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EFFECT OF ACCOUNTS RECEIVABLE MANAGEMENT

ON FINANCIAL PERFORMANCE OF RAKSO COMPUTER
TECHNOLOGY INC.

______________

A Capstone
Presented to the Faculty of the Graduate School
Institute of Accounts, Business, and Finance
Far Eartern University
Manila

__________________

In Partial Fulfillment
of the Requirements for the Degree
MASTE OF BUSINESS ADMINISTRATION

____________________

MA. LOURDES BERNABETH T. DE TORRES

July 2020

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APPROVAL SHEET

This thesis entitled, “EFFECT OF ACCOUNTS RECEIVABLE MANAGEMENT

ON FINANCIAL PERFORMANCE OF RAKSO COMPUTER TECHNOLOGY
INC.” prepared and submitted by MA. LOURDES BERNABETH T. DE TORRES in
partial fulfilment of the requirements for the degree of Master OF BUSINESS
ADMINISTRATION, has been examined and is hereby recommended for the Oral
Examination.

WILLY CUASON, MBA

Adviser

Approved by the Committee on Oral Examination with a grade of__________

ANICETO B. FONTANILLA, MBA, Ph.D.

Chairperson

RAFAEL L. CAMUS, MBA TOMAS S. TIU, MSF, Ph.D.

Member Member

Accepted in partial fulfillment of the requirements for the degree of master’s in

business administration.

EARL JOSEPH BORGOÑA, CPA, MBA, CFMP, LLB

OIC-DEAN

Date: ________________________

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DEDICATION

I dedicate my study to my husband, Jeric. You have been with me through every step

of this process, and I could never thank you enough for standing by my side in this

course. Je t’aime mon amour, and I look forward to sharing the rest of my life with

you. To my son, Vien Jerickson, despite all the times that I missed your activities, I

also devote this to you. To my mother and sister Monina and Evelyn, as the family is

everything. Also, I bestow this masteral in memory of my father, Benvienido Taranza,

for instilling in me a strong work ethic and a faith in God that can never be broken.

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ACKNOWLEDGEMENT

First, I thank God the Father Almighty for His guidance, and granting me the strength,

patience, and perseverance to complete this educational journey. With God, all things

are possible, and I would not have made it without the strength and faith through His

presence in my life.

I thank my bosses Allen Kristian A. Vasquez and Maria Luz Reyes for encouraging me

to study again and providing my financial needs. Thank you to Tiffany Cher Cuevas

and Rachelle Ann Manaois for helping from the beginning of my research till the end.

Thank you to my family, friends, and co-workers for their support, encouragement, and

most of all the motivation to achieve this.

Finally, I thank my adviser Willy Cuason, you have worked and assisted many masters

graduates by providing your time, encouragement, and most of all support. Thank you

for everything that you have done to reach my educational goals, and you came into my

life at a time when I needed direction and you far exceeded this task. Also, thank you

to the panelist Dr. Nick Fontanilla, Sir Rico Camus, and Dr. Tommy Tiu for your

feedback and dedication to help students place an emphasis on the quality of work

produced. This has been an unforgettable journey, and I will eternally grateful for all

those who have been there for me along the way.

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EXECUTIVE SUMMARY

As part of the acquired learning and understanding of the relevant topics and concept in

different subjects in Master Business Administration, a capstone study was conducted

to provide an opportunity to the student to work practical application of the concepts

involved. A company was chosen to be the subject of this evaluation, and Rakso

Computer Technology, Inc. (RCTI) was the organization being selected.

As a background, Rakso CT is a creative technology company that was incorporated in

2006. It is primarily engaged in the business of software, applications, and website

development for travel-related services, among others, and a pioneer in the digital

marketing/advertising industry in the Philippines.

For the purposes of this study, the research focused on the Accounting Department that

is only approved to be studied at RCTI. The process involves the creation of CE/

contract to invoicing up to the collection of payment which is presented. Such as

crafted according to the presented data up to interview.

By using the descriptive study, Audited Financial Statements and interviews as the

main data collection and subject of to certain limitations, the study was able to identify

where the appropriate changes should be made in the focused process. In line with this

study and main objectives, the researchers have come up with relevant

recommendations for process improvements for the company’s appreciation that aims

to add value for the client and company’s relationship as follows.

1. The researcher studied the AR aging report that is useful in giving you a

snapshot of the money that is outstanding and due to you by the clients, the

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researcher then recommended to have a credit policy that will best suit in this

kind of business which aims to collect early without hurting the sales.

