In order to understand and analyze how a company in practical context perceives and applies the concept of debtor management, we selected a company from the industry of interior designing; Arpico Interiors (Pvt) Limited. We hope, through this report, to present the application of above concepts in the practical scenario and its importance to and influence on the company’s entrance to market, survival, revenue, creating image and tackling the problems encountered during the business activities.
Furthermore, we hope, through this analysis of the use of the marketing concepts in the real business environment, to recognize the areas that can be improved and provide the recommendations pertaining to debtor management area.
Arpico Interiors (Pvt) Limited was initially started in 1991 as the Interior Décor division of Arpico furniture (pvt) limited and it was established as a separate company in May 2001.Arpico interiors (Pvt) Limited operates with following vision and mission.
To become the show case for interior décor and total furniture sectors in Sri Lanka
To be the most sought after supplier of quality assured furniture and turn-key solutions in interior décor in Sri Lanka, maintaining unparalleled standards in quality craftsmanship and innovative designs
In our endeavour to be the best in class, we would always be proactive to the changing needs of the market through a dynamic team of professionals and state of the art equipment achieving above average returns for our investors and stakeholders
As a responsible corporate entity, we would strive to fulfil our obligations, contributing positively towards the country’s economic growth, always being mindful of our obligations towards society and the environment.
The company renders its service of interior decorating and provision of furniture to both public and private sector institutional and corporate customers such as hotels, apartments, hospitals, factories and offices.
The company maintains the following product portfolio and has earned over the years a strong reputation as a provider of turnkey solutions.
- Wall covering
- Custom made furniture
In the industry of interior designing of Sri Lanka, Arpico Interiors (Pvt) Limited has been recognized as a high quality service provider. Yet it has a tough competition from some other key competitors. The major competitors for the company are Damro Furniture, Delmage interior and décor (Pvt) limited, Lucky homes interior décor company. Anyway, due to the unique characteristics of that the service of Arpico Interiors bear, it can be named as a key player in the industry, occupying a significant market share.
Company’s service is differentiated from those of other companies in the market due to its ability to generate effective, aesthetically admirable atmospheres, utilizing the available spaces to a maximum as well as the opportunity a customer is given to select whatever he needs from a broad variety of designs that any other company would hardly possess.
Like many other competitors in the industry, Arpico Interiors also benefits the maximum through personal contacts, i.e., most of newer customers are found by the recommendations made by clients about the company to third parties. In addition, they use over the phone selling method as well.
As the customer relationship management method, the company uses the over the phone conversations with their past and current customers and get their perceptions and comments about the company’s past and present service and also try to involve in very interactive conversations where customers reveal their design needs and opinions. Thereby company endeavours to maintain a good customer database and provide a maximum service.
Debtors are the people who are liable to the pay the organization for the goods and services they bought form the organization. If an organization does not arrange proper management policies for their debtors, it is unavoidable that the company faces major liquidity issues for their ongoing business activities as well as intended expansions. It has been the perception of many individuals as well as organizations that what matters the most is the sales; cash or credit. But merely issuing an invoice to the customers never guarantees that the company is going to have a healthy cash flow unless the creditors are ensured to pay duly. Yet, receiving money in turn for the sales which were made sometime earlier is not as easy and smooth and certain as the sales that were made; the company has to manage the credit sales to get paid as quickly as possible and thereby to avoid or mitigate the risk of credit default.
Some of the actions a company can take to ensure a proper debtor management policy include the following;
- Collecting debts on time
- Setting credit limits and payment terms
- Making credit applications and credit checks
- Enforcing a clear credit policy
- Considering debtor finance.
In Arpico Interior (Pvt) Limited’s context, the target market for them is corporate customers which are generally known to be elegance-favoured, high profile and eco friendly. As the marketing strategy, the company uses concentrated marketing in which they present n ideal product for to suit the personality and appetite.
Unlike in the past, the modern customer is very powerful as he has more knowledge. When a company gets a knowledgeable customers who knows the industry and its rates as well as the competition in the market, a company has to tackle those customers with utter care. Also, it’s of higher importance addressing the needs of the customer in a way they are satisfied and retained. Since Arpico Interiors (Pvt) Limited operates in a very sensitive industry to the customer care; corporate sector, the company has to pay attention to the ways to attract and retain customers while balancing the means of recovering the credit sales.
The credit policy of Arpico Interiors (Pvt) Limited can be summarized as follows;
- Obtaining insurance cover for export debtors.
- Developing and implementing Credit Policies.
- Obtaining bank guarantees, deposits and collateral for all major local customers.
- Following stringent assessment procedures to ensure credit worthiness of the customers prior to the granting of credit period and credit.
