Volume 2, Nomor 1, Januari 2022
p-ISSN 2774-7018 ; e-ISSN 2774-700X
149 http://sosains.greenvest.co.id
COLLECTIBILITY IMPROVEMENT IN PT. KALTIM PRIMA COAL
RECEIVABLES MANAGEMENT: A FRAMEWORK ROADMAP
PROPOSAL
Zuhri Ruslan and Anggoro Budi Nugroho
Bandung Institute of Technology, Indonesia
E-mail: zuhri.ruslan@sbm-itb.ac.id dan anggoro@sbm-itb.ac.id
Received:
December 26
th
2021
Direvisi:
January 10
th
2022
Disetujui:
January 15
th
2022
Abstract
Background :
The Importance of efficient working capital
management is indisputable given that a firm’s viability
relies on the financial manager’s ability to effectively
manage receivables, inventory, and payables. One of widely
used measurement to calculate the effectiveness of working
capital management is Cash Conversion Cycle.
Purpose :
Traditional Cash Conversion Cycle is calculated using items
from Financial Statement. However, it is proofed to be
overstated compare to the actual calculation. Based on a
comparison with Cash Conversion Cycle of another company
listed on Indonesian Stock Exchange, Cash Conversion Cycle
of PT Kaltim Prima Coal seems to be superior with lower
days it needs to convert inventory into cash and longer time
to pay its payables.
Method:
This research uses a quantitative
approach method.
Results :
The research found that based
on the regression method, days of late payment and sales
amounts of late payment have significant relationship with
Profit. Days of late payment and sales amounts of late
payment have significant relationship with ROA. And, Days
of late payment and sales amounts of late payment also have
significant relationship with NPM
. Conclusion :
PT. Kaltim
Prima Coal are recommended to implement analysis of Risk
Quadrant on periodic basis, to arrange Letter of Credit
training to adopt Company Bank’s point of view in reviewing
the Letter of Credit, to implement Letter of Credit checklist to
reduce discrepancy rate, to arrange objective review of
examining the extra staff requirement, and to develop Credit
Policy.
Keywords: Cash Conversion Cycle, Working Capital
Management, Roadmap
Introduction
The relation between Working Capital Management and Profitability at least can
be explained in three ways (Ponsian, Chrispina, Tago, & Mkiibi, 2014). If company does
not pay its liabilities, it will increase profitability. If company pays lot of its liabilities, the
profit will be reduced. If the company does not manage its Working Capital well, it may
not able to meet their short term financial obligations. It happens, the suppliers of the
company will stop supplying goods and services that company needs to create inventory
and sell to the market. No sales will reduce profitability (Christopher, 2016). On the
contrary, if company can manage its Working Capital, company can continue producing
or even increase its production and sells more (Takon & Atseye, 2015). Thus, it is able to
increase its profitability. If company does not manage its Working Capital well and not
Collectibility Improvement In PT. Kaltim Prima
Coalreceivables Management: A Framework Roadmap
Proposal
2022
Zuhri Ruslan and Anggoro Budi Nugroho 150
able to meet their short-term financial obligations, their creditors will seek legal
assistance to collect their dues. This will affect reputation of the company and lead to a
decrease in sales (Ganesamoorthy & Rajavathana, 2013).
Understanding relation between Working Capital Management and its impact on
company profitability will give useful information in managing account receivable,
inventory and account payable of the company thus company can survive and provide
value-added for the shareholder in the long run (Edmans, 2011). Hence, this research has
three purposes. First, is to examine the relation of Working Capital Management with
Profitability in PT Kaltim Prima Coal (KPC) for the year 2008-2013. Second, is to
examine the structure of risks exposing KPC regarding Working Capital Management.
And third, is to investigate any possible action to improve Working Capital. Specifically,
is to enhance the speed of collection receivable from customers.
Global Coal Market nowadays faces a challenging situation with the price suffering
from a downtrend since 2008 (Xia & Tang, 2011). Many have suffered and liquidated
their company, closed the operational even went bankrupt. The price fall was mainly
caused by two factors. First, the innovation of using natural gas as substitute of Coal
powered electric generator in United States (Liang, Ryvak, Sayeed, & Zhao, 2012).
Natural gas is considered cheaper in the long run and clearer or eco-friendly. Second,
China limited its amount of coal import which then made global coal market suffer from
oversupply (Zhao & Alexandroff, 2019). As the consequences, the price went fall
significantly and reduce the margin of the company (Cornot-Gandolphe, 2014). Company
will sell at a lower price, while the cost stays the same. The decreasing margin will
eventually trouble the working capital management.