2. The researcher identified that there is no staff that foresees the process so the

researcher recommended to hire or re-assign a staff who will focus on the

Invoicing to Collection process especially on the AR Aging of the company.

3. The researcher also identified that no one of the company is accountable of

uncollectible so the researcher recommended the policy and procedures that

indicated the responsibility of each employees involved.

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TABLE OF CONTENTS

Title Page ……………………………………………………………...………………..1

Approval Sheet ………………………………………………..……….……………….2

Dedication ……………………………………………………………………………...3

Acknowledgment ……………………………………………………………………... 4

Table of Contents ……………………………………………….……………............5-6

List of Figures….. …………………………………………..…………..……………11

List of Tables ……………………………………………..…………..…………….. 12

List of Appendices…. ……………………………………………..…………..…….. 13

I. INTRODUCTION

I.1. Background -------------------------------------------------------------------14

1.1.1 Understanding the relationship between client and RCTI-----14

1.1.2 Understanding the relationship of Accounting &

Marketing-----------------------------------------------------------------

------------14-15

1.1.3 Understanding the RCTI Financial Status base from AR

Aging----------------------------------------------------------------------

--15-16

I.2. Statement of the Problem---------------------------------------------------16

I.3. Purpose of the Study------------------------------------------------------16-17

I.4. Significance of the Study-------------------------------------------------17-18

I.5. Definition of Terms-------------------------------------------------------18-20

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I.6. Scope Limitation------------------------------------------------------------20

II. COMPANY BACKGROUND AND STATUS--------------------------21-23

3.1 Project Design-------------------------------------------------------------24-25

3.2 Review of Related Literature

3.2.1 Advertising Agency Guidelines----------------------------26-27

3.2.2 Advertising Practice------------------------------------------27-30

3.2.3 Advertising Predicament in Collection--------------------30

3.2.4 Theoretical Literature----------------------------------------31-32

3.2.5 Characteristics of Account Receivable--------------------32-33

3.2.6 Objectives on selling of credit-----------------------------34-35

3.2.7 Ways of executing trade credit----------------------------35-36

3.2.8 Factors affecting size of receivables----------------------36-37

3.2.9 Account Receivable Management------------------------38-39

3.2.10 Objectives of Account Receivable Management-------39-41

3.2.11 Principles and Practices of Account Receivable

Management----------------------------------------------------41

3.2.11.1 Credit Extension Policy-----------------------41-42

3.2.11.2 Credit Standard--------------------------------42-43

3.2.11.3 Credit Terms-----------------------------------43-44

3.2.11.4 Credit Collection Policy----------------------44-52

3.2.12 Empirical Review

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3.2.12.1 Inventory Turnover Period and Financial

Performance---------------------------------------------53

3.2.12.2 Average Payment Period and Financial

Performance-----------------------------------------53-54

3.2.12.3 Cash Conversion Period and Financial

Performance-----------------------------------------54-55

3.2.12.4 Average Collection Period and Financial

Performance-----------------------------------------55-56

3.2.12.5 Financial Performance-------------------------56

3.2.13 Balance Scorecard-------------------------------------------56-59

3.2.14 Accounting and Marketing Relationship----------------60

3.2.15 Strengthen the Relationship of client---------------------60-63

3.3 Operational framework/Process Design

3.3.1 Theoretical framework

3.3.1.1 Operational Motives Theory---------------------63-64

3.3.1.2 Transaction Cost Theory-------------------------64-65

3.3.1.3 Cash Conversion Cycle Theory------------------65-66

3.3.1.4 Account Receivable-------------------------------67

3.3.2 Conceptual Framework------------------------------------67-69

3.3.3 Operational Framework------------------------------------69-71

3.4 Analysis of Existing Business Process/Operations------------------71-74

III. METHODOLOGY

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3.1 Description of Research Method---------------------------------------75

