Project Report

Xavier Institute of Management and Entrepreneurship, Bangalore
1

LIST OF TABLES

1. Financial statement analysis format 39
2. Financial statement analysis example 40
3. Role matrix 35
3. Control risk assessment questionnaire 50
5. Vendorwise stock 57
6. Vendorwise debtors 58
7. Vendorwise creditors 59
8. Vendorwise working capital 60
9. Net working capital 62
10. Vendorwise working capital variation 63
11. DSO, DPO, DIO Calculation 67


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LIST OF FIGURES

1. Permanent and temporary working capital 11
2. Fixed assets investment policy 13
3. Matching financing 14
4. Conservative financing 15
5. Aggressive financing 15
6. Flowchart- Order to cash process 20
7. Flowchart- LC process 35
8. Vendor wise working capital 61
9. Net working capital 62
10. Cash conversion cycle 66


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ABBREVIATIONS
SOP: Standard Operating Procedure
AR: Accounts Receivable
CS: Credit Service
VP: Vice President
CFO: Chief Financial Officer
WC: Working Capital
NWC: Net Working Capital
GWC: Gross Working Capital
PAN: Permanent Account Number
TIN: Tax Authentication Network
TAN: Transaction Authentication Number
ST: Sales Tax
VAT: Value Added Tax
CST: Central Service Tax
PO: Purchase Order
SO: Sales Order
SCC: Supplier Code Creation
OPF: Order Processing Form
OVF: Order Value Form
PDC: Post Dated Cheque
LC: Letter of Credit
OPT: Order Processing Team
BOE: Bill of Exchange
TDS: Tax Deducted at Source
POD: Proof of Delivery

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EDC: Electronic Data Capture
RTGS: Real Time Gross Settlement
NEFT: National Electronic Funds Transfer
OE: Operation Executive
HO: Head Office
SOD: Segregation of Duties
DSO: Day Sales Outstanding
DPO: Day Payable outstanding
DIO: Day Inventory Outstanding


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EXECUTIVE SUMMARY
The project was done in the Finance & Credit Services Departments, in the headquarters of
Westcon (India) Pvt. Ltd. in Bangalore from May 10, 2012 to July 7, 2012. The learning obtained from
the internship is far beyond what can be comprehended in this report. Attending meetings, observing the
employees, observing the problems arriving at the CFOs desk, the way they are tackled, observing team
work in practice etc. added lot of value.
a) Objectives
The objective of the project was to analyze in depth the Accounts Receivable processes and its
various mechanisms bring out an SOP documenting the same. This would act as a process guide to the
employees of the company. Special stress was given to internal controls while analyzing the process. The
project also aimed at analyzing the working capital and for the year 2011- 12 and the cash conversion
cycle of the company.
b) Results
SOP for AR process was prepared.
A scientific format for the CS Team for determining the credit limit for a new customer or for
increasing the credit limit for existing customers. This was prepared in MS Excel. On inputting
certain values from the financials the excel sheet would give the approximate credit limit.
The Role matrix for AR process was prepared.
The Control Risk Assessment Questionnaire for the revenue cycle was answered and a score of
96% was obtained.
The vendor wise and net working capital for the company for the financial year 2011- 12 was
calculated.
The vendor Blue Coat shows higher variation in working capital than expected.
Operating Cycle of the company = 106 days
Cash Conversion Cycle company = 41 days
c) Conclusions
The master file containing the data on the customers needs updating.
The preliminary analysis of financial reports and bank statements for fixing or changing credit
limit can be done by the Credit Service Team itself.
The duties have to be segregated properly without giving chances for fraud.

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The processes have to be in place for early detection of mistakes and fraud.
Trust plays an important role in organizations and can be misused.
Business with the vendor Blue Coat is not profitable.
The cash conversion cycle of the company is quite high.
d) Recommendations
The scientific format of setting credit limit can be used by the CS Team for initial fixing of the
credit limit before it goes for approval to the VP Finance.
The customer database should be complete with all the necessary information (TIN number,
TAN, contact details etc.) during customer registration itself. The database should be updated
promptly in case of any change.
The company can preferably hire an external consultant evaluate the segregation if duties and
SAP access levels and suggest changes. An external consult can evaluate impartially without trust
factor coming into picture.
The employees should be given training to be out of the undue influence of trust.
The company can exit from business with the vendor Blue Coat as it is not profitable.
Cash conversion cycle of the company has to be reduced by enforcing stricter collection and
reducing the stocking period of stock and sell products.


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1. INTRODUCTION
1.1 Background
The study pertaining to my project was done in the Finance & Credit Services Departments, in
the headquarters of Westcon (India) Pvt. Ltd. in Bangalore. The Parent Company founded in the US in
1985, Westcon Group is the world's leading specialty distributor of networking, convergence, security,
mobility and collaboration IT solutions. Westcon is a USD 4+ billion, multi-national company with
operations in 43 countries on all continents and 2,800+ employees. Westcon serves customers in over 100
countries worldwide, with world-class logistics capabilities, and is the only distributor in the world
authorized to carry products from all leading convergence manufacturers. Westcon (India) Pvt. Ltd has its
regional presence in 9 locations across India, apart from SAARC. (Company Profile- Annexure 1)
The project aims at analyzing the working capital of Westcon (India) Pvt. Ltd and to prepare a
Standard Operating procedure (SOP) for the accounts receivable process. The project also analyses the
need of internal controls in Accounts receivable functions of the department.
Working capital represents operating liquidity available to a business. It is needed to pay planned
expenses, meet the short-term day to day obligations of the business and to build the business. Hence it
can be called the lifeblood of the business and its effective management is critical. A trading concern will
need working capital for purchasing goods and providing credit to its customers in addition to other day
to day expenses. Adequate working capital enables a firm to make prompt payments, create goodwill,
leading to high solvency and credit standing which helps in easy arrangement of loans from banks on
favorable terms, enables timely and regular payment of salaries and wages and it also helps in facing
spikes in cash flow requirements. On the other hand, excessive working capital includes the idle funds
which earn no profit for the firm. It reduces the overall efficiency of the business. It leads to unnecessary
purchasing and accumulation of inventories. This increases the inventory carrying cost. The key to
Working capital is that it should be maintained at an optimum level.
An SOP for all the processes of a firm is an ideal requirement. It acts as a reference to the existing
employees and also helps as an induction tool for new employees to know how to carry out their day to
day operations.
There are various incidents of frauds happening in businesses all around the world in accounts
receivables. It is therefore necessary to protect this component of the Working Capital, where in the
internal controls play a vital role.

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1.2 Objectives
To analyze in depth the Accounts Receivable processes.
To prepare a Standard Operating Procedure (SOP) - Accounts Receivable (AR) for the company,
which would document all the aspects of AR, which would act as a process guide to the
employees of the company.
To analyze the working capital and for the year 2011- 12 and calculate the cash conversion cycle
of the company.
To analyze the level of internal controls the AR process has.
To prepare a scientific format for determining the credit limit for a new customer or for
increasing the credit limit for existing customers. This will help the credit service team (CS
Team) to analyze the financials and determine an approximate credit limit for the partner.
1.3 Assumptions
As the company is not publicly listed, the financial statements are confidential. I have assumed
that the information provided by my manager depict the true picture of the company.


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2. METHODOLOGY
Data were obtained from both primary and secondary sources.
Primary: Data that has been collected from first-hand-experience is known as primary data. The major
sources of primary data were through
(a) Data given by the company: The financial data of stock, debtors and creditors was given from the
company database.
(b) Interviews with the employees of company.
The Credit Service (CS) Team shared a large part of data required to prepare the SOP on accounts
receivable. The steps involved in order to cash process, samples of documents involved and screenshots
of SAP pages involved in accounts receivable process were provided by CS team. The Vice President of
Finance and Operations gave inputs about how the credit limits are set.
(c) Attending Meetings of the company
There were few a instances where in, was allowed to attend sales meetings leading to conclusion
of deals, as well as instances being part of credit insurance (for debtors) meeting of the company with the
insurance broker, Underwriter and the Insurer.
(d) First hand observations
There were several firsthand observation experience when real time transactions were processed both in
credit services and accounts receivable team.
Secondary: Data collected from a source that has already been published in any form is called as
secondary data. The secondary sources of data were from internet based websites of both the company as
well as others, textbooks, company financials etc.
On collecting data for AR process it was observed that focus has to be given on internal controls
as it is where the cash comes in. Role matrix and control risk assessment questionnaire was used to
analyze the level of controls in the company.
The vendor wise working capital of the company of was calculated and the vendors which are not
profitable for the company were identified. Also the operating cycle and cash conversion cycle for the
year were calculated.

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3. INTRODUCTION TO WORKING CAPITAL
The two types of capital required for a company are fixed capital and working capital.
Fixed capital is that portion of the total capital that is invested in fixed assets (such as land,
buildings, vehicles, plant and equipment) that stay in the business almost permanently, or at the
very least, for more than one accounting period.

Working capital is that portion of total capital that is used to carry out the day to day operations
of an organization. It can be called operating capital in the sense that it the capital with which the
business is worked over. It is the capital that is invested in various current assets such as debtors,
inventory, cash balance, bank balance etc.
3.1 Concepts in Working Capital
Net and gross Working Capital
Gross working capital (GWC)
GWC refers to the firms total investment in current assets.
Current assets are the assets which can be converted into cash within an accounting year (or
operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills
receivable and stock (inventory).
Net working capital (NWC)
NWC refers to the difference between current assets and current liabilities.
Current liabilities are those claims of outsiders which are expected to mature for payment within an
accounting year and include creditors (accounts payable), bills payable, and outstanding expenses.
NWC focuses on liquidity position of the firm and the judicious mix of short-term and long-term
financing. It can be positive or negative.
Generally the term working capital refers to Net Working Capital.
NWC = Current assets Current liabilities

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NWC is necessary as the cash inflows and outflows do not coincide. The cash outflows due to
current liability payments are generally predictable but the inflows are not easy to predict. The more
predictable the cash inflows are, better management of working capital can be achieved.
Permanent and Variable Working Capital
Permanent or fixed working capital
A minimum level of current assets, which is continuously required by a firm to carry on its
business operations, is referred to as permanent or fixed working capital.
Fluctuating or variable working capital
The extra working capital needed to support the changing production and sales activities of the
firm is referred to as fluctuating or variable working capital.

Figure1: Permanent and temporary working capital
3.2 Determinants of Working Capital
1. Nature of Business: Manufacturing industries and trading organizations need more working
capital than in the service business organizations. A service sector firm does not require any
amount employed in stocking of goods. But in the manufacturing or trading firm, inventory are in
large amount. So, they would need more working capital.
2. Size of business: Working capital requirement of a firm is directly influenced by the size of its
business operation. Small businesses need very small fixed capital as they have only low amount
of fixed assets but need high working capital for paying day to day expenses. But large businesses
require more fixed capital than working capital for purchasing fixed assets.

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3. Storage Time or Processing Period: Time for which the stock is kept in store is called storage
period. If storage period is high, a firm should keep more quantity of goods in store and hence
requires more working capital. Similarly, if the processing time is more, then more stock of goods
must be held in store as work-in-progress.
4. Market and demand: If the demand of the product is high a small amount of working capital is
enough because the money earned from sales can fulfill the shortage the operating expenses. If
demand is less, it is required to have larger amount of working capital because there is not enough
sales to finance the day to day expenses.
5. Manufacturing policy/ Seasonal Requirement: Some companies stop or decrease the
production level in off seasons and may also reduce the number of employees or decrease the
purchasing of new raw material. Then they can decrease the amount of working capital. On the
other hand, if there is similar level of operation throughout the year, the company will need a
large amount of working capital. In certain business, raw material is not available throughout the
year. Such business organizations have to buy raw material in bulk during the season to ensure an
uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the
form of raw material inventories which gives rise to more working capital requirements.
6. Credit policy: A longer credit period for customers requires more investment in debtors. Hence
more working capital is needed. The firm which allows less credit period needs less working
capital. If a company purchases all goods on credit and sells on cash basis or advance basis, it
needs only a very low amount of working capital. If the company purchases on cash basis, and
sells on credit basis, it will require a large amount of working capital for continuing our business.
7. Potential Growth or Expansion of Business: If the business is to be extended in future, more
working capital is required.
8. Operating efficiency: The operating efficiency of a firm also affects the firm's need of working
capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum
utilization of assets in turn results in more fund release for working capital.
9. Inflation/ Changes in Price Level: The rise in price will require the firm to maintain large
amount of working capital as more funds will be required to maintain the sale level of current
assets.
10. Dividend Policy: The need for working capital can be met with the retained earnings. If a firm
retains more profit and distributes lower amount of dividend, it needs less working capital.

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11. Access to Money Market: If a firm has good access to capital market, it can raise loan from
bank and financial institutions. It results in minimization of need of working capital.
12. Working Capital Cycle: When the working capital cycle of a firm is long, it will require larger
amount of working capital. But, if working capital cycle is short, it will need less working capital.
3.3 Policies related to current assets investment
There are three alternative policies related to total amount of investments made in current assets.
The three policies differ in respect to the total amount of current assets carried to support any given level
of sales. The three policies are:
Relaxed or conservative policy: The firm carries relatively large amounts of cash and cash
equivalents, inventories and receivables. The time span of credit period extended to the debtors is
longer in order to promote sales.
Aggressive or restricted policy: The firm holds minimum cash and cash equivalents, inventories
and receivables. The firm would hold a minimum level of safety stock of cash and inventory and
have a tight credit policy for credit sales with the risk of losing sales. It has a greater risk
compared to the relaxed policy.
Moderate policy: This falls between the relaxed and aggressive policy in terms of current assets
carried and expected return and risk.