Hence, coal companies have to carefully manage their working capital. If they
make a mistake, the worst case scenario is company will not have any funds left to fulfill
its liability. The creditor and supplier will use legal approach to claim their receivables. If
they can manage working capital better, not just the company will survive through
difficult times, perhaps still can show some profit to its shareholder. This extremely
important position of working capital management makes it as one of the financial
manager’s most important and time-consuming activities, and more than one half of the
financial manager’s time is spent managing account receivables and account payables
(Gitman & Tyutin, 2012).
The impact of a price decrease on collection the receivable is collection is lower,
and now the longer time is needed to collect the receivable and the amount (Van der
Vliet, Reindorp, & Fransoo, 2015). These increase risk in KPC because the collection is
not able to meet the liabilities needs to be paid every week (Weil, 2014). To our best
knowledge, the research of how much Working Capital Management affect Profitability
of KPC has never been conducted before, and considering KPC should maintain its
profitability in the mid downtrend of coal price imposes the importance of this research.
Research methods
The method used is the descriptive text analysis method used to identify the form
of changes that occur in the transfer of the material object. This method limits its
activities to library collection materials without the need for field research. The steps of
the research work consisted of collecting data, processing data, and presenting the results
of the analysis.
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Results and Discussion
Figure 1. Conceptual Framework
How to increase Profitability and liquidity is always the focus of good working
capital management. One of the most used working capital management measures is Cash
Conversion Cycle. Cash Conversion Cycle measures the Average Age of Inventory,
Average Collection Period, and Average Payment Period (Malik & Bukhari, 2014). When
the date of Age of Inventory is not available, and Payment period already delay as long as
possible, improvement focus should be on faster Collection Period. The project to
enhance and speed up collection will result in the ability of the company to fulfill its
short-term and long-term obligations, and hypothetically will increase profit.
Considering KPC has received payment exceeding the day stipulated in the
contract, root-cause analysis is performed to search the root of the problems (Teachout,
2020). The structure of the problem appears from discussion with Superintendent
Accounting and Administration in Marketing Department who is handling the Invoicing
process. The next page shows the fishbone root-cause analysis, and findings of several
root causes are as of following:
Collectibility Improvement In PT. Kaltim Prima
Coalreceivables Management: A Framework Roadmap
Proposal
2022
Zuhri Ruslan and Anggoro Budi Nugroho 150
Figure 2. Root Cause Analysis
Collectibility Improvement In PT. Kaltim Prima
Coalreceivables Management: A Framework Roadmap
Proposal
2022
Zuhri Ruslan and Anggoro Budi Nugroho 152
There are several reasons why poor collectibility happens. They are:
1. Sequence Type of Work.
Invoicing process is at the end of work cycle. The prior process is establishing
contract, arranging Ship Scheduling, Blending and Coal Quality process, and Coal
loading. Sales Accounting and Administration Section is the section that handles
invoices and documentation. They are at the end of the process and any delay in the
earlier process will also cause the delay in preparing a document for the collection
process.
2. Selling to Trader instead of to End User.
KPC not only sell the coal to the end user but also expand its customer range to a
trader, which later will sell the coal to the end user or to another trader.
3. Reconsider the Number of Staff.
The number of staff is quite tight and as the workload increase mistakes may happen.
Even little mistakes such send one original set of certificate of analysis instead of
three as contract asked will cause incomplete document, and customer will not start to
pay if the document is incomplete.
4. Letter of Credit Discrepancy (LC)
LC is a document issue by a bank in relation to provide security for buyer and seller
in exchange of goods and payment. In LC scheme, buyer’s bank and seller’s bank
will credibility of the buyer and the seller. Simply said, the benefits of using LC are
the buyer will buy the correct goods, and the seller will receive right amount of cash
payment.
Generally, the discrepancy rate is really high. Roughly 80% of the LC was found to
be discrepant. It the LC is discrepant, company cannot discount the LC and receive
the cash faster. The company has to wait for the customer pay to Issuing Bank, and
then Issuing Bank will send the cash to Advising Bank, which later on will send the
cash to the company. There is an urgent need for a project to reduce the discrepancy
rate of LC.
5. Motivation
When employees are given a target, they tend to overcome the target with extra
effort.
6. Contract Enforcement
The normal contract will have clause that if the payment is not paid on the due date
there shall be an interest charge applied for the payment until the payment is paid.
However, the enforcement of this clause is always a subject to Management approval
and depends on the relationship between KPC and the customer.