3.2 Respondents of the Study, Sample Size, and Sampling Technique—75

3.3 Research Locale-------------------------------------------------------------75

3.4 Research Instrument Used-------------------------------------------------76

3.5 Data Gathering Procedure-------------------------------------------------76

IV. PRESENTATION, ANALYSIS, AND INTERPRETATION OF DATA

4.1 Sample CE with Costing-------------------------------------------------76-77

4.2 AR aging as of December 2019-----------------------------------------77-78

4.3 Leverage of RCTI--------------------------------------------------------78-79

4.4 Financial Ratio: Advertising Industry versus RCTI-----------------80-81

4.5 Summary of Interview---------------------------------------------------74-75

4.5.1 How RCTI treat client---------------------------------------------81-82

4.5.2 Does RCTI impose credit policy to its clients-----------------82

4.5.3 How does RCTI respond on late payments for clients-------82

4.5.4 Credit Period Given----------------------------------------------83

4.5.5 Credit Terms Agreement----------------------------------------83-84

4.5.6 Other related interviews-----------------------------------------84

V. RESULT AND DISCUSSION

5.1 Findings---------------------------------------------------------------------85

5.2 Conclusion------------------------------------------------------------------86

5.3 Recommendation---------------------------------------------------------- 86

5.3.1 Action Plan--------------------------------------------------------87

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5.3.2 Balance Scorecard------------------------------------------------88

5.3.3 New OTC for Invoicing and collection------------------------89-93

5.3.4 Account Receivable and Collection Policy-----------------93-102

Bibliography-------------------------------------------------------------------------------103-104

Appendices -------------------------------------------------------------------------------105-109

Curriculum Vitae-------------------------------------------------------------------------110-111

LIST OF FIGURES

Organizational Structures--------------------------------------------------------- 22

Accounting and Finance task structure-----------------------------------------22

Accounting and Finance Department--------------------------------------------23

Project Design------------------------------------------------------------------------24

Flow chart----------------------------------------------------------------------------24

Conceptual Framework 1-3--------------------------------------------------------67-69

Operational Framework-------------------------------------------------------------70

Analysis of Existing Business Process/Operations-----------------------------71-72

Credit Period Given-----------------------------------------------------------------83

Credit Terms Agreement-----------------------------------------------------------83

Other Related Interview------------------------------------------------------------84

New OTC for Invoicing to Collection--------------------------------------------89-93

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LIST OF TABLES

Account Receivable vs Cash------------------------------------------------------------74

AR Aging as of April 2020--------------------------------------------------------------74

Sample Costing---------------------------------------------------------------------------77

AR Aging December 31, 2019---------------------------------------------------------78

Leverage of RCTI------------------------------------------------------------------------79

Financial Ratio: Advertising versus RCTI--------------------------------------------80-81

Findings-----------------------------------------------------------------------------------85

Action Plan-------------------------------------------------------------------------------87

Balance Scorecard-----------------------------------------------------------------------88

Milestone----------------------------------------------------------------------------------99

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LIST OF APPENDICES

a. Sample CE and Contract---------------------------------------------------105

b. ROA/ ROI/ Sales Growth-------------------------------------------------106

c. Days Outstanding Sales---------------------------------------------------107

d. Day Payable Outstanding--------------------------------------------------108

e. Sample Computation for a Discount, Free Prod cost and Incentive---108-109

f. Questionnaire-------------------------------------------------------------------109-111

g. DSO of Different Industry----------------------------------------------------111

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I. INTRODUCTION

1.1 Background

Rakso Computer Technology Inc located in the city of Makati, is a digital solutions

provider that can execute an amazing digital marketing and advertising campaigns

and services here and abroad. They are composed of both the young and the young-

at-heart who are fully dedicated to give the best shot for their customers.

1.1.1 Understanding the relationship between client and RCTI

A company who is client- oriented and treating their users as partners and top

priority by practicing various traits such as high quality listening to client needs;

giving respect, dignity and honesty; asking for feedbacks; and most of all, giving

the best value for everything they do. They also believe that seeing things from

customer’s perspective is the best way to understand every client that can lead to a

strong interpersonal relationship and later build a customer loyalty. Even if the

client is paying late, has a long overdue, or has a big amount of AR aging, RCTI

will still find ways to deliver their needs and always maintain a good relationship.

1.1.2 Understanding the relationship of Accounting & Marketing

Accounting and Marketing department of RCTI are separate and have distinct job

descriptions. However, they work together from invoicing to collection process.

Accounting department helps marketing by reminding them to request and to send

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invoices to client while the Marketing helps Accounting to follow up the collection

if the client has a long overdue. Unfortunately, the Marketing and Accounting

department do not have the accountability even if the client has a big amount of

uncollectible which greatly affects the financial status of RCTI.

1.1.3 Understanding the RCTI Financial Status base from AR Aging

Based on the Audited Financial Statement of RCTI for the past five years, their

average sales growth is 24%, the return on investment before tax is 21.89% and

return of asset of 9%. This implies that RCTI is excellent in penetrating their

market segment and provides a good line of insight into net margins and turnover.