Figure 2: Fixed assets investment policies


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3.4 Financing Working Capital - Policies
How to finance current assets is an important decision to be taken in working capital
management. Current assets can be funded either by short term sources or by long term sources.
Financing mix deals with the proportion of long term and short term resources used to fund the current
assets. There are three basic approaches for this. They are:
Matching/ hedging approach
Conservative approach
Aggressive approach
Matching approach

Figure 3: Matching financing
In this approach, the maturities of debt are matched with the maturities of financial needs. The
maturity of source of funds should match the nature of assets being financed. Here, the long term funds
are used to finance the fixed portion of the current asset requirement and short term funds are used to
finance the fluctuating current asset requirement.


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Conservative approach

Figure 4: Conservative financing
In this approach the use of short term funds are restricted to only emergency situations or
unexpected cash flows. The estimated requirement of total funds is met from long term sources. In this
approach the interest cost will be high and can affect the profit of the company. DLF Realtors, Future
Group etc. witnessed reduction in profit due to high interest costs. The company follows conservative
approach in financing its current assets. The source of long term funds to a certain limit is the parent
company itself. Hence the interest rate is low compared to borrowing from banks.
Aggressive approach

Figure 5: Aggressive financing
In this approach, a portion of permanent current assets are also financed by short term sources.
Risk involved in this approach is quite high.


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4. ACCOUNTS RECEIVABLE
90% of the sales of the company are credit sales. Hence debtors are the most valuable current
assets of the company. It is the major source of cash flow. Hence the accounts receivable process is
approached in detail in the project.
A company will have to extend credit to its customers, which is critical in this competitive
industry. It is an important marketing strategy to increase sales. Credit sales help in retaining existing
customers and attracting new customers. Receivables are more liquid than inventory.
Credit sales also include certain costs. They are:
Cost of funds employed
Credit Insurance for debtors
Bad debts (in spite of due diligence / credit evaluation)
Cost of the administrative set up to keep track of the receivables and its collection.
4.1 Order to Cash Process
Order to cash (O2C or OTC) normally refers to the business process for receiving and processing
customer sales. The steps followed by the company in processing an order are as follows. The information
about the process was obtained by interviewing the employees.
1. Customer requests a quotation from the company.
2. The company gives the quotation for such products (after calculating the margins of such deal) and the
delivery dates (after calculating the approximate lead time) along with other terms and conditions.
3. Customer places a Purchase order (PO) to the company. PO specifies price, quantity and all other
items mostly based out of the quotation given earlier.
4. Branch head and Sales head approves the PO after estimation of margin, credit amount etc. It takes
about two days.
5. If the customer is new, the Credit Service Team (CS Team) registers the customer in SAP using a
Supplier Code Creation Form (SCC) (SCC Format- Annexure 10). SCC specifies various
documentation / data requirements like PAN, TIN, TAN, ST numbers etc. It takes one day.

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6. The credit limits to the new partner are fixed after analyzing the financials. It is done by the Vice
President (VP), Finance.
The financials analyzed include;
Audited annual report (Balance Sheet for the previous two years, Profit and Loss account
for the previous two years)
Bank Statement for the previous six months.
Income tax return acknowledgement.
Registration of Company (ROC) documents.
The same documents are required in case the credit limit of an existing partner needs to be changed. It
takes around 3 days to finalize the credit limit.
7. Payment terms for customers are fixed by the Head Office Credit Service Manager/ VP, Finance.
100% advance payment: Payment is made before processing the order.
Advance against delivery: Payment is made after processing the order but before
delivery.
30/45/60 days credit: Payment after 30/45/60 days from the date of delivery.
30/60 days against the Post Dated Cheque (PDC): Payment through account payee
cheque dated 30/60 days from the date of delivery.
30/45/60/90 days Letter of Credit (LC): Beneficiary bank pays the amount on the due
date which is 30/45/60/90 days from the day of delivery.
In case the customer requests for more days of credit than that offered by the company, interest is
charged at 18% p.a. for the additional days of credit.
8. Order Processing Form (OPF) (OPF Format- Annexure 9) is prepared by the Business Development
Manager (BDM) based on the PO and given to the branch. It takes one day.
9. Branch Operation Executive prepares the Order Value Form (OVF) in SAP. It also takes a day.

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10. Branch Operation Executive also prepares a Sales Order (SO) in SAP on the same day as the day of
preparation of OPF.
11. If there is a credit deviation or overdue from the concerned partner the SO goes for approval of the
Head Office Credit Service Team. Otherwise there is no need of approval from the CS Team. (1day)
12. Order Processing Team (OPT) checks the terms and conditions of the PO and related taxes. The profit
margin ({(Selling price- Direct Costs)/Selling Price} x100) is estimated and found if the sale is profitable.
(2days)
13. Inventory is checked by the OPT to see if the required stock is available. If the stock is available, the
process proceeds to billing. If the stock is not available, raise a purchase order against the vendor/
Technical Partner (TP) and calculate margin. (2days)
14. Operations Manager approves the PO. (Same day as 13)
15. Product is shipped by the Technical Partner (Vendor) to the branch. Duties are paid for shipment.
(Time taken for shipment is between 15 to 20 days in case of hardware, 2 days for Software/ Support)
Taxes involved in different types of transactions:
Hardware : VAT, Customs duty
Software : Service Tax, VAT
Support : Service Tax
Then it proceeds to billing.
16. Billing: The sales invoice (Sales invoice format- Annexure 2) is made by the OPT and is given to the
customer along with the product or service. (2 days)
17. Delivery: Product or service is delivered to the End Customer (EC) or Channel Partner (CP) by the
branch. (Same day as 16)
Delivery methods:
Branch Operation Executive Products / Implementation are sent through road or air. Courier receipt,
airway bill and transportation bill of personnel are the documents involved. In Mumbai, a local tax called
OCTROI is also paid. Software is sent through mail.

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Delivery challan (Delivery challan format- Annexure- 4) and Proof of Delivery (POD) are collected from
the customer.
18. Collection: Outstanding Aging Report (Annexure- 82) is used to keep track of the due dates of
various customers. The report is generated weekly.
100% advance: CS Team makes sure that the money is received before the delivery.
Advance against delivery: Collection is confirmed before billing by the Branch
Executive.
30/60/90 days credit: Before the due date the Branch Executive follows up the customer.
The customer will pay through account payee cheque or transfer the money electronically
using NEFT or RTGS. In case of default in payment, an interest of 18% is charged.
30/60 days credit against PDC: On the date of the cheque, deposit the cheque in the
bank. In case the cheque bounces, charge interest and bouncing charges (INR 1000 per
cheque). The CS Team should report to the concerned branch, the occurrence of bounce.
PDC is collected before delivery. It should be crossed/ account payee cheque.
30/45/60/90 days LC: Beneficiary bank pays the amount to the beneficiary on the due
date. For collection before due date, a commission has to be paid to the bank.
19. Tax Deducted at Source: Customer deducts taxes before payment at and 10% for professional
charges. (Based on service tax registration) Collection report from the bank gives an account of the
amount and rate of TDS. To reclaim the TDS from the government, collect the TDS Certificate and file
IT return. In case of tax due, the company will have to pay the due amount. In case the TDS was in excess
of what should have been paid, government will return the money. (1 year)
20. Sales Returns: Customer can reject the order in case of delay in shipment or product defects. In that
case, the OPT raises an AR credit memo after the goods have been received in the warehouse. CS Team
will reverse the invoice entries. The money will be refunded. Tax refund (CST-Central Service Tax, ST-
Sales Tax, VAT-Value Added Tax) should be reclaimed within 6months. The customer can cancel the LC
or reshipment can be done by the company in case the payment means was LC.
The above process can be depicted in a flowchart as below.


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Figure 6: Flowchart- Order to cash process
Start
Customer places purchase order
Yes
N
o
N
o
Ye
s
If new customer
HO credit service manager/ VP
Finance: Fix credit and payment
terms to the partner
If increasing
credit limit
HO Credit Service Manager/
VP Finance: Fix credit limit
Get financials
CST: Register partner in SAP
(SCC)
PAN, TAN, TIN
etc.
BS, P/L, Bank Statement, IT
return acknowledgement,
ROC
Branch head & Sales head:
Approval
B

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No
Ye
s
N
o

BDM: Makes OPF
Branch operation executive:
Makes OVF
Regional/ Branch Operation
Executive: Makes SO
HO CST approval
OPT: Checks terms and
conditions of PO and related
taxes
OPT: Check Inventory
If credit deviation
or overdue
OPT: Estimate profit margin to
assure profitability
C
B

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Ye
s
N
o
If inventory
present
OPT: Raise PO against vendor/
TP
OPT: Calculate margin
Operations Manager: PO
approval
Product shipped to branch
(Duties are paid)
Invoice the customer (Billing)
CST: Monitor OS Aging Report
Branch, CST: Collection
CST: Review collection report,
Collect TDS certificate, file IT
return, Reclaim TDS
Stop
C

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4.2 Results and Discussions
4.2.1 Standard Operating Procedure (SOP)
An SOP is a written document or instruction detailing all steps and activities of a process or
procedure. An SOP provides employees with a reference to common business practices, activities, or
tasks. New employees use an SOP to answer questions without having to interrupt supervisors to ask how
an operation is performed.
a) SOP FOR ACCOUNTS RECEIVABLE
Subject: Accounts receivable
Description: Accounts receivable (Debtors) are the money owed by the customers to the business.
Accounts receivable management starts from billing the customer to collecting the money from the
customer.
Whenever a seller decides to offer its goods or services on credit, the seller boosts its potential to
increase revenues since many buyers appreciate the convenience and efficiency of making purchases on
credit and the seller opens itself up to potential losses if its customers do not pay the sales invoice amount
when it becomes due.
If a buyer does not pay the amount it owes, it is a cash loss or a bad debt expense on its income
statement, and a reduction of accounts receivable on its balance sheet.
Collection: Outstanding Aging Report is used to keep track of the due dates of various customers. The
report is generated weekly.
a. Pre-delivery Collection of monies
100% advance: Credit Service Team makes sure that the money is received before the
delivery.
Executive.


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b. Post Delivery collection of monies
Credit Period - 30/60/90 Days: Before the due date the Branch Executive follows up
with the customer. The customer will pay through account payee cheque or transfer the
money electronically using NEFT or RTGS. In case of default in payment, an interest of
18% P.a. is charged.
bank. In case the cheque bounces, charge interest and bouncing charges (Rs. 1000 per
Note: PDC is collected before delivery. It should be crossed/ account payee cheque.
Note: For SOP on Letter of Credit, refer page number 23.
Payment: In full / Partial Settlement of Invoice / Deductions (TDS & Others)
a) Full settlement of Invoices: The customer makes full payment on a particular invoice.
Payment can be made through cheque, cash, EDC (Electronic Data Capture) machine,
RTGS or NEFT.
b) Partial Settlement of Invoices (Short Payment): The customer makes partial payments
due to product issue or their cash flow issues.
If the reason for partial payment IS product issue we raise a credit note to the customer. We hold
the payment to the vendor and return the product to the vendor. A credit note or credit memorandum
(memo) is a commercial document issued by the seller to the customer. The seller usually issues a Credit
Memo for the same or lower amount than the invoice, and then repays the money to the buyer or sets it
off against a balance due from other transactions. In this case the credit note is for the amount that is not
paid.
If the reason of short payment is the cash crunch of the customer, take a security deposit cheque
from the customer and wait for the period they have asked for extension. If the payment is not made
within the extended period, the company can file a lawsuit against the customer.


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c) Deductions:
Tax Deducted at Source: Customer deducts taxes before payment at 2% for contractors and 10% for
professional charges. Collection report from the bank gives an account of the amount and rate of TDS.
To reclaim the TDS from the government, collect the TDS Certificate and file IT return. In case of tax
due, the company will have to pay the due amount. In case the TDS was in excess of what should have
been paid, government will return the money. It can take about a year.
Other deductions: Late delivery charges, Rebates.
Refund / Cancellation of LC / Issue of Credit Note:
a. Sales Returns: On Approval from the Companies authorized personnel, Customer may be
allowed to cancel the order In which case, the Operations raises an AR credit memo (subject
to return of material) and will reverse the invoice entries. The money will be refunded in case
it is paid in advance. The customer can cancel the LC or reshipment can be done by the
company in case the payment means was LC.
b. Cancellation of SO & refund of Advance: On Approval from the Companies authorized
personnel, Customer may be allowed to cancel the order in case of delay in shipment, product
defects etc.
Process:
OPT raises the sales invoice or bill.
The bill is sent to the branch.
The branch will send the bill with the material to the customer.
Once the material reach the branch/HO, billing team will convert the SO to AR invoice (Sample-
Annexure 3) in SAP. When the AR invoice is passed, the journal entry of debiting the customer account
and crediting the sales account is generated in SAP.
AR invoice contains the details about the customer and the order. The order details include the item
number, item name, quantity, price, discount, tax rate, distribution rule etc.