- Demarcating the local areas and appointing new distributors thus increasing the number of customers with the objective of reducing credit exposure due to the reliance of a few customers.
- Closely monitoring the debtor balances, laying action plans, and determining the same are under control.
(Richard Pieris and Company Annual Report 2015 / 2016)
Company has employed a separate division of personnel with three employees; two recovery officers as well as one recovery manager, to implement the credit and recovery policy of the organization. The above stated credit policies are determined by the Group level of Richard Pieris and Company PLC which Arpico Interiors (Pvt) Limited is also a part of. Company generally offers a thirty day credit period for all its customers. But as per the interview carried out with the General Manager of the Company Mr. Farazan Jallil, it is stated that there are certain situations where the standard credit period of thirty days is extended up to ninety days. For these kind of altered credit periods, it is needed to have been obtained the approval of the Sales and marketing Manager of the company, General Manager of the company as well as the Group Chief Finance Controller. But also as per the words of the General Manager, the average debt collecting period of the company amounts to thirty five (35) days.
In turn when it comes to provision for the bad debts, company provides full provision for impairment for debtors exceeding seven hundred and twenty (720) days and a seventy five per centum for all the debtors who exceed three hundred and sixty (360) days. But when it comes to the debtor writing off, as per the laid down standard procedure of the Richard Pieris Group of Companies, the recovery officers have to submit a report for the debtors that are supposed to be written off and a detailed description for the reasons for the write off. This report has to be checked and approved by the recovery manager, General Manager, Group Chief Finance Controller and the Group finance Director. However, as per the General Manager, the company has not written off any debtor balances in the past five years.
When a customer seems to be defaulting their dues, the recovery officers frequently reminder them about their dues and when such debtors are repaying, the recovery staff is allowed to a commission of the recovery amount yet the General Manager refused to disclose the per centum commission received by the recovery staff, stating it is confidential.
By analysing the existing recovery policy of the company, the following weaknesses could be recognized with respect to Arpico Interiors (Pvt) Limited.
Inadequacy of the recovery staff
During the last financial year, company had made sales amounting to eighteen million (18 million) out of which almost seventy five per centum sales had been on credit basis. Despite the company undertakes major projects, there are many other corporate customers who obtain the service of the company for the projects of relatively lesser value. Hence the customer basis and thereby the debtors of the company are high but as per our observation, the allocated staff for the recovery process is not adequate for the handling of this entire debtor base. As a result, the average debt collecting time has become dissatisfactory to the management of the company.
Intentional delay of debt recovery
As per our observation, another fact that was screened was the capability of the recovery staff to intentionally delay the recovery of some long outstanding balances. As per the company policy, when a recovery officer recovers a long outstanding balance from a customer, the recovery officer entitles to a relatively bigger commission from the amount recovered than it was recovered within the allowed credit period. This is disadvantageous to the company in two ways; first the company has to bear an excess commission cost and second, company has to face unnecessary cash flow issues which could have been avoided if the debtors were recovered earlier.
Absence of proper debt collection analysis
In most of the companies, there can be seen recovery analysis meetings during regular time periods in order to ensure the healthy collection of debts. But in Arpico Interiors (Pvt) Limited, there cannot be seen recovery analysis meetings at regular time intervals. If the company had it, it could have been useful to analyze the efficiency of the debt collectors as well as the effectiveness of existing recovery policies.
As per our observations, the following recommendations can be given to the company to better manage its debtors.
Review the appropriateness of the credit policy
The debt recovery policy has been formulated for the entire Richard Pieris Group of companies and hence there can be certain mismatches in the policy to the company in terms of its volume of operations, industry trends, customer behaviour etc. Therefore it is advisable for the company to review its credit policy considering the industry practices as well to better implement the policy instead of merely depending on the Group of Companies’ policy.
Conduct recovery analysis meetings
Often the recovery officers hardly get an opportunity to meet the Group Chief Finance Controller or the Group Finance Director to discuss and get advice from them with regard to the recoveries. On the other hand there could be certain impracticalities in adopting the laid down recovery procedures which are only known to, understood and experienced by the recovery officers. Through these kind of meetings, the recovery officers get an opportunity to rectify those matters as well as the top level of the company gets to know the practicality of the recovery policies and thereby can consider reformulating or enhancing the existing policies. In addition, these meetings can be utilized to evaluate the efficiency of the recoveries.
Conduct credit checks
Through credit checks, the company can be aware of the possibilities of default the company would have to face in the future. This can be utterly useful in determining the credit limits, deciding the customers and their credit periods, the cash flow deficiencies etc.