However, Advertising collection culture influences the habitual factors of

RCTI in performing, causing them a conflict with collection. First, there is no

extensive monitoring of overdue invoices because follow-ups depend on the go

signal from Marketing. As long as the project is not yet done, they should not

force the client to pay even the invoice is overdue already. Secondly, RCTI has no

definite credit terms to its CE. Instead, they are so generous to clients and gives

more credit. And lastly, the Accounting department as in-charge with the

collection process, do not have a stand in stern collection fearing that they may

lost their big clients. The management on the other hand will not interfere with

the procedure unless being asked for help, which is very alarming for financial

status of the company.

Moreover, according to the Audited Financial Statement, their accounts receivable

to sales ratio escalated from 3% to 39%. The average days sales outstanding is 96

days which is unfavorable in a business. As of December 2019 Audit, the

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uncollected receivables on 61-90 days is Php to 5,026, 952.34 and for 91 days

and over is Php 9, 134,644.52 which appears that 60% of total account receivable

is tied up in a balance sheet instead of using this for a day to day transaction,

investment and growth. As a result, RCTI is forced to borrow additional capital

from their mother company to sustain their day to day transactions. The liquidity of

RCTI is getting worse every year.

Some many argue this is no big deal, but the truth is not so simple. If a

company needs to borrow money to meet its obligations because customers are

paying late, it could incur losses on the financing charges alone. Even if that is not

the case, carrying overdue account receivable still has a cost.

1.2 Statement of the Problem

How to improve the present Over the Counter process of Rakso Computer

Technology Inc?

Based on the main problem, the study will also focus on the following

identified sub- problems:

 Does RCTI impose credit policy to its clients?

 How does RCTI respond on late payments for clients?

 How does credit control and monitoring on management account receivable

affect the RCTI?

I.3 Purpose of the Study

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The motive of this study is to ascertain how an effective account receivable

management influence the financial performance of RCTI.

This study also sought to:

 Determine the effect of constant credit monitoring in accounts

receivables.

 Determine how the policies influence account receivable management in

RCTI.

1.4 Significance of the Study

The study will have the following significance:

RaksoCT Management Team- They can indicate that a certain customer is

becoming credit risks and may reveal whether the company should keep doing

business with customers that are chronically late payers.

Accounting & Finance Personnel- It will point out areas of weaknesses in the

existing credit practices that inhibit effective control of account receivable and

give recommendations on the best practices to employ to achieve optimal

efficiency.

Researchers- It will be important to other researchers who may want to carry

out further research on Account Receivable since it will provide a report on a

current practices in a management of account receivable in the Digital Agency

and give recommendations on areas that need further research.

Digital Marketing Industry- It will help to change the existing collection

culture of the industry.

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Far Eastern University – They can have ideas and apply them to the

institution that the efficient receivables management can lead to good sales

growth, healthy cash flows, profitability, and stable operating cycle.

To me as a researcher- This study will help me to change my perspective in

life in collection process.

1.5 Definition of Terms

RaksoCT/RCTI- Rakso Computer Technology Inc.

AR- Account Receivable

CE- Cost Estimate

CCC- Cash Conversion Cycle

DPO- Days Purchases Outstanding

DSO- Days Sales Outstanding

MRMO- Marketing Resource Management Officer

MKTG- Marketing and Customer Operation

ACCTG- Accounting & Finance

Account Receivable – is the balance money due to a firm for goods or

services delivered or used but not yet paid for by customers.

Credit Line- is the amount of money that can be charged to a credit card

account. The size of a credit line, and how much of it has been borrowed, have

a large influence on customer credit scores.

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Balance Sheet- a statement of the assets, liabilities, and capital of a

business or other organization at a point in time, detailing the balance of income

and expenditure over the preceding period.

Collectibles- an asset of limited supply that is sought for a variety of

reasons including, it is hoped, an increase in value.

Contract- is a specific type of agreement that, by its terms and elements,

is legally binding and enforceable in a court of law.

Cash Conversion Cycle- measures how long a firm will be deprived of

cash if it increases it investment in resources in order to expand customer sales.

Days Sales Outstanding – In accountancy, is a calculation used by a

company to estimate their average collection period (ACP). A low number of

days indicate that the company collects its outstanding receivables quickly.