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Things to remember while invoicing:
1. Check the invoice as per the Partner or Customer PO before sending the same.
2. Sales Credit Branch should not deliver or mail the license/hardware and invoice without receipt of a
mail confirmation from the Branch OE who has entered OVF.
3. For all Hardware Invoices Company Seal with signature and date on invoice is mandatory. In case of
CST billing, way bill (courier receipt) copy acknowledgement is must from partner or customer.
4. For all Software/Support Invoices Company Seal with signature and date on invoice is mandatory. If
CST billing, way bill copy is must from partner or customer. If the delivery is through email, email
confirmation from partner is required.
The product/service is delivered along with the bill, to the end customer or the channel partner by the
branch operation executive. Goods and services can be delivered through,
Products/Implementation: by road or air
Software: by mail
On delivery, a proof of delivery (POD) should be obtained from the customer. Company seal with
signature and date of invoice is a POD. If CST billing, way bill copy is must from partner or customer. If
the delivery is through email, email confirmation from partner is required. The delivery challan is
collected from the customer on delivery of the product or service.
In case of LC, the customer has to approve the delivery challan by sealing it. Delivery charges:
Paid on a monthly basis to the courier service. The freight charges account is debited and the courier
company account is credited. (AP)
Taxes collected by the company from the customer and paid to the government
VAT and CST: After adjustment of input VAT, the balance has to be paid to the govt. before 21
th
of
every month for the previous month in Karnataka. Dates are different in different states.
ST (Service tax): Collected from the customer while billing. It is paid on 5
th
of every month for the
previous month to the government.
If the selling dealer pays CST @ 2% then he has to produce proof to his sales tax assessing
authorities that the purchasing dealer is eligible to get these goods at concessional rate. Otherwise the

27

selling dealer will be asked to pay balance tax payable plus penalty as applicable. Therefore section
8(4)(a) provides that concessional rate is applicable only if purchasing dealer submits a declaration in
prescribed form C. The blank C forms are issued by the sales tax authorities to the purchasing dealer who
has made interstate purchases on concessional rate of CST. OCTROI is Collected from the customer and
paid by the Mumbai branch before delivery.
Conclusion:
The accounts receivable are the income for the company and the company has to keep track of it
to determine how to increase it, to learn where your money is coming from, who is the best customer etc.
Accounts receivable management is very important for maintaining financial health of the company. The
company can put its human resources to its right use by hiring a receivables management services or can
outsource the entire debt collection process to receivables management services that are fully competent
and hold expertise in debt collection and accounts receivable.
b) SOP FOR COLLECTION
Subject: Collection
Description: The money from the debtors has to be collected on the due date of the credit as mentioned
in the credit terms for the partner.
Outstanding Aging report is generated weekly by SAP. It keeps track of the aging of due dates of
Accounts receivable. As per Debtors outstanding Customer-wise and Invoice-wise Aging Summary
Report Annexure 5
15 days before the due date, the Credit Service Team will check the OS aging report, alert the branch to
remind the debtor to pay the credit amount.
The different payment terms are;
100% advance: CS Team makes sure that the money is received before the delivery.
Executive.
Net 30/60/90 (30/60/90 days credit): Before the due date the Branch Executive follows
up the customer. The customer will pay through account payee cheque or transfer the

28

money electronically using NEFT or RTGS. In case of default in payment, an interest of
18% is charged.
bank. In case the cheque bounces, charge interest and bouncing charges (Rs. 1000 per
PDC is collected before delivery. It should be crossed/ account payee cheque.
Process:
AT THE BRANCH/ REGION:
For advance against delivery, before goods are delivered to the customer, money is collected. The
Operations Executive of the branch (OE) collects the money as CDC or RTGS. The delivery is done only
after depositing the cheque in the bank or after the money hits the account. CS Team checks bank
statement and confirms if the money has hit the account.
PDC is delivered to the OE by the customer. OE is responsible for keeping the cheque safe under
lock and key. The OE reviews the cheques in hand summary and deposits the cheques on the due date
in the bank. The Collection Report is also prepared and sent to the heads office. In case of cheque bounce,
the branch informs the head office CS Team and the CS Team follows it up.
AT THE HEAD OFFICE:
The CS Team does the entries in SAP referring to the collection report. The details of the TDS are
also entered in SAP. In case of a cheque bounce, the CS Team prepares a cheque bounce report and
follows up the customer for payment. The CS Team also prepares a Bank Reconciliation Statement (BRS)
monthly to reconcile the cash and bank books and find out if any mistakes have occurred. In the case of
LC, it is produced in the beneficiary bank on the due date and the company account gets credited with the
amount. In the case of advance against PO, the further processing of the PO is done only after the CS
Team confirms the reception of the money with the bank. A weekly summary of the collections made and
documented.


29

Conclusion:
The Credit Service Team and the branch play the major role in collection. When the actual
collection is made by the OE, the CS Team In case of failure in payment, interest is charged. If the debtor
fails to pay the amount it becomes a bad debt to the company. This affects the profitability and working
capital of the company. LC is a financial tool that safeguards the company against failure in payment by
the debtor.
c) SOP FOR LETTER OF CREDIT
Subject: Letter of Credit
Description: A letter of credit is negotiable instrument issued at the instruction of the buyer to the seller
through a financial institution (generally banks) for goods or services sold to such buyer. The issuer then
seeks reimbursement from the buyer or from the buyer's bank. The document serves essentially as a
guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the
buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the
seller to the letter of credit's issuer.
Types of Letter of Credit
1. Revocable Letter of Credit
A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank
without notification. It is rarely used in international trade and not considered satisfactory for the
exporters but has an advantage over that of the importers and the issuing bank.

There is no provision for confirming revocable credits as per terms of UCPDC, Hence they cannot be
confirmed. It should be indicated in LC that the credit is revocable. If there is no such indication the credit
will be deemed as irrevocable.
2. Irrevocable Letter of Credit
In this case it is not possible to revoke or amend a credit without the agreement of the issuing bank, the
confirming bank, and the beneficiary. From an exporters point of view it is believed to be more
beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required
documents are presented and the terms and conditions are complied with, payment will be made.

30

3. Confirmed Letter of Credit
Confirmed Letter of Credit is a special type of LC in which another bank apart from the issuing bank has
added its guarantee. Although, the cost of confirming by two banks makes it costlier, this type of LC is
more beneficial for the beneficiary as it doubles the guarantee.
4. Sight Credit and Usance Credit LC
Sight credit states that the payments would be made by the issuing bank at sight, on demand or on
presentation. In case of usance credit, draft is drawn on the issuing bank or the correspondent bank at
specified usance period. The credit will indicate whether the usance draft is to be drawn on the issuing
bank or in the case of confirmed credit on the confirming bank.
5. Back to Back Letter of Credit
Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as back to back
credit when a LC is opened with security of another LC.
A back to back credit which can also be referred as credit and counter credit is actually a method of
financing both sides of a transaction in which a middleman buys goods from one customer and sells them
to another.
The parties to a Back to Back Letter of Credit are:
1. The customer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank.
3. The manufacturer's subcontractor and his bank.
The practical use of this Credit is seen when LC is opened by the ultimate buyer in favour of a
particular beneficiary, who may not be the actual supplier/ manufacturer offering the main credit with
near identical terms in favour as security and will be able to obtain reimbursement by presenting the
documents received under back to back credit under the main LC.
The need for such credits arises mainly when:
The ultimate buyer not ready for a transferable credit
The beneficiary does not want to disclose the source of supply to the openers.

31

The manufacturer demands on payment against documents for goods but the beneficiary of credit
is short of the funds
6. Transferable Letter of Credit
A transferable documentary credit is a type of credit under which the first beneficiary which is
usually a middleman may request the nominated bank to transfer credit in whole or in part to the second
beneficiary.
The LC does state clearly mentions the margins of the first beneficiary and unless it is specified
the LC cannot be treated as transferable. It can only be used when the company is selling the product of a
third party and the proper care has to be taken about the exit policy for the money transactions that take
place.
This type of LC is used in the companies that act as a middle man during the transaction but do
not have large limit. In the transferable LC there is a right to substitute the invoice and the whole value
can be transferred to a second beneficiary.
The first beneficiary or middleman has rights to change the following terms and conditions of the letter of
credit:
1. Reduce the amount of the credit.
2. Reduce unit price if it is stated
3. Make shorter the expiry date of the letter of credit.
4. Make shorter the last date for presentation of documents.
5. Make shorter the period for shipment of goods.
6. Increase the amount of the cover or percentage for which insurance cover must be effected.
7. Substitute the name of the applicant (the middleman) for that of the first beneficiary (the buyer).
Format of an Inland LC
An inland LC ( LC within India) contains the following data:
Address and details of the applicant bank

32

Date of issue
Form of LC (Generally irrevocable)
LC number
Amount of LC
Tolerance on the amount of LC according to the tolerance in the quantity of product
Expiry date and expiry place
Applicant (customer) name and address
Address of the advising bank
Beneficiary address
Details of days of credit and details of the draft issued
Documents required
Process:
The account party (customer/ applicant) instructs the issuing/applicant bank to open a
LC.
The advising bank (either a third party or the beneficiary bank itself) accepts the LC from
the issuing bank, verifies its authenticity and forwards it to the beneficiary. The advising
bank charges fees for advising. No payment obligations are taken up by the advising
bank.
The Credit Service Team of the beneficiary (company) vets the LC. The team checks if
the LC matches the commercial agreement and if all the terms and conditions of the LC
can be satisfied. An amendment is advised (to the beneficiary bank) if there is any
condition that cannot be satisfied. For example if there are documents to be submitted
that cannot be arranged by the beneficiary amendment can be advised to remove that
document submission from the terms and conditions.
The order processing, billing and delivery takes place after the amendments are made.

33

Negotiation is the next step. It includes checking of the documents and giving value to
the seller by the beneficiary bank. The documents to be submitted include Copy of LC
with amendment of LC, Signed commercial invoice (triplicate), BOE (triplicate), Packing
list, Courier receipt etc.
After negotiation, the beneficiary bank opens a bill to applicant bank as per the due date
of LC.
The applicant bank sends the documents to the account party for acceptance. The account
party accepts it by sealing them and sends them back to the applicant bank.
On the due date, the beneficiary bank pays the LC amount to the beneficiary regardless
the customer payment to the applicant bank. The applicant bank has to pay the amount to
the beneficiary bank on the due date. It is the applicant banks responsibility to collect the
money from the account party.
The beneficiary can collect the amount from the beneficiary bank even before due date in
case of urgent cash requirements for the company. A commission has to be paid to the
bank for the same.
Documents involved:
Negotiation documents: Copy of LC with amendment of LC, Signed commercial invoice (triplicate),
Bill of Exchange (triplicate)- Format in annexure- 7, Packing list- Format in annexure- 6, Courier receipt
etc.
Packing list is prepared by the OPT and approved by the Operations Manager. It is sent to the
branch for acceptance. The bank seals it and sends it back to the HO. The packing list contains Packing
list number and date, Warehouse address, Customer PO number and date, LC number, Shipping address,
TIN number, contact person, contact number of the customer, Item description, quantity, CST No.,
Service Tax No., PAN No. etc.
BOE is a negotiable instrument. It is a document guaranteeing the payment of a specific amount
of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments
Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable
either to order or to bearer. The three types of negotiable instruments in India are promissory note, bill of

34

exchange and cheque. If these bills are issued by a bank, they can be referred to as bank drafts. If they are
issued by individuals, they can be referred to as trade drafts.
Collection Report (Format- Annexure 8) is made by the branch Operations Executive on a daily
basis. It contains the collection amount and its details including the deducted amounts like TDS,
OCTROI, bank charges etc. The Credit Service Team makes the corresponding entries in SAP and also
cross checks the values with the bank statement and makes sure the figures are right. The flow chart of the
LC process is shown below.
Figure 7 (next page): Flowchart- LC process


35

Start
If LC
Customer opens LC
CST: Vett the LC&
advise amendment if
required
CST: Negotiate LC in the
beneficiary bank
Copy of LC with
amendment of LC, Signed
commercial invoice
(triplicate), BOE
(triplicate), Packing list,

Beneficiary bank: Opens
a bill to applicant bank as
per the due date of LC
Applicant bank: Send the
documents to the
customer for acceptance
Customer acceptance
Customer: Sends
documents back to
applicant bank
Applicant bank: Pays the
money on the due date to
the beneficiary bank
Stop
Order processing, billing
and delivery
Collection: Beneficiary
bank pays the amount to
the beneficiary on the due
date.
For collection before due
date, pay commission to
the bank.

36

Conclusion:
LC is a financial instrument which reduces the risk of bad debts to nil. The burden of collection
of the money lies on the applicant bank. It is also advantageous in the sense that the beneficiary can
collect the money from the beneficiary bank even before the due date by paying a commission to the
bank.
4.2.2 Analysis
While collecting the information for SOP preparation, the following points were inferred:
Issue of incomplete database
The database (or the master file) of certain customers was not complete in SAP. This created
problems at a later stage. It consumed lot of time to find out the details of customers at a later stage.
Hence it should be made sure that the database of customers is completed promptly at the time of
registration. Details including TIN Number, PAN Number, contact details, Service tax Number and all the
other details should be filled in during registration to avoid last minute rush to find the same during a
transaction.
Fixing credit limit
At present, the Vice President of Finance and Operations fixes and approves the credit limit. If
there is a scientific and uniform format for credit limit fixing, the credit control team can do the
preliminary analysis for fixing the credit limit or changing it. Hence preparation of such a format is
necessary.
Internal Controls
The internal controls should be in place to avoid fraud. It was observed that the SAP access
controls have glitches. Some processes like the debtor entry and the collection entry are done by the same
person. This can lead to misuse or fraud. Hence the duties should be segregated properly. A role matrix
can help in finding the current duties and who all have the combination of duties that can lead to fraud. A
control risk assessment questionnaire can be used to find out to what extent the controls are in place. The
detailed analysis on internal controls is done in this report.