7. Regulation
Some government regulations required time to fulfill and will cause delay to the
completion of the invoice and supporting documents which later will delay the day
payment received in KPC’s bank.
8. Communication between Marketing and Finance.
The function of Account Receivable is also normally under Finance Division not
under Marketing Division. This structural type creates may conflict between
Marketing Division and Finance Division.
9. Procedure Days in Process
The faster Sales Accounting and Administration complete the invoice and
documentation process, the faster documents are ready to be sent, and the faster the
Collectibility Improvement In PT. Kaltim Prima
Coalreceivables Management: A Framework Roadmap
Proposal
2022
Zuhri Ruslan and Anggoro Budi Nugroho 154
due date will be since the due date will be counted starting from the date KPC present
correct invoice and supporting documentation.
10. Measurement Days Sales Outstanding.
KPC not yet use Days Sales Outstanding as a Key Performance Indicator.
The faster KPC receives the payment from the coal customer, the better for KPC.
The funds can be used to pay off some of its debt in the next month i.e. leasing, special
term contractor payment, etc. Thus, strengthen the Account Receivable collection
function is the most important thing to do.
Cash Conversion Cycle consists of three components. First component is Average
age of Inventory which calculates how many days KPC need to convert extracted coal
into sales and Account Receivable. KPC at the moment did not calculate this. Second
component is average Collection period which calculates how many days company need
to claim its Account Receivable (Gul et al., 2013). In KPC, this is different for each
customer. Some customers pay a week after receiving the invoice and its supporting
document, while another supplier pay more than a week after the bill of lading date. The
third component is Average payment period which calculates how long KPC paying its
liabilities.
Figure 3. Cash Conversion Cycle diagram
The lower the number of Cash Conversion Cycle, the lower the amount of tied up
capital. The best practice is to have zero tied up capital or even surplus tied up capital.
And it means collection is received first before making any payment to supplier.
However, this is rare and the target of this research is to reduce KPC’s Cash Conversion
Cycle ratio as lower as possible. Poor collectibility is shows as longer average collection
period. The effect is more tied up capital locked as account receivables. Picture below
explains poor collectibility.
Calculation of Cash Conversion Cycle calculation based on Financial Statement
will be put in comparison to Cash Conversion Cycle calculation based on physical
movement and cash received or pay by KPC. Calculation of Actual physic Average Age
of Inventory is not possible to do since no data available for goods like coal. Average
Collection Period is calculated by measure how many days payment received in bank
from Bill of Lading date. There are significant different in collection days between
Domestic Average Collection Period and other KPC export market customer.
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Calculation of Average Payment Period is calculated by collecting data from
Ellipse system which show the “invoice date” and “update as paid” date. Invoice date is a
date invoice being payable to KPC. The date KPC received the invoice from the supplier
usually not very different from the invoice date. The update as paid date means the date
KPC claim in the system that the invoice will be paid in one or two days which is the day
needed for banking process to remit that payment to the supplier’s account. 59,817
invoices with period form 1st January 1997 to 31st December 2014 were used. The
different from Invoice date and update as paid date is the actual Payment Period. The
differences between Average Collection Period and Average Payment Period using
Financial Statement calculation and using actual calculation provided below:
Figure 4. Comparison ACP Calculated from Financial Statement and Actual Days
Cash Collected.
Figure 5. Comparison APP Calculated from Financial Statement
and Actual Payment.
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The differences of Cash Conversion Cycle using Financial Statement calculation
and using actual calculation provided below:
Figure 6. Comparison CCC Calculated from Financial Statement
and Actual Days.
Clearly show above that the Cash Conversion Cycle from Financial Statement
calculation is overstated compare to actual Cash Conversion Cycle that counted
physically.
Based on the Audited Financial Statement 2009 to 2013 that available on
www.idx.co.id below are the calculations of Cash Conversion Cycle. Comparison is made
between same industry (Coal Mining) and from different industry (Plantation, Crude Oil,
Nickel, Cement, Tire). Each company was selected based on the highest price of each
industry, except for PT. Adaro Energy Tbk. and PT. Berau Coal Energy Tbk.. They are
taken because they also major players in the industry and have same background with
KPC which is mine operation conducted in Kalimantan.
Figure 7. Cash Conversion Cycle Comparison KPC with Other Listed Company.