DSO= (Receivables/Sales) x Days in Period (can use average

receivables as a more conservative estimate)

Day’s payable outstanding (DPO)- This is an efficiency ratio that

measure the average number of days a company takes to pay its suppliers. The

formula for DPO is : DPO= ending AP/(COGS/Days) where ending AP is the

account payable balance at the end of the accounting period being considered

and COGS/ day is calculated by dividing the total cost of goods sold per year

365 days.

Marketing Strategy – Is process that can allow an organization to concentrate its

limited resources on the greatest opportunities to increase sales and achieve a

sustainable competitive advantage.

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Management- The act of getting people together to accomplish a mission in

order to achieve desire goals and objectives using available resources efficiently

and effectively.

Cash out flow- is the amount of cash that the business disburses.

Cash inflow- is the money going into a business. That could be from sales,

investments, or financing. A business is considered healthy if its cash inflow is

greater than its cash outflow.

1.6 Scope and limitation of the study

This research focuses only on the Accounting and Finance Department of

Rakso Computer Technology Inc as it is the only being approved to be studied about

the company.

II. COMPANY BACKGROUND AND STATUS

Rakso Holdings Co., Ltd. was established on March 1987, by Ok Jung a Korean

national. Rakso Holdings Co., is the group’s major affiliate, conducting mostly

airline and GSA business. As the mother company of the Rakso Group. SEAHO

Air Service Co., Ltd. represents the Middle East airlines as GSA for Korea of Iran

Air. SEAHO Air has been greatly contributing to the travel vitality of the Middle

East Region for the past 30 years. Onfill Inc. is a highly professional, Korea-based

travel agency which provides Philippines travel Information and product based

through its first prominent Philippine national portal. Rakso Travel is one of the

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Philippines’ major travel agency offering Philippines in/outbound travel products

and services. AVIA-RH represents Royal Brunei Airlines and Flynas as the GSA

to the Philippines. Rakso Australia is a professional passenger airline service

enterprise composed of experienced airline practitioners located in Sydney,

Australia and represents Philippines Airlines as the GSA to Australia. While the

Rakso Computer Technology is a different from all those companies that Mr. OK

Jung founded this company is pioneer in advertising that offer a digital marketing

to the Philippine Market.

Rakso Computer Technology Inc was incorporated and registered with the

Securities and Exchange Commission (SEC) on June 27, 2006. The principal

activities of the company are to engage in software and applications development

and website development for travel related services, and other general business

applications; and to engage in other Information Technology (IT)- related service

endeavors. It falls under the classification of a Small and Medium Enterprise

(SME). The company’s office is located at the 5th Floor, Ricogen Building, 112

Aguirre St., Legaspi Village, Makati City, Metro Manila, Philippines.

It is a Creative Technology company and one of the pioneers in the digital

marketing industry in the Philippines, as it has been operating for more than a

decade. The company is committed to providing affective and effective Creative

Technology experiences here and abroad, as it possesses competencies in Digital

Marketing, Technology Development and Activations.

In line with its vision, Rakso CT commits to be an empathetic and human

enterprise, provide innovative solutions shaped from deep insights and powerful

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ideas; and show excellence in all its services that establishes and sustains a

harmonious relationship among partners and stakeholders.

As a leader and pioneer in the industry, Rakso CT provides digital solutions and

creates websites, mobile applications, systems, software, and digital design, among

other computer- related services, that are crafter to suit the client’s vision. In doing

so, the company’s services are so divers that are typically unique to the client, and

the service design thereof is usually done on a per project basis.

a. Organizational Structure

The company has a total of Forty-two (49) employees. Its organizational structure

is composed of five (7) major organizational units. See figure 1 below:

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b. Accounting and Finance task structure

c. Accounting and Finance Department

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2. 1 Project Design

The researcher made a Gantt Chart that are useful for planning and scheduling

the research study. Gantt charts help to assess how long the study should take,

determine the resources needed and plan the order in which you will complete tasks.

Project Design
5/5/20 5/10/20 5/15/20 5/20/20 5/25/20 5/30/20 6/4/20 6/9/20
Task A
Task B
Task C
Task D
Task E
Task F
Task G
Task H
Task I
Task J
Task K
Task L

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Also, the researcher makes a flow chart that helps to analyze, design,

documents or managing a process.