37

4.3 Fixing or Changing Credit Limit
Financial statement analysis is the process of identifying the financial strengths and weaknesses
of the firm by properly establishing relationships between the items of the balance sheet and the profit and
loss account. Analyze debtor turnover ratio, creditor turnover ratio, share capital, reserves and surplus.
Compare the revenue and profit before tax for the current year and the previous year. Credit limit is
approximated as 10% of (share capital + reserves and surplus).
The Bank Statement also has to be analyzed while fixing or changing the credit limit to find out
the magnitude of transactions done by the company.
While analyzing the financial the financial statements, ratio analysis is what is mainly done.
4.3.1 Ratio Analysis
Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of
ratios to interpret the status and performance of a firm. This analysis makes related information
comparable. Not all the ratios are discussed below. The ones that are taken into consideration while
deciding upon the credit limit are only discussed.
Liquidity ratios measure a firms ability to meet its current payment (less than one year) obligations.
The liquidity ratios are:
Current ratio
Quick/Acid test ratio
Cash ratio
Current ratio:

Current assets include cash, current investments, debtors, inventory, loans and advances and
prepaid expenses. It represents those assets which can be on the course of business be converted to cash
within a short period of time (Not exceeding one year). Current liabilities are those liabilities that are
expected to mature in next twelve months. A high current ratio is normally considered to be a sign of
financial strength.

38

Quick ratio:

This is more stringent than current ratio as it excludes inventory which is the least liquid of the
current assets.
Cash ratio:

Cash ratio is the most stringent of all liquidity ratios.
Turnover ratios are referred to as activity ratios or asset management ratios. They measure how
efficiently assets are managed by the firm. These ratios are based on the relationship between the level of
activity represented by sales or cost of goods sold and levels of various assets. The turnover ratios used
while fixing the credit limit are discussed below.


39

Given below is a scientific format I prepared in MS Excel for the Credit Service Team to analyze
the financials and calculate approximate credits limit. On inputting certain values from the financials the
excel sheet would give the approximate credit limit.
Parameter Current
year
Previous
year

Share capital
Reserves and surplus
Total If total of current year>previous
year; good implication.
Revenue/ Sales Revenue of current year>previous
year; good implication.
Profit before Tax (PBT) PBT of current year>previous year;
good implication.
Debtors
Average collection period/ Debtor
days

Creditors
Purchases
Average payment period/ Creditor
days

Approximate credit limit
Current assets
Current liabilities
Inventory
Current ratio High ratios => good
Quick ratio
Recommendations:
Table 1: Financial statement analysis format


40

An example for a vendor analysis is given below.
Parameter Current year
Previous
year

Share capital

10,000,000

5,300,941
Reserves and surplus

261,092

82,064
Total 10,261,092 5,383,005
If total of current
year>previous year; good
implication.
Revenue/ Sales 26,665,535 17,527,843
Revenue of current
implication.
Profit before Tax (PBT) 179,028 (54,734)
PBT of current
implication.
Debtors

4,066,804

3,769,665

Average collection period/ Debtor days 55 77
Creditors

2,441,242

2,627,916
Purchases

21,318,518

14,312,654
Average payment period/ Creditor days 41 66
Approximate credit limit 1,026,109 538,301
Current assets

8,067,292

8,001,756
Current liabilities

3,472,041

4,310,070
Inventory

3,788,279

3,076,500
Current ratio 2.32 1.86
High ratios => good
Quick ratio 1.23 1.14
Table 2: Financial statement analysis example
4.3.2 Limitations of Ratio Analysis
Using ratio analysis we can assess the liquidity position, long term solvency, operating efficiency
and overall efficiency of a firm. It can also be used for inter-firm comparison. However there are certain
limitations for the ratio analysis. They are:
Differences in procedures adopted by different firms.
For example different firms uses different basis for evaluation of inventory (Eg. First in first out,
last in first out). Other differences can be in depreciation methods, estimated working life of

41

assets, amortization of intangible assets like goodwill, amortization of deferred revenue
expenditure such as preliminary expenditure etc.
Inflation and other economic factors are not considered while valuing assets.
Ratio analysis gives us a picture of what happened between two balance sheet dates. The position
in the interim period is not revealed by the ratios. Hence it cannot give a clue about the future.
4.4 Internal Control
Internal control is a system that the company defines and implements under its own
responsibility.
It encompasses a set of resources, behaviours, procedures and actions that are adapted to the
individual circumstances of each company that contribute to control over its activities, the efficiency of its
operations and efficient use of its resources and enable the company to assess all significant operational,
financial and compliance risks appropriately. More specifically, the system aims to ensure:
a) Compliance with laws and regulations.
b) Implementation of the instructions and directions given by executive management or the executive
board.
c) Proper functioning of the companys internal processes, especially those relating to the protection of its
assets.
d) Reliability of financial information.
4.4.1 Segregation of duties (SOD)
Segregation of Duties is the separation of incompatible duties that could allow one person to
commit and conceal fraud that may result in financial loss or misstatement to the company. Segregation
of duties has always been an important component of a properly functioning internal control environment.
It has the following functions.
Represents a key internal control that ensures no single person has too much influence over any business
transaction or operation.
Serves to prevent unintentional errors or fraud and ensure timely detection of errors that may occur.
Provides a method of improving organizational, business process and IT control alignment.

42

Risk of Fraud is reduced as fraud.
Clear separation of Roles/Responsibilities across various functions in organization.
If proper SoD does not exist in an organization, then:
There are ineffective internal access controls.
There is improper use of materials, money, financial assets and resources.
Estimation of financial condition may be wrong.
Financial documents produced for audits and review may be incorrect.
Segregation of Duties must be so performed that it reduces the risk associated with a function/process that
can be mal-functioned to practice any fraudulent exercises.
Drivers causing companies to consider use of Segregation of Duties (SOD) in the management of
their business
Regulatory Compliance - Sarbanes-Oxley and other regulatory issues are forcing companies to increase
their awareness and accountability of their employees actions within the company.
Security and Data Management Recent privacy laws and prosecution of security violations is bringing
a new awareness to monitoring and controlling security and access to data within the organization.
Access Management Provisioning and management of users access to applications have not been
enforced, resulting in access creep.
Rapid Implementation of ERPs Application Security was often overlooked or implemented
incompletely (Segregation of Duties was not addressed).
Regulatory Compliance
Not only should business functions be separated departmentally, and at an even more granular level
within departments, companies now finding that they need to provide system enforcement of traditional
segregation of duties models.
External auditors are insisting on evidence that proper segregation of duties exists. Sarbanes-Oxley is now
providing a compelling case for the implementation and maintenance of appropriate segregation of duties
at the organizational, manual process and system level.

43

Security and Data Management
Recent privacy laws and prosecution of security violations is bringing a new awareness to monitoring and
controlling security and access to data within the organization.
Lack of application specific Segregation of Duties are resulting in Access Creep, Fraud Risk and Failed
User Management Processes.
Disclosure of sensitive information can have a negative impact on shareholder value.
Increased use of web services (online auctions and banking) has brought increased risk of identity theft
and fraud.
Privacy laws and disclosure of violations is increasing the need for proactive segregation and control
over access to data.
Access Management
Implementation of identity management and ERP tools provides an avenue to leverage technologies to
enforce and regulate enterprise level segregation of duties.
Established authoritative sources of information through ERP systems.
Leverage user lifecycle through role based access control and system integration.
Automated provisioning to lower operational costs.
Greater visibility by management to monitor user activity.
Centralization of user ID management for multiple applications through the single sign-on concept.
Across an enterprise there are various functions and these functions are performed, together by a
set of roles/responsibilities. SOD says that these set of Roles/responsibilities should be assigned in such a
way that, across an enterprise, any individual should not have end to end access rights over any function.
The Roles and Responsibilities for the function should be divided in such a way that one person does not
full right over the function that the risk of malicious activity of manipulation of the function is reduced.
The more critical the function is, greater and clearer Segregation of Duties should be.

44

Segregation of Duties deals with access controls. Access Control ensures that one individual
should not have access to two or more than two incompatible duties. Some examples of incompatible
duties are:
Creating vendor and initiate payment to him.
Creating invoices and modifying them.
Processing inventory, and posting payment.
Receiving Checks and writing pay-offs.
Ideally, single individual must not have authority of creation, modification, reviewing and
deletion for any transaction / tasks / resources.
If any individual has access rights to creation and modification, he can create and after getting it
reviewed, he can modify it to do some fraudulent exercises. Similarly if an individual has creation and
deletion rights he can create, initiate payment and later delete any transaction logs that can track his
activity.


45

4.4.2 Role Matrix
Role Matrix is a two dimensional matrix. All the roles/responsibilities and functions/processes in
an enterprise are identified and they are represented over each axis of matrix. Then it is identified by
putting a flag, across each set of roles/responsibilities and function/processes, over x and y axis,
whether they are conflicting or not.
ROLES
P
O

a
p
p
r
o
v
a
l

P
a
r
t
n
e
r

r
e
g
i
s
t
r
a
t
i
o
n

i
n

S
A
P

A
n
a
l
y
z
e

f
i
n
a
n
c
i
a
l
s

F
i
x
/
A
p
p
r
o
v
e

c
r
e
d
i
t

l
i
m
i
t

A
p
p
r
o
v
a
l

o
f

p
a
y
m
e
n
t

t
e
r
m
s

PO approval
Partner registration in SAP X
Analyze financials X X
Fix/Approve credit limit X
Approval of payment terms X X
Approval in case of overdue X
OPF preparation X
OVF preparation X
SO preparation X
Approval of SO X
Checking the terms of OPF
Raising PO against vendor
Vendor PO approval X
OS Aging Report preparation X X X X
OS Aging Report monitoring X X X X
Collection of PDC X
Collection of Cash X
Vetting the LC X X X X
Negotiation of LC X X X X
Collection of LC X X X X
Sales journal entry X X X X
Sales return reversal X X X X
Collection entry X X X X
Cheque bounce entry X X X X
Table 3: Role matrix


46

ROLES
A
p
p
r
o
v
a
l

i
n

c
a
s
e

o
f

o
v
e
r
d
u
e

O
P
F

p
r
e
p
a
r
a
t
i
o
n

O
V
F

p
r
e
p
a
r
a
t
i
o
n

S
O

p
r
e
p
a
r
a
t
i
o
n

A
p
p
r
o
v
a
l

o
f

S
O

PO approval
Partner registration in SAP X X
Fix/Approve credit limit
Approval of payment terms
Approval in case of overdue
OPF preparation X X
OVF preparation X X
SO preparation X
Approval of SO
Vendor PO approval
OS Aging Report
preparation X
OS Aging Report
monitoring X
Collection of PDC
Collection of Cash
Vetting the LC X
Negotiation of LC X
Collection of LC X
Sales journal entry X
Sales return reversal X
Collection entry X
Cheque bounce entry X
Table 3 contd.: Role matrix


47

ROLES
C
h
e
c
k
i
n
g

t
h
e

t
e
r
m
s

o
f

O
P
F

R
a
i
s
i
n
g

P
O

a
g
a
i
n
s
t

v
e
n
d
o
r

V
e
n
d
o
r

P
O

a
p
p
r
o
v
a
l

O
S

A
g
i
n
g

R
e
p
o
r
t

p
r
e
p
a
r
a
t
i
o
n

O
S

A
g
i
n
g

R
e
p
o
r
t

m
o
n
i
t
o
r
i
n
g

PO approval

Partner registration in SAP X X
Approval in case of overdue X X
OPF preparation
OVF preparation
SO preparation
Approval of SO
Raising PO against vendor X
Vendor PO approval
OS Aging Report
preparation X
OS Aging Report
monitoring X
Collection of PDC
Collection of Cash
Vetting the LC
Negotiation of LC
Collection of LC
Sales journal entry
Sales return reversal
Collection entry
Cheque bounce entry


48

ROLES
C
o
l
l
e
c
t
i
o
n

o
f

P
D
C

C
o
l
l
e
c
t
i
o
n

o
f

C
a
s
h

V
e
t
t
i
n
g

t
h
e

L
C

N
e
g
o
t
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i
o
n

o
f

L
C

C
o
l
l
e
c
t
i
o
n

o
f

L
C

PO approval X X
Partner registration in SAP X X X
Analyze financials X X X
Approval in case of overdue X X X
OPF preparation X X
OVF preparation X X
SO preparation
Approval of SO
Vendor PO approval
OS Aging Report
preparation X X X
OS Aging Report
monitoring X X X
Collection of PDC
Collection of Cash
Vetting the LC X X
Negotiation of LC X X
Collection of LC X X
Sales journal entry X X X
Sales return reversal X X X
Collection entry X X X
Cheque bounce entry X X X


49

ROLES
S
a
l
e
s

j
o
u
r
n
a
l

e
n
t
r
y

S
a
l
e
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n

r
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y

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h
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b
o
u
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e
n
t
r
y

PO approval
Partner registration in SAP X X X X
Analyse financials X X X X
Approval in case of overdue X X X X
OPF preparation
OVF preparation
SO preparation
Approval of SO
Vendor PO approval
OS Aging Report
preparation
OS Aging Report
monitoring
Collection of PDC
Collection of Cash
Vetting the LC
Negotiation of LC X X X X
Collection of LC X X X X
Sales journal entry X X X
Sales return reversal X X X
Collection entry X X X
Cheque bounce entry X X X


50

4.4.3 Control Risk Assessment Questionnaire
The control risk assessment questionnaire is a tool prepared by Deloitte & Touche. The answers
to the questionnaire give a score to each section (Production Cycle, Revenue Cycle etc.). As my emphasis
is on the internal controls in the accounts receivable and credit services, only the revenue cycle is
analyzed here for the company. This questionnaire is made in Microsoft Excel and is protected. Once the
answers to the questions are entered and corresponding weights (out of 5) for each question are assigned,
the score is automatically generated by the file. The questionnaire was answered by the CFO and weights
were given consulting him. The answer to the questions can be Yes (Y), No (N), Isolated cases (I) and
Not Applicable (X).