2013 2012 2011 2010 2009
ADRO PT. Adaro Energy Tbk. Coal Mining (6) 3 (8) (12) (9)
BRAU PT. Berau Coal Energy Tbk. Coal Mining (2) 21 (4) (3) 17
ITMG PT. Indo Tambangraya Megah Tbk. Coal Mining 19 26 23 19 21
BYAN PT. Bayan Resources Tbk. Coal Mining 4 10 17 (9) (9)
PTBA PT. Tambang Batubara Bukit Asam (Persero) Tbk. Coal Mining 67 83 77 76 93
AALI PT. Astra Agro Lestari Tbk. Plantation 4 36 13 21 39
APEX PT. Apexindo Pratama Duta Tbk. Crude Oil 91 58 44 77 94
INCO PT. Vale Indonesia Tbk. Nickel 61 76 59 69 107
INTP PT. Indocement Tunggal Prakarsa Tbk. Cement 66 72 86 87 103
GDYR PT. Goodyear Indonesia Tbk. Tyre 22 28 26 33 53
Stock Code
Company
Industry
Year
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Presented as graphic is as below:
Figure 8. Cash Conversion Cycle Comparison KPC with Other Non-Coal Listed
Company.
Figure 9. Cash Conversion Cycle Comparison KPC with Other Coal Listed
Company.
According to the table, coal mining industry has relatively low cash conversion
cycle compare to other industry, except plantation industry. That means coal mining
company can have lower cash available to pay its due liabilities before received cash
from the customer compare to another industry. For Example, KPC have cash conversion
cycle 26.33 days on 2013. That means, KPC must have enough cash to operate the mine
and pay its liabilities for 26.33 days before received cash for sold inventory. PT. Berau
Coal Energy Tbk. has the best cash conversion cycle which is negative number -2.2 days.
Collectibility Improvement In PT. Kaltim Prima
Coalreceivables Management: A Framework Roadmap
Proposal
2022
Zuhri Ruslan and Anggoro Budi Nugroho 156
Meaning, PT. Berau Coal Energy Tbk. does not need to have cash available since it will
receive cash from the customer before their liabilities due in the next 2.2 days. The
longest cash conversion cycle is PT. Apexindo Pratama Duta Tbk 91.44 days. This hurt
cash availability, since PT. Apexindo Pratama Duta Tbk. must have larga cash to cover
production for nearly 3 months before receive cash from its customer. This is ineffective,
since that much cash better be allocated to another activity like expansion or investment.
Interview efforts has been conducted to interview PT. Adaro Energy Tbk., PT.
Bayarn Resources Tbk., PT. Berau Coal Energy Tbk., PT. Indotambang Megah Raya
Tbk., and PT. Bukit Asam (Persero) Tbk. considering those companies are within same
industry with KPC and have approximately same size. The interview efforts were found
to be unresponded until the study is finalized.
Conclusion
Based on research question stipulated before, the study found:
1. Sensitivity analysis using linear regression provide proof that there are impact of poor
collectibility to Profit / Loss, COGS, and Profitability ratios of the company (ROA,
ROE, Net Profit Margin).
a. Relationship
Average Age of Inventory and Average Collection Period has
negative relationship with NPM, ROA, ROE and Profit.
Average Payment Period has positive relationship with NPM,
ROA, ROE and Profit.
The number of days of late payment has positive relationship
with Profit, COGS and ROA.
The number of days of late payment has negative relationship
with NPM and ROE.
Sales amount of late payment has positive relationship with
Profit, COGS, ROA, ROE, and NPM.
b. Significances
There is significant relationship between sales amounts of late
payment with Profit.
There is significant relationship between sales amounts of late
payment with ROA.
There is significant relationship between sales amounts of late
payment with NPM.
2. Interview effort of collecting data through interview of best practice collection
activities from other company in same industry and from another industry is found to
be unresponded until the study is finalized.
3. Implementable framework and Improvement to KPC for better Account Receivable
management and customers control system are:
a. Implement analysis of Risk Quadrant on periodic basis. (Annually, mid
annually, monthly)
b. Ensure KPC and Bank both has same perception in recognizing the
discrepancies item. For this purpose, LC training delivered by competent
trade advisor from Company’s bank is urgently needed.
c. Implement reviewing LC using the checklist provided in chapter III to reduce
the discrepancy rate.
d. Implement longer time (1 month) review regarding the sufficiency of number
of employee that handling invoice and supporting documents.
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e. Develop credit policy.
Collectibility Improvement In PT. Kaltim Prima
Coalreceivables Management: A Framework Roadmap
Proposal
2022
Zuhri Ruslan and Anggoro Budi Nugroho 158
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