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2.2 Review of Related Literature

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2.2.1 Advertising Agency Guidelines

According to the Republic Act No. 7394 from the Republic of the Philippines

Congress of the Philippines Article 4:

a)             “Advertisement” means the prepared and through any form of mass medium,

subsequently applied, disseminated or circulated advertising matter.

b)             “Advertising” means the business of conceptualizing, presenting or making

available to the public, through any form of mass media, fact, data or information about

the attributes, features, quality or availability of consumer products, services or credit.

c)             “Advertising agency or Agent” means a service organization or enterprise

creating, conducting, producing, implementing or giving counsel on promotional

campaigns or programs through any medium for and in behalf of any advertiser.

d)             “ Advertiser” means the client of the advertising agency or the sponsor of the

advertisement on whose account the advertising is prepared, conceptualized, presented

or disseminated.

According to (Ads Standard Council) ASC Guidelines,

Rule I. The overriding principles that guide the voluntary adoption of the ASC rules to

which all members subscribe are:

1. The advertising industry can be best protected by espousing self- regulation.

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2. The paramount consideration is the consumer’s interest.

3. Content regulation serves to safeguard truth in advertising.

4. The rules and procedures facilitate the production and placements of

advertisements.

According to Digital Marketing Philippines they can help your business to create a

solid brand, impress perspective client, expose your brand, connect to the right

prospect, market persuade your audience and convert to a high paying customer.

Their goal is to make sales and customers to your business.

2.2.2 Advertising Practice

According to Evokad, the thought of streamlining policies and procedures seems like a

good idea. It sounds like it should work. It seems like it should be easy. So why don’t

we always follow it?

Good question.

Of course, most successful companies have some sort of systematic workflow, a

streamline of policy and procedures and believe that if they follow these steps, they are

guaranteed success! In the Real World, no matter what company structure you

1
https://www.officialgazette.gov.ph/1992/04/13/republic-act-no-7394-s-1992/
https://www.evokad.com/streamlining-policies-and-procedures-inside-an-advertising-agency/

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consider, this is not always the case. Companies set forth policies and procedures and

try to abide by, but there is always an exception that seems to arrive, unannounced and

unexpected.

In the fast-paced advertising industry, there must be an absolute streamlined process in

place. It is essential, or the initial expectation will not be met, and the final deliverable

won’t be realized. Our seemingly simple process works quite well when it is adhered to

and goes something like this.

1. The account manager meets with Client to discuss scope of project. The projects

could be the brainchild of the client, but moreover, from the agency, through internal

brand-building meetings or from our creative director, copywriter, media planner,

account planner or a combination thereof

2. The account manager writes strategy brief and outlines task(s) with mandatory

elements, point of difference, primary target, main objectives, and due date

3. The account manager opens a new project in our online job trafficking system and

outlines the deliverable(s)

4. The account manager, creative team and any needed outside services/ vendors

needed have kickoff meeting

5. Account Manager writes a creative brief and summarizes the kickoff meeting and

any additional elements, concepts, ideas etc. outside the strategy brief

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6. Job gets turned into traffic where the initial tasks are assigned

7. First proof is drafted and is reviewed by four accountable departments—art director,

creative director, copywriter, and account manager. Revisions, if any, are made at this

time before the client sees the first draft

8. Client is sent first draft of print or electronic medium via e-mail or, preferably, in-

person presentation

9. If there are revisions, go to step 5, if approved, continue to send job to destination

(media outlet, printer, make live on Internet or upload online)

10. Follow up, tracking and metrics to measure success of main objectives via the

strategy, and if necessary, apply any lessons learned in future executions and

deliverables

That is a brief description, but you get the gist. So why don’t we always follow this? It

is so simple!! Answer: Earlier we mentioned the Real World. Well that is it. We live in

the Real World—not an “Easy Button” fantasy land where there’s an “F 12” key that

creates perfect advertisements, campaigns, websites, media plans and marketing

strategies or promotions at the press of a key command. The reality is that a litany of

considerations and factors make or break our strategy of streamlining. Such examples

include, but are not limited to: changes in project details, changes in the marketplace,

sector developments or current events, late discoveries, grand changes of project scope

or deliverables, wrong file formats, run/print-dates sneak up, missed appointments,

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scope creep, memory loss, vacations, computer and sever melt downs, too busy

multitasking, sickness, contact no longer with the company, budget cut.

2.2.3 Advertising Predicament in collection

According to anytime collect in the advertising industry, account receivable has a bad

track record. Studies show that a vast majority, 62 percent, are not getting paid on their

invoices for over 60days. Depending on the size of the advertising company, payment

can range between 49days to a whopping 100 days. That kind of delay in cash flow can

hold back a company and create time delays.