Sl No. Sales Answer Weight
1 Are the oral orders committed to writing? Y
3
2 Is there an approved list of customers to whom goods may be supplied under
normal circumstances?
Y
4
3 Is a "stop supply" list prepared and issued by a senior official on at least a
monthly basis (and also when computer systems are not operational for
automatic credit verification) to all sales, dispatch and order personnel?
Y
4
4 Are the lists referred to in 2 and 3 above inspected before an order is accepted
and processed (especially in the case of manual delivery notes)?
Y
5
5 Are special sales prices approved in writing by a senior official? Y
5
6 Is a sales price variance report generated at least monthly and is this report
reviewed by a senior official?
X
3
7 Are all special discounts or settlement terms approved in writing by a senior
official?
Y
5
8 Are dispatch notes prepared for the release of stock? Y
3
9 Is it possible to produce more than one "original" copy of a dispatch/delivery
note?
N
4
10 Are there procedures in force to ensure that all goods leaving the premises are
invoiced timeously?
Y
5
11 Are dispatch notes agreed to sales invoices? Y
5
12 Are dispatch notes agreed to order details? Y
2

51

13 Are Goods Received Notes (GRNs) made out for all goods returned for credit? Y
3
14 Are credit notes issued for goods returned matched with the appropriate GRN's? Y
5
15 Are 'other' credit notes issued to customers approved in all instances by a duly
authorized official?
Y
5
16 Are cut off procedures adequate to ensure that goods are only invoiced on
dispatch?
Y
3
17 Is there a report generated, at least once a month, of the nature, volume and
amounts of credit notes, and is this report reviewed by a senior official?
Y
5
18 Are cut off procedures adequate to ensure that goods dispatched are invoiced
immediately?
Y
3
19 Are dispatch notes pre-numbered and sequentially controlled? Y
3
20 Are credit notes pre-numbered and sequentially controlled? Y
3
21 Where consignment stocks are held by customers, have they accepted
responsibility in writing for control of those stocks?
Y
4
Sl no. Debtors

1 Where sales are made to a new customer, is credit application procedures
conducted before the order can be filled?
Y
3
2 Is customer liquidity assessed through credit bureaux and follow up of trade
references?
Y
3
3 Are credit limits set and captured in the customer master file? Y
4
4 Are credit limits approved by an authorized person? Y
3
5 Are debtors credit limits and terms strictly enforced? Y
4
6 Are new customer details captured in the customer master file by a person
independent of the sales and cash receiving function?
Y
3
7 Is access to the customer master file restricted to only authorized persons? Y
3
8 Are all trade debtors accounts reconciled monthly? N
3
9 Are the above reconciliations reviewed for accuracy and approved by an
independent senior official?
Y
3
10 Is there a procedure in place to identify old unused debtors accounts and place
them on hold for future credit checks if used again?
Y
3
11 Is the debtors control account in the general ledger reconciled to the debtors
ledger on a monthly basis?
Y
5
12 Is there evidence that the above reconciliation is reviewed by a senior official? Y
4

52

13 Are all reconciling items followed up in a timely manner? Y
3
14 Does the above mentioned reconciliation contain long outstanding items? Y
4
15 Are master file amendments properly authorized and reviewed? Y
3
16 Are trade debtors aged monthly? Y
4
17 Is it possible to re-age debtors invoices on the debtors system (i.e. change the
original date)?
N
3
18 Is there evidence that the age analysis is reviewed by a senior official? Y
3
19 Are there set guidelines on follow up actions to be taken when debtors accounts
are not settled within agreed terms?
Y
3
20 Are follow up actions documented for future reference? Y
3
21 Is provision for doubtful debts made in accordance with group policy? Y
3
22 Are advances and loans to staff only made on the authority of a senior official? Y
3
23 Are advances and loans to staff properly controlled? Y
3
24 Are cash sales accounts and COD accounts only used for the purpose for which
their name suggests?
X
5
25 Is a complete list of debtors journals printed on at least a monthly basis, and is
this list reviewed by a senior official?
Y
4
26 Are other adjustments to debtors accounts independently reviewed, on a regular
basis, by a senior official?
Y
3
27 Is the write off of bad debts properly authorized by a senior official? Y
3
28 Is debtor write off only approved after proper follow up actions have been taken? Y
4
29 Does an unallocated deposit account exist for all unknown receipts? Y
3
30 Will allocations (journal) from this account be authorized by a senior official? Y
3
Table 4: Control risk assessment questionnaire
The score generated by the program was 96%. (The copy of the file is attached in the annexure- 12)
4.4.4 Analysis
There is a major role for trust in Indian organizations. To demonstrate that the CFO asked an
employee of the CS Team who can initiate a bank transfer to transfer an amount to a particular account.
The CFO told the employee that he will give the relevant documents later. The employee agreed to do the
transfer without a second thought. This is the level to which trust has penetrated to the system. This can
be used as a loop hole to commit fraud.

53

The role matrix shows that the person handling the collection in the head office is also having
access to SAP AR module to make the journal entries. So he/she can collect the money for himself and
not debit the debtor account. It is the same person who is handling the BRS and verifying the collection
report. This could be detected only very late. Hence his/her access to the SAP should be limited or the
duties have to be segregated properly. According to the answer to the questionnaire, the credit limit is
approved by the senior official. But the credit limits once entered in the SAP can changed by the CS
Team in favour of a customer on acceptance of a personal benefit. Controls should come in there also.
All the trade debtor accounts are not reconciled monthly. It should ideally be reconciled weekly
so as to detect mistakes or frauds. Hence proper segregation of duties and access controls has to be in
place to detect and prevent mistakes and fraud at an early stage itself.


54

5. WORKING CAPITAL MANAGEMENT
The components of working capital are discussed in detail below.
a) Cash and Bank Balances
As the name clearly says, it is the amount of liquid cash in hand or in bank. Cash also includes the
near- cash assets such as marketable securities. The bank provides a facility for overdraft. Overdraft
financing is provided when businesses make payments from their business current account exceeding the
available cash balance. An overdraft facility enables businesses to obtain short-term funding. The main
characteristic of marketable securities and bank balances are that they can be easily converted to cash.
The cost of having excessively large cash balances is called excess cash balance cost. The implication of
funds being idle is that the firm has missed opportunities invest those funds and thereby has lost interest
that it would have otherwise earned. A low level of cash balance on the other hand may mean failure to
meet the payment schedule. Hence there should be an efficient cash management to ensure optimum
amount of cash balance.
b) Inventory
Inventory is an idle stock of physical goods that contain economic value, and are held in various
forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a
future point of time.
Any organization which is into production, trading, sale and service of a product will necessarily hold
stock of various physical resources to aid in future consumption and sale. Inventory can be in one form or
other; it can be in complete state or incomplete state. Inventory is held to facilitate future consumption,
sale or further processing/value addition. All inventoried resources have economic value and can be
considered as assets of the organization.
The purposes of maintaining inventory are the following.
To maintain independence of operations.
To meet variation in product demand.
To allow flexibility in production scheduling.
To provide a safeguard for variation in raw material delivery time.
To take advantage of economic purchase-order size.

55

Westcon (India) Pvt. Ltd. Inc. being a distribution company maintains only finished goods
inventory (No raw materials or work in progress). There is no value addition taking place to the
product. It carries out sales in two different ways. They are:
Back to back: No inventory is stocked in this method. Company places order for the product only
after receiving the sales order.
Stock and sale: The company stocks certain products and sells them from its warehouse according
to the customer demand.
The costs associated with inventory are:
Material costs: These are the costs of purchasing the goods and related costs such as
transportation and handling costs associated with it.
Ordering Cost: The expenses incurred to place orders with suppliers and replenish the inventory
of raw material are called ordering costs. They include costs of requisitioning, purchase ordering
or setup, transportation, receiving, inspecting and receiving at the ware house. These costs
increase in proportion to the number of orders placed. Firms maintaining large inventory levels
place a few orders and incur less ordering costs.
Carrying Costs: Costs incurred for maintaining the inventory in ware house are called carrying
costs. They include interest on capital locked up in inventory, storage, insurance, taxes,
obsolescence, deterioration spoilage, salaries of ware house staff and expenses on maintenance of
ware house building. The greater the inventory held the higher the carrying costs.
Shortage costs or stock out costs: These are the costs associated with either a delay in meeting
the demand or inability to meet the demand at all due to shortage of stock. These costs include
loss of profit on account sales lost caused by the stock out, loss of future sales customers migrate
to other dealers, loss of customer goodwill and extra costs associated with urgent replenishment
purchases. Measurement of shortage cost attributable to the firms failure to meet customers
demand is difficult because it is intangible in nature and it affects the operation of the firm now
and in future.
c) Creditors
A creditor is a party (e.g. person, organization, company, or government) that has a claim to the
services of the company. It is a person or institution to whom the company owes money. The creditors are
majorly trade creditors or vendors.

56

d) Debtors/ Account receivables
Trade credit happens when a firm sells its products or services on credit and does not receive cash
immediately. Characteristics of credit sales are:
Involves an element of risk.
It is based on economic value.
It implies futurity.
90% of the total sales of Westcon (India) Pvt. Ltd. are credit sales. Hence collection of debts is
the biggest source of cash inflow and management of debtors is the most important maintaining working
capital at optimum level.


57

5.1 Vendor wise performance
The vendor wise stock, debtors and creditors for the four quarters of the year 2011-12 (April 2011 to
March 2012) was calculated from the month wise data. (Refer annexure 11 for month wise data)
Stock
INR in '000s

Approx.
Stock
Days Q1 Q2 Q3 Q4
Symbol

1,795.48

1,950.24

2,041.53

2,824.81 40
SonicWall

1,421.72

1,427.44

1,171.54

1,151.69 40
Blue Coat

1,562.19

1,467.16

1,220.07

920.00 30
F5 Networks

223.33

264.13

365.52

110.57 7
Zebra

129.79

351.87

547.71

420.83 7
Isilon

3.20

9.58

16.63

10.00 7
Extreme Networks

377.24

311.96

219.46

216.53 7
Motorola/Canbium

404.82

423.04

337.13

273.54 7
Barracuda

1.71

0.62

18.35

35.97 7
Plantronics
- - -

147.59 7
Others

0.16 -

10.03

29.29 7
Total
5,919.64 6,206.05 5,947.97

6,140.82

Table 5: Vendorwise stock
Higher number of stock days represents the stock & sell products while lower number of stock
days represent back to back products. The stocking of Symbol products is the highest and is increasing
through quarters. While stocks of products from other vendors remain almost constant, stocks of Blue
Coat are coming down.


58

Table 6: Vendorwise debtors
The debtors of a particular vendor refers to the amount owed (credit sales) by the customers who
purchased the products of that particular vendor. The debtors of Blue Coat are coming down which
implies that the sales of Blue Coat products are not increasing. But the sales of other companies are
reasonable.

Debtors
INR in '000s

Debtor
days
Q1 Q2 Q3 Q4
Symbol

5,329.85

7,721.20

6,510.09

4,980.06 75
SonicWall

1,294.17

1,395.27

1,556.67

1,734.33 75
Blue Coat

1,794.50

448.98

221.65

130.44 60
F5 Networks

1,900.23

897.73

430.58

802.17 75
Zebra

979.18

808.04

740.78

866.00 75
Isilon

1,072.04

2,592.58

3,308.83

1,702.95 60
Extreme Networks

1,288.41

789.04

1,154.91

1,338.27 60
Motorola/Canbium

71.80

20.24

508.11

166.00 75
Barracuda

480.78

321.09

457.91

828.21 75
Plantronics
- - -

146.52 60
Others

191.80

289.96

613.43

259.46 60
Total
14,402.77 15,284.13 15,502.96

12,954.40


59

Creditors
INR in '000s
Approx.
Creditor
days Q1 Q2 Q3 Q4
Symbol

2,000.04

5,723.33

3,016.84

3,671.31 60
SonicWall

725.75
779.24

1,074.28

1,243.05 60
Blue Coat

762.35
759.89

785.78

714.16 45
F5 Networks

111.44
90.20

33.12

210.69 60
Zebra

753.01
946.64

1,110.56

800.42 60
Isilon

841.00

1,977.22

3,176.30

1,280.00 45
Extreme Networks

490.29
253.02

802.95

1,181.42 45
Motorola/Canbium - 34.89

256.89

138.68 60
Barracuda

212.08
203.93

272.03

538.06 60
Plantronics - - -

194.68 45
Others 4.91 101.24

502.08

181.07 45
Total 5,900.85 10,869.62 11,030.83 10,153.54
Table 7: Vendorwise creditors
The amount owed by the company on purchase of products from the vendors is given in the
above table.


