a
longer policy
3. Just in Time Inventory mechanism should be followed by IOCL to reduced the
Inventory Holding Period and there-by the CCC of the Company can be decreased
mitigating the problem of cash flow.

4. IOCL should try to get a higher Credit period from its Creditors to infuse more
liquidity. This can will also solve the Cash flow problems and can allow IOCL to give a
better Credit Period for its Debtors to retain a competitive edge in this Highly competitive
market with Private players like Reliance and Essar Oil entering the scenerio.
5. For better receivable Management, IOCL has to take some Steps:
a. Prices and Discounts should be updated in SAP regularly,so that correct
challans are generated from time to time.

b. There should be reduction in lead time between Sales Data and Actual Data of
dispatch from location.

c. All the customers should use the RTGS or Core-to-Core fecility for better
regulation
6. IOCL buys product at International Prices and it is forced to sell the products to
ratailers and customers at Goverment regulated prices, which is sometimes less than the
purchase prices. All this leads to huge loss to IOCL.Therefore IOCL has to take some
policies:
a. Government should consider the better Pricing Policies to prevent losses.
b. To allow IOCL to control the prices of the Premium Brands. Rates of
commercial products like Naphtha and Bitumen should be regulated correctly.

c. By introduction of differential rate to different income groups in the society for
the same product. Eg. High rate of LPG cylinders to high income groups and
subsidized rate to low income groups.
111
Limitations:
1. Time is definitely the main Constraint. Time was not sufficient enough to assess all
processes and policies of an organization of the stature of IOCL.
2. Inadequecy of required data is another constraint. In such situations data is taken with
certain assumptions.
3. Even if the actual data can be gathered, it is often against the company policy to
disclose such data in the project report.

4. 2011-12 Annual Report was not published during the preparation of the report and so it
is neglcted in many of the analysis.
References:
Books:
Khan M.Y. and Jain P.K. (2007), Financial Management, The McGraw-Hill Companies
Pandey I.M.(2008), Financial Management
Weblinks:
http://www.iocl.com
http://www.hpcl.com
http://www.bpcl.com
http://myiris.com/shares/research/motilal/INDOILCO_20100129.pdf
http://www.dart-creations.com/article-tree/dbt/Debt_Collections_Law.html
http://www.profitera.com/pdfs/A%20Formula%20for%20Success_Karl%20Boone_Ian%20Robe
rts.pdf
http://www.articlesbase.com/finance-articles/debt-collection-techniques-420145.html
http://www.feefunding.com.au
http://www.sooperarticles.com/business-articles/things-do-before-selecting-debt-consolidationcompany-60339.html
http://www.magfinancial.com/account-receivable-management.cfm
http://www.indiastudychannel.com/projects/1583-working-capital-management.aspx
http://www.ferret.com.au/c/Business-Diagnostics-and-Solutions/Debtor-Control-n667421
http://www.business.qld.gov.au/dsdweb/v4/apps/web/content.cfm?id=7415

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Summer Internship Project Report

Under the kind guidance of

authority for that.

Pawan kumar meena

Pawan kumar meena

solutions to the existing problems has been formulated.

Internship Project in this esteemed organization.

Pawan kumar meena

Cash Conversion Cycle

OIL INDUSTRY OVERVIEW

tones per year.

OIL INDUSTRY STRUCTURE

Fig.1: Structure of Oil Industry in India

Oil Industry Dynamics in India

significantly in the coming years

Company Market Share (%)

Fig. 2: Market Share of Different Companies in India

Fig.3: Formation of Indian Oil Corporation Ltd.

Beginning in 1959 as Indian Oil

As the flagship national oil company in

Indane cooking gas to the doorsteps of over 50 million

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

PRODUCTS PROFILE (IOCL)

Furnace Oil (F.O.)

10. Mineral Turpentine Oil (M.T.O)

different terrains and regions of the Indian subcontinent.

16 State Offices and over 100 decentralised administrative offices.

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

finishing; Coke Calcining, etc.

MMTPA to 15 MMTPA, among others.

of the frequency of accidents.

Fig. 5: Pipeline Network of IOCL in India

friendly mode for transportation of crude oil and petroleum products.

crude oil at Haldia port through smaller tankers.

Jammu and Leh in J&K.

commissioned in December 2008.

use of a 14 km long existing pipeline from Churwa to Kandla.

coming up under the Naphtha Cracker project at Panipat.

amongst others. The countrywide marketing operations are coordinated by 16 State

A Prescription for Debt Recovery Management, Towards Reducing

the business reality along with the

To know the Credit Policies of IOCL for different Customers.

Analyse the efficiency of different Collection Procedures with special emphasis on

the e-Collection Mode like RTGS and Core-to-Core banking.

whom credit sales have been made.

credit or receivables or capital cost.

the profit of firm will increase.

What are Debtors?

low as most of their sales are cash sales.

Ways to manage debtors - credit policy and collection procedure

on time it can mean the difference between prosperity and failure.

liquidity will be equal. We can show it graphically.

Fig. 6: Relation between Profitability and Liquidity

increase the length of credit period according to reputation of customers.

cost of investment in credit sale.

Credit policy analysis

policy is based on following factors.

a) Collection of debtors information

useful for knowing capability to pay the debt.

following steps will be taken under formulation of collection policy.

from past sundry debtor and their turnover ratio.

credit, as well as the rights and obligations of both parties.

Essential components of a credit application:

comprehensive details of all directors/partners/owners