Advertising and marketing agencies are facing a crisis in their ability to get paid on

time. Over the years, average payments to these agencies has gotten longer and longer.

Many big companies are taking advantage of this and auctioning off work to the

agency with the lowest bid, most free hours of work, and longest payment terms. This

leaves agencies in a difficult position, often fighting with each other to do the best

work for the lowest price. In fact, the Guardian reports that 66 percent of mid-sized

agencies experienced problems with late payments. In addition, one in five small

companies experience some type of “corporate bullying” in the form of late payments

or excessively long payment terms. Advertising and marketing agencies need to say,

“enough is enough” and start expecting businesses to pay you on time.

2
https://anytimecollect.com/advertising-media/
https://anytimecollect.com/accounts-receivable-tips-marketing-advertising-industry/

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2.2.4 Theoretical literature

The Operational theory stresses the role of trade credit in smoothing demand and

reducing uncertainty in the payments. Feris (2019) argue that trade credit can reduce

cash flow uncertainty by separating the payment cycle from the delivery cycle so that

both the buyer and can save on cost of handling liquidity. According to the

Commercial theory, trade credit improves product marketability by making it easier for

firms to sell. Also, trade credit can be used to maximize profits through price

discrimination that is selling the same product at different prices to different customers.

Potential buyers with difficulties to obtain credit of the banking system constitute new

opportunities; giving easier terms to this segment through trade credit sellers’ market

can be extended. Proponents of the Product quality theory argue that firms extend trade

credit to guarantee product quality by alleviating information asymmetry between

buyers and sellers. This study will lean more closely towards the Commercial theory of

trade credit.

According to International Financial and Reporting Standards (IFRS) and International

Accounting Standards (IAS), accounts receivable is recognized and measured

according to IAS (39) and are disclosed in accordance with IFRS (7). According to IAS

(39) on Financial Instruments Recognition and Measurement, trade debtors are

measured at their fair value. IFSR(7) set out disclosure requirements that are intended

to enable users to evaluate the significance of financial instruments for an entity’s

financial position and performance, and to understand the nature and extent of risks

arising from those financial instruments to which the entity is exposed. These risks

include credit risks, liquidity risks and market risks. This study partly seeks to establish

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the extent to which firms carry out credit analysis and evaluation on their potential

customers and the procedures employed in credit monitoring to establish the health

status of the accounts receivables held by the firm at any given time.

Trade credit creates receivables or book debts which the firm is expected to collect in

the near future. Accounts receivable is money owed to a firm when it sells its products

or services on credit and does not receive cash immediately. Selling on credit is one of

the company’s approaches in enhancing sales and it has turned up to be an enticement

for customers in retaining the business relationship with the company and in time

increase the company’s sales volume and eventually optimizing the company’s profit

(Valix & peralta 2016). Selling on credit is almost a universal practice especially for

manufacturing firms who sell primarily to other firms. Almost all sales are on credit

terms making accounts receivable to account for a significant proportion of the firms’

current assets.3

2.2.5 Characteristics of Accounts Receivable

Since Accounts receivable arise when a firm sells goods or services to another without

receiving immediate payment for the goods, this asset has two common salient

characteristics. Firstly, the existence of credit risk element. Credit risk is the potential

loss that may arise out of failure by the credit customers to honor their obligations as

and when they fall due (Valix 2016).

3
http://dijitalavrupa.bilgi.edu.tr/financial_accounting_ferris_second_ed_answers.pdf
Financial accounting volume two valix-peralta-valix 2016

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When a firm sells goods on credit to another, it assumes a risk since it is not certain as

to whether the customer will pay for them in good time or ever at all. Typical examples

in Kenya are two local banks namely, Rural Urban Credit Finance Limited and Trade

Bank which collapsed in the 1980s‟. The major causes of failures of local banks during

the period were accumulation of bad debts because of fraudulent of imprudent lending.

Rural urban credit finance which collapsed in 1984 is said to have for instance, given

out thousands of largely unsecured loans to residents of a slum area in Nairobi to buy

matatus, plots and houses. As it turned out, nearly all the loans were non- performing

loans and the bank had to close its doors. In the case of Trade Bank Ltd, it is said that

the bank was coerced into lending a company by the name LZcompany limited four

hundred million shillings, an amount way above the banks‟ capital base. The money

was utilized to put up a business Centre. On suing for recovery, LZ Co. Ltd called a

valuer who “valued” the building at nine hundred million shillings meaning that, even

if Trade Bank was to acquire the asset it still would have to pay an additional five

hundred million. Inevitably this bank too had to go under (Millan 2019).