60

5.2 Results and Discussion
5.2.1 Calculation of Working Capital
The vendor wise working capital is calculated using the formula:

Vendorwise Working
capital
INR in '000s
Q1 Q2 Q3 Q4
Symbol

5,125.30

3,948.11

5,534.78

4,133.56
SonicWall

1,990.14

2,043.47

1,653.93

1,642.96
Blue Coat

2,594.35

1,156.25

655.94

336.28
F5 Networks

2,012.12

1,071.67

762.98

702.05
Zebra

355.97 213.27

177.93

486.40
Isilon

234.25 624.93

149.16

432.95
Extreme Networks

1,175.37 847.98

571.42

373.37
Motorola/Canbium

476.62 408.40

588.35

300.87
Barracuda

270.42 117.78

204.23

326.12
Plantronics
- - -

99.42
Others

187.04 188.71

121.37

107.69
Total
14,421.57 10,620.56 10,420.10 8,941.68
Table 8: Vendorwise working capital

61

Figure 8: Vendorwise working capital
Net Working Capital
The net working capital is calculated as,

( )
( )
50% of the working capital is financed by bank (overdraft) and 50% is financed by the share capital. (This
is a dummy proportion as the actual proportion is confidential)

-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
5,500.00
6,000.00
1 2 3 4
I
N
R

i
n

'
0
0
0
s

Vendorwise WC
Symbol
SonicWall
Blue Coat
F5 Networks
Zebra
Isilon
Extreme Networks
Motorola/Canbium
Barracuda
Plantronics
Others

62

Net Working Capital
INR in '000s
Q1 Q2 Q3 Q4
Bank balance

(8,839.86)

(6,679.79)

(6,872.84)

(6,298.29)
Stock

5,919.64

6,303.04

5,947.97

6,140.82
Debtors

14,402.77

15,284.13

15,502.96

12,954.40
Other Assets

4,173.98

3,386.29

4,399.16

4,899.16
Trade Creditors

5,900.85

10,869.62

11,030.83

10,153.54
Other Creditors

915.83

744.26

1,073.57

1,244.26
Net Working Capital
8,839.86 6,679.79 6,872.84 6,298.29
Table 9: Net working capital

Figure 9: Net working capital

(12,500.00)
(10,000.00)
(7,500.00)
(5,000.00)
(2,500.00)
-
2,500.00
5,000.00
7,500.00
10,000.00
12,500.00
15,000.00
17,500.00
1 2 3 4
I
N
R

i
n

'
0
0
0
s

Net Working Capital
Bank balance
Stock
Debtors
Other Assets
Trade Creditors
Other Creditors
Net Working Capital

63

Difference between the amount of Working capital blocked by each vendor and the expected value:
Vendor,Quarter Expected WC(E) Observed WC(O) % difference
Symbol,Q1 5,035.61 5,125.30 1.78%
Symbol,Q2 3,900.73 3,948.11 1.21%
Symbol,Q3 5,512.64 5,534.78 0.40%
Symbol,Q4 4,125.30 4,133.56 0.20%
Average 0.90%
SonicWall,Q1 1,940.39 1,990.14 2.56%
SonicWall,Q2 2,015.88 2,043.47 1.37%
SonicWall,Q3 1,634.08 1,653.93 1.21%
SonicWall,Q4 1,629.82 1,642.96 0.81%
Average 1.49%
Blue Coat,Q1 2,464.63 2,594.35 5.26%
Blue Coat,Q2 1,100.75 1,156.25 5.04%
Blue Coat,Q3 626.42 655.94 4.71%
Blue Coat,Q4 322.83 336.28 4.17%
Average 4.80%
F5 Networks,Q1 1,961.82 2,012.12 2.56%
F5 Networks,Q2 1,058.81 1,071.67 1.21%
F5 Networks,Q3 760.69 762.98 0.30%
F5 Networks,Q4 699.95 702.05 0.30%
Average 1.10%
Zebra,Q1 341.02 355.97 4.38%
Zebra,Q2 205.59 213.27 3.73%
Zebra,Q3 174.37 177.93 2.04%
Zebra,Q4 481.54 486.40 1.01%
Average 2.79%
Isilon,Q1 236.00 234.25 0.74%
Isilon,Q2 630.56 624.93 0.89%
Isilon,Q3 149.61 149.16 0.30%
Isilon,Q4 431.65 432.95 0.30%
Average 0.56%
Extreme Networks,Q1 1,131.29 1,175.37 3.90%
Extreme Networks,Q2 832.71 847.98 1.83%
Average 2.14%
Motorola/Canbium,Q1 478.77 476.62 0.45%

64

Average 0.26%
Barracuda,Q1 274.47 270.42 1.48%
Barracuda,Q2 118.84 117.78 0.89%
Barracuda,Q3 204.85 204.23 0.30%
Barracuda,Q4 325.14 326.12 0.30%
Average 0.74%
Plantronics,Q1 - - -
Plantronics,Q4 98.82 99.42 0.60%
Average 0.15%
Others,Q1 187.88 187.04 0.45%
Others,Q2 189.28 188.71 0.30%
Others,Q3 121.56 121.37 0.15%
Others,Q4 107.52 107.69 0.15%
Average 0.26%
Table 10: Vendorwise working capital variation
The company policy is to exit business with vendors for which working capital variation is more
than 3% from the expected value to maintain an optimum level of working capital. The special cases are
discussed below.
Symbol: Wireless products which were bought as stock & sell did not get liquidated as expected. In May
2011 this was discussed and decided that a team was dedicated to take measures and liquidate the stock
within the next couple of quarters. But the sales increased in the second and third quarters as shown by
the debtors figure and compensated for this.
Sonic Wall: Products which were bought as stock & sell did not get liquidated as expected. In May 2011
this was discussed and decided that a team was dedicated to take measures and liquidate the stock within
the next couple of quarters.
Blue Coat: The profit was low and the inventory carrying costs were high. As per Blue Coat's
requirements the model was planned for a high stock and sell (with advance ordering). However the
expected liquidation of these stocks did not materialize. Hence the company decided to liquidate the
existing stock in the upcoming quarters without stocking any more. The company should hence exit from
business with Blue Coat.

65

Extreme Networks, Zebra, F5 Networks: The values are quite close to 3%. There were slight variations
in the amount stocked in the warehouse. Cyclical variations happen due to the quarter end variations of
the vendor. But this was within the allowable limit.
5.2.2 Calculation of Operating Cycle and Cash Conversion Cycle
Operating Cycle
Operating cycle is the time duration required to convert sales, after the conversion of resources
into inventories, into cash. The operating cycle of a manufacturing company involves three phases:
Acquisition of resources such as raw material, labour, power and fuel etc.
Manufacture of the product which includes conversion of raw material into work-in-
progress and then to finished goods.
Sale of the product either for cash or on credit. Credit sales create account receivable for
collection.
The length of the gross operating cycle of a manufacturing firm is the sum of Inventory
conversion period (ICP) and Debtors (receivable) conversion period (DCP).
Gross Operating Cycle = ICP + DCP
Inventory conversion period is the total time needed for producing and selling the product.
Typically, it includes:
Raw material conversion period (RMCP)
Work-in-process conversion period (WIPCP)
Finished goods conversion period (FGCP)
ICP = RMCP + WIPCP + FGCP
In a distribution firm, ICP is irrelevant. Hence operating cycle contains the lead time for
obtaining the inventory and the DCP.
The operating cycle of Westcon (India) Pvt. Ltd can be depicted as below:

66

Figure 10: Cash conversion cycle
Cash Conversion or Net Operating Cycle is the difference between gross operating cycle and
payables deferral period.

Days Sales Outstanding - DSO
DSO is a measure of the average number of days that a company takes to collect revenue after a
sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts
receivable. A high DSO number shows that a company is selling its product to customers on credit and
taking longer to collect money.

( )

Days Payable Outstanding - DPO
DPO is a company's average payable period. DPO is an efficiency ratio that measures the average
number of days a company takes to pay its suppliers.

()

Stock
Creditors
Sales
Debtors
Cash

67

Days Inventory outstanding DIO
Days in inventory (DII or DIO) is an efficiency ratio that measures the average number of days
the company holds its inventory before selling it.

()

Month Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11
Sales
5,571.92 5,981.97 6,172.62 6,004.31 6,702.56 5,954.86
Stock
6,368.47 6,368.47 5,022.00 6,158.56 6,221.56 6,238.03
Debtors
14,858.45 14,858.45 13,491.40 12,479.47 17,595.80 15,777.13
Purchases
2,859.26 2,741.76 2,766.02 3,258.17 4,512.45 4,940.74
Trade
Creditors
6,671.61 6,671.61 4,359.33 7,214.80 12,341.87 13,052.20
DSO (# of
days)
80 77 70 68 65 77
DPO (# of
days)
70 73 64 56 53 66
DIO (# of
days)
67 68 54 63 53 44
Table 11: DSO, DPO, DIO calculation
Month Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Sales
6,758.25 6,447.10 6,371.08 6,481.32 5,862.84 5,632.35
Stock
6,479.27 5,809.40 5,555.25 6,502.18 6,276.00 5,644.29
Debtors
15,286.47 16,000.20 15,222.20 12,850.58 11,208.27 14,804.34
Purchases
5,463.28 4,925.60 5,014.01 5,439.69 4,821.18 4,686.25
Trade
Creditors
11,209.93 10,709.60 11,172.96 10,211.62 8,988.87 11,260.12
DSO
(# of days)
72 73 73 68 67 69
DPO
(# of days)
67 71 66 59 63 65
DIO
(# of days)
39 34 32 38 37 34
Table 11 contd.: DSO, DPO, DIO calculation

68

Average DSO: 72 days
Average DPO: 65 days
Average DIO: 34 days
The difference between DSO and DPO is 7 days. The working capital should be financed for
these 7 days. Also the average number of inventory days is also high. This can be explained by the excess
inventory from Blue Coat, Sonic wall, Symbol etc. which did not move as fast as expected.
Operating Cycle = 72+ 34 = 106 days.
Cash Conversion Cycle= 72+ 34 -65 = 41 days.
This means that the company took 41 days on an average to convert its cash. It has to be reduced
by using stricter collection methods and lower stocking.


69

6. CONCLUSION AND RECOMMENDATIONS
All the calculation for credit limits happen in the VPs brain. Hence the scientific format of
setting credit limit can be used by the CS Team for initial fixing of the credit limit before it goes
for approval to the VP Finance.
The customer database is not complete for various customers. It should be made sure that it is
complete with all the necessary information (TIN number, TAN number, contact details etc.)
during customer registration itself. The database should be updated promptly in case of any
change.
Operations on the basis of trust should be eliminated. The employees should be given training
to be out of the undue influence of trust. They should be counseled against performing any
operation out of the formal process.
There are multiple duties for the same employee including access to SAP at sensitive levels. The
company can preferably hire an external consultant evaluate the segregation if duties and SAP
access levels and suggest changes. An external consult can evaluate impartially without trust
factor coming into picture.
The company can exit from business with the vendor Blue Coat as it is not profitable.
Cash conversion cycle of the company has to be reduced by enforcing stricter collection and
reducing the stocking period of stock and sell products.

7. LIMITATIONS
The data used for working capital calculation values are scaled down in proportion with the actual
values as the actual values are confidential.
Time was limited. If there was more time a deeper analysis on internal controls could have been
done.
The in depth analysis was limited to accounts receivable. The payables and stocking part was not
analyzed in that detail.
Due to time constraints a visit to the branch office was not possible. Had it been done, the process
happening at the branch would have been more deeply studied. This would have made the SOP
better.
The SOP has to be put in a standard format followed by the company.


70

8. OTHER LEARNINGS
8.1 Controls in Money Transfer from an account to another
Money is transferred to external accounts mainly through Hong Kong Shanghai Banking
Corporation (HSBC). In addition to the username name and password that is normally provided for
internet banking, HSBC provides a security device (Secure Key) which gives password real time when it
is turned on.
According to the agreement with the bank any two authorized persons should approve the transfer
online for the transaction to actually take place. The Credit Service Team goes online entering the
username and password on the web page. When security device is turned on the password is entered in
the device, it provides passwords that has to be entered at different stages of the process.
The Credit Service team makes an excel file which contains the details of transfer (Account
numbers, Amount etc.) in a specific format (Format in Annexure). This file converted to another format
using Secure Convex Client Converter software. This file is then uploaded to the website. The process
will not be initiated if there is any error in the uploaded file. Transfer takes place when the two authorized
persons logs in using the Security Key and approves the transaction. After the approval, the Credit
Service Team will get an acknowledgement mail from the bank called the Payment Advice.
AXIS Bank on the other hand provides security through Mobile Netsecure Code. The password
comes as an SMS on the authorized mobile telephone number.
8.2 Credit Insurance
During the course of the internship, I got a chance to attend a meeting with a Credit Insurance
Company. Insuring the debtors can be considered as a measure of risk management outsourcing. There
were employees from the Insurance Company, an underwriter and a broker who attended the meeting
along with the CFO and Sales head of Westcon. The credit insurance designed to cover two risks-
insolvency and default. It excludes disputes, sales to government companies and LC sales. The premium
for the policy was about Rs. 1 crore per year.
Giving credit less than Rs. 25 lakh is the discretion of the company. The analysis of the debtor
should be done by the company, but still covered by the policy. For credits greater than Rs. 25 lakhs, the
insurance company will provide advice to the company about what credit can be given. The insurance
company maintains database about the firm including the history of defaulting debts. Based on that the

71

insurance company will advise the company to provide credit or not. The insurance company also has tie
up with various agencies to obtain financials and data about the non-listed buyers. If the buyer not advised
by the insurance company is given credit, it will not be covered. If the buyer is known to the insurance
company, the response time about whether to lend or not is 1-2 days. If the buyer is unknown the
response time will be about 5days.
According to the insurance company, 30days after the due date is called the Maximum Extension
Period (MEP). If the buyer does not pay back within 30days from the MEP, the company is advised to
stop further supply to that buyer and the insurance stops covering for further sales to that buyer.
My observation from attending the meeting was that the premium is too high for the amount of
bad debts that occur to the company. Also the insurance company acts more like an advisor than a cover.
Hence the company cannot get into risky deals and if it does, it is not covered. This can affect sales
negatively. It takes at least 3 months for the insurance for the amount to be refunded by the insurer. This
will not be of great help to the working capital. It is also not necessary that the National Systems
Integrators (NSI) which are the big system integrators would pay on time or within 30 days of MEP. They
are the valuable customers of the company and the company cannot stop supplying to them. Considering
all the factors together, taking the credit insurance is not really a good option for the company. If the
premium if lower the company can consider it.
8.3 Escrow Account
An escrow is:
an arrangement made under contractual provisions between transacting parties, whereby an
independent trusted third party receives and disburses money and/or documents for the
transacting parties, with the timing of such disbursement by the third party dependent on the
fulfillment of contractually-agreed conditions by the transacting parties, or
an account established by a broker, under the provisions of license law, for the purpose of holding
funds on behalf of the broker's principal or some other person until the consummation or
termination of a transaction or,
a trust account held in the borrower's name to pay obligations such as property taxes and
insurance premiums.


72

8.4 Conference Call for a Business Deal
During the course of the internship I got a chance to listen to a conference call with a vendor
(CISCO- the CISCO products are handled by a separate legal entity called Comstor). The deal was for a
huge sum (in dollars- amount confidential). The proposed margin on the products was 1-2%. The margin
in dollars seemed to be a very attractive amount. Hence the sales department was pushing for the approval
of the deal. The way the CFO handled the deal was very impressive. He said he needs at least 15-20%
margin to move forward with the deal. The explanation he gave was very simple. The costs incurred by
the company in the deal are- Forward premium for import (2%), ST (12.3%), TDS (10%). The working
capital will be blocked until the goods are sold and the taxes are recovered. Also the companys credit
rating with the bank for the following year will go down if the company borrows more. Hence the deal
did not happen.
8.5 RTGS and NEFT money transfer
The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the
continuous (real-time) settlement of funds transfers individually on an order by order basis (without
netting). 'Real Time' means the processing of instructions at the time they are received rather than at some
later time. 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on
an instruction by instruction basis). Considering that the funds settlement takes place in the books of the
Reserve Bank of India, the payments are final and irrevocable.
NEFT (National Electronic Funds Transfer) is an electronic fund transfer system that operates on
a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes
place with all transactions received till the particular cut-off time. These transactions are netted (payable
and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example,
currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week
days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated
settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS
transactions are processed continuously throughout the RTGS business hours. The Indian Financial
System Code (IFSC) is an alphanumeric code that uniquely identifies a bank-branch participating in the
NEFT system. This is an 11-character code with the first 4 alphabetic characters representing the bank,
and the last 6 characters (usually numeric, but can be alphabetic) representing the branch. The 5th
character is 0 (zero). IFSC is used by the NEFT system to route the messages to the destination banks /
branches.

73

The RTGS system is primarily meant for large value transactions. The minimum amount to be
remitted through RTGS is Rs. 2 lakh. There is no upper ceiling for RTGS transactions. Under normal
circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are
transferred by the remitting bank. The beneficiary bank has to credit the beneficiary's account within two
hours of receiving the funds transfer message. The RTGS service window for customer's transactions is
available from 9.00 hours to 16.30 hours on week days and from 9.00 hours to 13.30 hours on Saturdays
for settlement at the RBI end. However, the timings that the banks follow may vary depending on the
customer timings of the bank branches.


74

9. ANNEXURE


75

1. Company Profile

Founded in 1985, Westcon is the worlds leading SPECIALITY distributor of networking,
convergence, security, mobility and collaboration IT solutions. Westcon Group is head quartered in New
York USA. Parent is Datatec: A $5 billion investment ICT company publicly listed on Johannesburg
and London markets. Westcon is a $4+ billion, multi-national company with operations in 19 countries on
all continents, with 2400+ employees. Westcon serves customers in over 100 countries worldwide, with
world-class logistics capabilities.
Mission: To be the leading "Information Management & Communication" Products, Solutions and
Services company - enable our customers adopt new technologies and to use "Information" effectively to
create business strategies and be productive, efficient and competitive.
Global Presence:
Europe: Austria, Belgium, Czech Republic, France, Germany, Italy, Nordics, Spain, Sweden, the
Netherlands, Turkey, UK.
The Americas: Brazil, Canada, Caribbean, Mexico, US.
Asia Pacific: Australia, Indonesia, Malaysia, Thailand, New Zealand, Singapore, Vietnam.
South Asia: Bangladesh, Bhutan, India, Maldives, Nepal, Sri Lanka.
Middle East: Dubai, UAE, GCC countries, N. Africa, Saudi Arabia, the Levant.
Africa: Emerging Africa, South Africa.
About Westcon Group- South Asia
Conceived and promoted in 2005 as Inflow Technologies Pvt. Ltd.
The core team members have a collective industry experience of more than 500+ man years.
Focused niche player in the Information Management, Communications Products, Solutions and
Services space to operate in South Asia.
Direct relationship with 30 Global Technology vendors in the space of Networking, Information
Security, Storage, Enterprise Mobility, Infrastructure & Application Software, Unified
Communication and Services.
Headquartered in Bangalore with presence in 16 locations. Indian entity is a Board managed
Organization.
Westcon Group has been a Strategic Investor since September 2008.
Westcon Group South Asia operates through 4 business groups.- Inflow Technologies
Products and Solutions, Westcon India Products and Solutions, Comstor India - Products and
Solutions, Services

76

Area /Billing Locations: Bangalore, Chennai, Hyderabad, Kochi, Kolkata, Mumbai, Pune, Ahmedabad,
Delhi, Pondicherry, Mohali, Gurgaon, Jaipur, Shimla (HP), Patna, Srilanka, Singapore.
Go to Market Strategy:

Role:


77

Business Model:

Core Competencies:
Business Development: High touch activities with End Customers.
Channel Engagement: Recruiting Channels and developing them by providing training,
certification etc.
Pre sales: Providing channels the value add of POC, BOM creation, Technical training.
Post Sales: After sales support such as RMA, implementation and L2 support.
Product marketing: EDM, seminars, events etc.
The Westcon Wheel:


78

Business Groups:

Customers: A few customers of the company from various sectors are listed below.
Information Technology: Genpact, Verizon, iGate, Covansys, Wipro Technologies, First Source, EDS,
Accenture, HP, Infosys, Cognizant, TCS, HCL Tech, Tata Tech, Tech Mahindra.
BFSI: AVIVA, SBI, Standard Chartered, HDFC, ICICI, Goldman Sachs, BNP Paribas, Axis Bank,
American Express, PNB, Oriental Bank of Commerce, Prime Bank, Bangladesh.
Telecom: Reliance, Bharti, Vodafone, BSNL, MTNL, Uninor, Idea Cellular, Tata Indicom, British
Telecom, Nokia, Siemens, Aircel, MTS, DOCOMO, Tata Comm.
Automobile: Ashok Leyland, Hyundai, Tata Motors, Maruti Suzuki, TVS Motors, Skoda, Volvo, Force
Motors, Mercedes Benz India, Toyota, Kirloskar, MRF, Bajaj Auto, Goodyear.


79

2. Sales Invoice Format

SALES INVOICE
Office Address: Invoice No: Dated :

Warehouse Address: Customer PO No & Date:
LC No. Date:
Payment terms:

Bill To Address: Ship to Address:

TIN No : TIN No:
Contact Person : Contact Person:
Contact Number : Contact Number:

Sl. No. Part No. Item description Quantity Unit Amount

Tax @ x%
Total
Round
Amount in words
TIN No: Declaration:
CST No:
Service Tax No.: PAN No:

Terms & Conditions:
1) Our responsibility ceases on delivery of
the goods to customer.
2) Please pay this bill by cheque/dd favoring
"WESTCON (INDIA) PVT LTD"
3) Goods once sold will not be taken back. Authorized Signatory
4) Payment should be made strictly as per
terms mentioned.
5) Subject to Bangalore Jurisdiction.
6) Interest @18%PA will be charged from the
date of invoice for delayed payment.
In respect of this invoice, no credit of the
additional duty of customs levied under Sub-
Section (5) of Section 3 of the Customs Tariff
Act, 1975 shall be admissible to the buyer.

We declare that this Invoice shows the actual price of
the goods described and that all particulars are true
and correct.

80

3. Sample AR Invoice


81

4. Delivery Challan Format

DELIVERY CHALLAN

Office Address: DC No: Dated :

Warehouse Address:
Customer PO No. &
Date

LC NO. Date:

Ship To Address

Tin No :
Contact Person :
Contact Number :

Sl.
No.
Part No Item Description Quantity

(For Westcon India Pvt Ltd)

Authorised Signatory


82

5. OS Aging Report format
Doc
type
Customer
Code
Customer
Name
Customer
Group TP
Doc
No.
Ref.
No
Doc
Date
Due
Date
End
Customer
Collection
Branch

Doc
Currency
Doc
Rate
Doc
Value

Outstanding

Outstanding
LC
0-
30
30-
45

45-
60

60-
90

90-
120
120-
180 >180


83

6. Packing list format

Warehouse address PL NO: Dated :

Customer PO No. & Date

LC NO.

Ship To Address

Tin No :

Contact Person :

Contact Number :

Sl. No. Part No. Item Description Quantity No. of boxes Gross Weight

TIN No :
CST No :
Service Tax No : PAN No :

For Westcon India Pvt. Ltd

Authorised Signatory

84

7. Bill of Exchange

Date: Due Date:

Value:

LC #:--------------------- Dated ------------
Issued Bank: ---------------------------------

Drawn under LC: # -------------- dated --------------- valued Rs.---------/- issued by the -----------
Bank against our Invoice number ----------- valued Rs.-------------/- dated -------------------.

At ----- (Number of days of credit) days from the date of bill of exchange (Due date --------),
please pay to the order of (Beneficiary bank address) a sum of Rs. -------------/-(Rupees -----------
----------------------- (in words) Only) towards delivery of -------------------- (Product/ Service)
with invoice number ---------- dated -------------------.

To,
Applicant Bank address.

For Inflow Technologies Pvt Ltd

Authorized signatories


85

8. Collection Report
INVOICE
Sl.No
Received
From
No. Date Amount Currency
Cheque
Amount

Deduction Details

TDS
Octroi
/ Bank
Chgs
Credit
Note
ORC/Others
Customer
PO Ref
PO
Date
Collected
At
(Branch)
Cheque#
Drawn
on
(short
name)

Cheque
Date
Deposited On
Type of Bank
Deposited
Made
TDS
% age
Realised or
Bounced
Remarks if
any.
TDS
deducted
for period


86

9. Order Processing Form
OPF - ORDER PROCESSING FORM
TO BE FILLED BY BDE/BDM/TL IN CONSULTATION WITH PM/BM/BH
TO BE SENT BY PM/BM IN THE ABSENCE OF BDE/BDM/TL
TO BE SENT TO OE
TP DETAILS
BRAND / PRODUCT
PRODUCT CODE / PART CODE
MARGIN TO COMPANY (% AGE) W/O ORC
BASIC PRICING - W/O TAXES
IF SPL PRICE CLEARED - APPROVAL DETAILS
ATTACHED?

COMMERCIAL TERMS
INR or USD ORDER
TAX STRUCTURE - SPECIFY %AGE & TYPE VAT: 12.5 % ST: _____ CST:___% C-
FORM:___%
IF USD - WHT OR ANY DEDUCTIONS, NOT
APPLICABLE CLAUSE INCLUDED? YES / NO

CONVERSION FACTOR APPLIED
CP DETAILS
NAME OF CP
IF PO FROM NSI / RSI - DETAILS TO SPOC REGION
OE/TL/LH SENT ? YES / NO

IS THERE ANY OVERDUE? YES / NO
CREDIT PERIOD AS PER SAP SYSTEM
CREDIT TYPE AS PER SAP SYSTEM
IF SPECIAL CREDIT, APPROVAL FROM LH?
(PLS ATTACH APPROVAL)
IF LC/BG - IS THE DOCUMENT ATTACHED WITH
PO ?

DELIVERY TERMS COMMITMENT TO EC/CP
DELIVERY TERMS CIF / FOB DTLS - Charges Addnl
or Part of Price cleared [Pls attach relevant mail]

EC DETAILS
EC NAME
EC ADDRESS
EC CONTACT PERSON
EC CONTACT PERSON EMAIL ID

87

EC CONTACT PERSON PHONE NUMBER
EC DELIVERY LOCATION ?
IF EC PO RELEASED DIRECTLY ON WESTCON
EC PAYMENT TERM ? APPROVED BY LH?
EC PAYMENT CONTACT PERSON NAME
EC PAYMENT CONTACT PERSON EMAIL ID
EC PAYMENT CONTACT PERSON PHONE #
CDF ATTACHED? YES / NO
EC PAYMENT DOCUMENTATION PROCESS [
DETAILS FOR BDM/TL & OE TO FOLLOW UP]

ORC DETAILS
ORC VALUE TO LSI/ NSI/ RSI/ TSP/ CONSULTANCY
FIRM ? (NO INDIVIDUALS)

IF ORC TO RSI/NSI/TSP/CONSULTANCY FIRM, HAS
IT BEEN UPDATED TO OE/TL/LH of SPOC REGION?

ORC CONFIRMATION LETTER (in the specified
format) FROM CP ATTACHED?


88

10. SCC Form

SCC FORM
(To be filled by OE & sent to HO Credit Services )
NAME OF THE COMPANY [ CP or EC Pls
specifiy]

COMPLETE ADDRESS
CONTACT PERSON NAME
CONTACT PERSON PHONE
TIN NO.
TAN NO [ if the company is a Pvt Ltd Co or Public
limited co]

PAN NO
SERVICE TAX NUMBER [If a company sells /
resells support / services ]

CIN NO [ COMPANY INCORPORATION
NUMBER ] or ROC NO

CURRENT ORDER VALUE IN HAND /
EXPECTED

PRODUCT ORDER [BRAND] EXPECTED
CREDIT TYPE & CREDIT TERM EXPECTED
LHs RECOMMENDATION


89

11. Month-wise Stock, Debtors and Creditors for FY 2011-12

Stock (INR in
000s) Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11
Symbol

2,176.89

2,176.89

1,032.67

1,691.93

2,200.53

1,958.27
SonicWall

1,484.31

1,484.31

1,296.53

1,713.80

1,346.07

1,222.47
Blue Coat

1,561.49

1,561.49

1,563.60

1,467.16

1,467.16

1,467.16
F5 Networks

223.32

223.32

223.33

223.33

183.47

385.60
Zebra

138.28

138.28

112.80

250.87

349.67

455.07
Isilon - - 9.60 9.60 9.60 9.53
Extreme Networks

380.97

380.97

369.80

395.13

243.40

297.33
Motorola/Canbium

403.20

403.20

408.07

406.73

420.73

441.67
Barracuda - - 5.13 - 0.93 0.93
Plantronics - - - - - -
Others - - 0.47 - - -
Total 6,368.47 6,368.47 5,022.00 6,158.56 6,221.56 6,238.03

Stock (INR in
000s) Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Symbol

2,306.67

1,931.20

1,886.72

2,784.95

2,944.76

2,744.72
SonicWall

1,489.33

1,268.20

757.08

1,358.98

1,185.70

910.39
Blue Coat

1,220.07

1,220.07

1,220.07

920.00

920.00

920.00
F5 Networks

386.07

383.20

327.28

110.75

110.48

110.48
Zebra

466.27

450.67

726.21

571.45

449.22

241.81
Isilon

9.53
9.60

30.76

30.00
- -
Extreme Networks

258.00

185.20

215.19

190.33

199.72

259.54

90

Motorola/Canbium

319.13

361.27

331.00

325.61

257.75

237.26
Barracuda

11.60
-

43.45

43.45

45.24

19.22
Plantronics - - -

149.16

112.29

181.31
Others

12.60
-

17.50

17.50

50.83

19.55
Total

6,479.27
5,809.40 5,555.25 6,502.18 6,276.00 5,644.29

Debtors (INR in
Symbol

5,897.88

5,897.88

4,193.80

4,631.20

9,544.47

8,987.93
SonicWall

1,189.92

1,189.92

1,502.67

1,116.33

1,348.07

1,721.40
Blue Coat

1,810.32

1,810.32

1,762.87

757.40

417.73

171.80
F5 Networks

2,072.12

2,072.12

1,556.47

1,361.73

797.73

533.73
Zebra

1,144.64

1,144.64

648.27

804.33

1,001.93

617.87
Isilon

729.60

729.60

1,756.93

2,149.27

3,374.47

2,254.00
Extreme Networks

1,341.78

1,341.78

1,181.67

794.13

837.20

735.80
Motorola/Canbium

100.60

100.60

14.20
3.93

10.73

46.07
Barracuda

547.57

547.57

347.20

415.73

224.80

322.73
Others

24.03

24.03

527.33

445.40

38.67

385.80
Total 14,858.45 14,858.45 13,491.40 12,479.47 17,595.80 15,777.13


91

Debtors (INR in
Symbol

7,915.80

6,774.40

4,840.07

3,920.77

4,517.54

6,501.89
SonicWall

1,533.20

1,352.13

1,784.67

1,348.88

1,405.27

2,448.83
Blue Coat

193.80

328.87

142.28

181.88

206.28

3.17
F5 Networks

836.07

101.13

354.54

1,026.65

727.02

652.84
Zebra

734.87

728.00

759.47

1,200.83

463.37

933.79
Isilon

1,652.40

3,915.80

4,358.30

2,692.58

1,563.53

852.72
Extreme Networks

1,032.80

1,163.80

1,268.13

1,225.81

809.17

1,979.81
Motorola/Canbium

374.13

578.87

571.33

250.20

158.00

89.80
Barracuda

349.67

437.53

586.53

723.32

1,061.85

699.46
Plantronics - - -

10.07

74.95

354.53
Others

663.73

619.67

556.88

269.60

221.29

287.50
Total 15,286.47 16,000.20 15,222.20 12,850.58 11,208.27 14,804.34

Creditors (INR in
Symbol

2,176.89

2,176.89

1,032.67

1,691.93

2,200.53

1,958.27
SonicWall

1,484.31

1,484.31

1,296.53

1,713.80

1,346.07

1,222.47
Blue Coat

1,561.49

1,561.49

1,563.60

1,467.16

1,467.16

1,467.16
F5 Networks

223.32

223.32

223.33

223.33

183.47

385.60
Zebra

138.28

138.28

112.80

250.87

349.67

455.07
Isilon - - 9.60 9.60 9.60 9.53
Extreme Networks

380.97

380.97

369.80

395.13

243.40

297.33
Motorola/Canbium

403.20

403.20

408.07

406.73

420.73

441.67
Barracuda - - 5.13 - 0.93 0.93

92

Others - - 0.47 - - -
Total 6,368.47 6,368.47 5,022.00 6,158.56 6,221.56 6,238.03

Creditors (INR in
Symbol

4,957.93

1,954.33

2,138.24

1,590.08

3,167.34

6,256.50
SonicWall

1,257.40

1,108.20

857.24

1,399.17

918.44

1,411.56
Blue Coat

791.67

795.47

770.20

703.73

825.30

613.44
F5 Networks

33.07
-

66.29

315.32

316.74
-
Zebra

1,178.53

987.87

1,165.27

1,562.72

527.94

310.61
Isilon

1,531.07

3,713.40

4,284.44

2,571.43

1,268.55
-
Extreme Networks

435.00

912.13

1,061.73

1,203.86

784.05

1,556.37
Motorola/Canbium

245.33

509.33

16.02

215.62

54.28

146.13
Barracuda

328.27

190.13

297.68

353.95

826.29

433.94
Plantronics - - -

116.55

141.22

326.28
Others

451.67

538.73

515.85

179.18

158.74

205.29
Total 11,209.93 10,709.60 11,172.96 10,211.62 8,988.87 11,260.12


93

12. Control Risk Assessment Questionnaire
ANSWER WEIGHT SCORE
5. REVENUE CYCLE 1 2 3 4 5
5.1 Sales
5.1.1 Are the oral orders committed to writing? Y/N/I/X Y 3 0
5.1.2 Is there an approved list of customers to
whom goods may be supplied under normal
circumstances?
Y/N/-/X Y 4 0
5.1.3 Is a "stop supply" list prepared and issued
by a senior official on at least a monthly
basis (and also when computer systems are
not operational for automatic credit
verification) to all sales, dispatch and order
personnel?
Y/N/-/X Y 4 0
5.1.4 Are the lists referred to in 5.1.2 and 5.1.3
above inspected before an order is accepted
and processed (especially in the case of
manual delivery notes)?
Y/N/I/X Y 5 0
5.1.5 Are special sales prices approved in writing
by a senior official?
Y/N/I/X Y 5 0
5.1.6 Is a sales price variance report generated at
least monthly and is this report reviewed by
a senior official?
Y/N/-/X X 3 0
5.1.7 Are all special discounts or settlement terms
approved in writing by a senior official?
Y/N/I/X Y 5 0
5.1.8 Are dispatch notes prepared for the release
of stock?
Y/N/I/X Y 3 0
5.1.9 Is it possible to produce more than one
"original" copy of a dispatch/delivery note?
Y/N/-/X N 4 0
5.1.10 Are there procedures in force to ensure that
all goods leaving the premises are invoiced
timeously?
Y/N/-/X Y 5 0
5.1.11 Are dispatch notes agreed to sales invoices? Y/N/I/X Y 5 0
5.1.12 Are dispatch notes agreed to order details? Y/N/I/X Y 2 0
5.1.13 Are Goods Received Notes (GRNs) made
out for all goods returned for credit?
Y/N/I/X Y 3 0
5.1.14 Are credit notes issued for goods returned
matched with the appropriate GRN's?
Y/N/I/X Y 5 0
5.1.15 Are 'other' credit notes issued to customers
approved in all instances by a duly
authorised official?
Y/N/I/X Y 5 0
5.1.16 Are cut off procedures adequate to ensure
that goods are only invoiced on dispatch?
Y/N/-/X Y 3 0
5.1.17 Is there a report generated, at least once a
month, of the nature, volume and amounts
of credit notes, and is this report reviewed
Y/N/-/X Y 5 0

94

5.1.18 Are cut off procedures adequate to ensure
that goods dispatched are invoiced
immediately?
Y/N/-/X Y 3 0
5.1.19 Are dispatch notes pre-numbered and
sequentially controlled?
Y/N/-/X Y 3 0
5.1.20 Are credit notes pre-numbered and
sequentially controlled?
Y/N/-/X Y 3 0
5.1.21 Where consignment stocks are held by
customers, have they accepted responsibility
in writing for control of those stocks?
Y/N/I/X Y 4 0
5.2 Debtors
5.2.1 Where sales are made to a new customer,
are credit application procedures conducted
before the order can be filled?
Y/N/-/X Y 3 0
5.2.2 Is customer liquidity assessed through credit
bureaux and follow up of trade references ?
Y/N/-/X Y 3 0
5.2.3 Are credit limits set and captured in the
customer master file?
Y/N/-/X Y 4 0
5.2.4 Are credit limits approved by an authorized
person?
Y/N/-/X Y 3 0
5.2.5 Are debtors credit limits and terms strictly
enforced?
Y/N/-/X Y 4 0
5.2.6 Are new customer details captured in the
customer master file by a person
independent of the sales and cash receiving
function?
Y/N/-/X Y 3 0
5.2.7 Is access to the customer master file
restricted to only authorised persons?
Y/N/-/X Y 3 0
5.2.8 Are all trade debtors accounts reconciled
monthly
Y/N/-/X N 3 27
5.2.9 Are the above reconciliations reviewed for
accuracy and approved by an independent
senior official?
Y/N/-/X Y 3 0
5.2.10 Is there a procedure in place to identify old
unused debtors accounts and place them on
hold for future credit checks if used again?
Y/N/-/X Y 3 0
5.2.11 Is the debtors control account in the general
ledger reconciled to the debtors ledger on a
monthly basis?
Y/N/-/X Y 5 0
5.2.12 Is there evidence that the above
reconciliation is reviewed by a senior
official?
Y/N/-/X Y 4 0
5.2.13 Are all reconciling items followed up in a
timely manner?
Y/N/-/X Y 3 0
5.2.14 Does the above mentioned reconciliation
contain long outstanding items?
Y/N/I/X Y 4 30
5.2.15 Are master file amendments properly
authorised and reviewed?
Y/N/-/X Y 3 0
5.2.16 Are trade debtors aged monthly? Y/N/-/X Y 4 0

95

5.2.17 Is it possible to re-age debtors invoices on
the debtors system (i.e. change the original
date)?
Y/N/-/X N 3 0
5.2.18 Is there evidence that the age analysis is
Y/N/-/X Y 3 0
5.2.19 Are there set guidelines on follow up actions
to be taken when debtors accounts are not
settled within agreed terms?
Y/N/-/X Y 3 0
5.2.20 Are follow up actions documented for future
reference?
Y/N/-/X Y 3 0
5.2.21 Is provision for doubtful debts made in
accordance with group policy?
Y/N/-/X Y 3 0
5.2.22 Are advances and loans to staff only made
on the authority of a senior official?
Y/N/-/X Y 3 0
5.2.23 Are advances and loans to staff properly
controlled?
Y/N/-/X Y 3 0
5.2.24 Are cash sales accounts and COD accounts
only used for the purpose for which their
name suggests?
Y/N/-/X X 5 0
5.2.25 Is a complete list of debtors journals printed
on at least a monthly basis, and is this list
Y/N/-/X Y 4 0
5.2.26 Are other adjustments to debtors accounts
independently reviewed, on a regular basis,
Y/N/-/X Y 3 0
5.2.27 Is the write off of bad debts properly
authorised by a senior official?
Y/N/-/X Y 3 0
5.2.28 Is debtor write off only approved after
proper follow up actions have been taken?
Y/N/-/X Y 4 0
5.2.29 Does an unallocated deposit account exist
for all unknown receipts?
Y/N/-/X Y 3 0
5.2.30 Will allocations (journal) from this account
be authorised by a senior official?
Y/N/-/X Y 3 0
5. REVENUE CYCLE 1 2 3 4 5
R E V E N U E C Y C L E - S C O R E
TOTAL SCORE 57 0 0 27 30 0
POTENTIAL MAXIMUM SCORE 1,485
PERCENTAGE RATING 96%

11. References
M. Y. Khan and P. K Jain, Theory & Problems in Financial Management, Tata McGraw Hill,
New Delhi (2007).

96

Prasanna Chandra, Financial Management Theory and Practice, Tata McGraw Hill, New
Delhi (1994).
www.rbi.org.in
www.investopedia.com
www.westcongroup.com
www.datatec.co.za
www.deloitte.com

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