A credit customer may fail to honor its obligation for several reasons including stiff

competition, inferior quality of products, poor pricing policies, but most importantly,

poor management among other reasons. The second common characteristic of account

receivable is the time value of money. The value of the money received later for goods

supplied now is lower due to factors such as inflation and loss of investments

opportunities for the money held by the trade debtors in form of accounts receivable.4

4
Intermediate accounting 2019 by Zeus Vernon Millan
Financial Management volume 2 2015ed by Ma. Elenita Cabrera, Mba, Cma

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2.2.6 Objectives of selling on credit

There are many reasons for offering credit including increasing or facilitating sales,

meeting terms offered by competitors, attracting new customers or providing general

convenience (Grag, 2015). As accounts receivables will increase the sales volume, the

sales expansion would favorably raise the marginal contribution proportionately more

than the additional costs associated with such an increase. This in turn would ultimately

enhance the level of profit of the concern.

A firm offering sale of goods on credit basis always falls in the top priority list of

customers willing to buy those goods. Therefore, a firm may resort to granting of credit

facility to its customers in order to protect sales from losing it to competitors. Accounts

receivable acts to attract potential customers and retaining the existing ones at the same

time by weaning them off from the competitors. Accounts receivable are valuable to

the customers on the ground that it augments their resources. It is favored particularly

by those customers who find it expensive and cumbersome to borrow from other

sources. In a typical business to business environment, a company may have to offer

trade credit just to generate sales. This is especially the case for a large company

selling to smaller companies where the smaller company literally needs the credit

period to sell merchandise so that it can pay its supplier. To this end, not only the

present customers but also the potential customers are attracted to buy the firms

products at terms and conditions favorable to them.

As a usual practice companies may resort to credit granting for various other reasons

which include industrial practice, dealers‟ relationship, status of the customers,

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customers‟ requirements, and transit delays, among others. In a nutshell the overall

objective of making such commitment of funds in the name of accounts receivable

aims at generating a large flow of operating revenue and earning more than what could

be possible in the absence of such commitment (Cabrera, 2015).5

2.2.7 Ways of Executing Trade Credit

There are four ways through which trade credit may be executed. These are categorized

into two broad groups as corporate credit and consumer credit. This study will limit

itself to the corporate credit. In corporate credit, the bulk of credit sales are made on

open account, meaning the seller only keeps a single account that records obligations

arising out of a sales transaction with the buyer. In this case there is no contractual

undertaking in terms of formal acknowledgement of the debts arising or signed

promissory notes. In the event of disputes the company can only fall back on

documents generated during the transaction such as customers‟ orders, delivery notes,

invoices and shipping documents in case of foreign trade to prove the validity of a debt

in a court of law. In the open account system, there is no collateral security and the

firm does not charge interest and enjoys no special rights to recover the goods sold

even if the account or debt is not paid. The second way of executing a trade credit is

the documentary credit commonly used in foreign trade. In this case, the firm may

place additional requirements such as bank guarantees on the buyer before authorizing

5
Original Financial Management volume 2 2015ed by Ma. Elenita Cabrera, Mba, Cma
Working capital Management educreation Pub. 9, 2015 Manika Garg

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shipment of goods. The buyer is required to draw a letter of credit in favor of the

selling firm or open a bank guarantee in favor of the selling firm (Cabrera, 2015).

Trade credit may also be in form of installment credit where payment is made as a

series of regular installments for the principal amount and interest. This form of credit

is common for one-off purchase of expensive goods such as motor vehicles, airplanes,

and equipment’s (Cabrera 2015).

Trade credit can also be a revolving credit where the buyer has the flexibility of paying

differing amounts ranging from settling the entire balance to paying the minimum

installment required to remain current.

2.2.8 Factors Affecting the Size of Receivables

The size of accounts receivable is defined by several factors given that accounts

receivables is a major compound of current assets. Most of these factors vary from

business to business in accordance with the nature and type of business.

If the sales are seasonal, the seasonal nature of sales will violate the continuity of sales

in between the year. So, the sale of such a business in a particular season would be

large requiring a large size of accounts receivable (Garg 2015).

A firm may affect its sales either on cash basis or on deferred payment basis. The

larger the volume of sales made on credit the higher the volume of receivables will be

and vice versa.

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Establishments of credit department and its function of operating efficiency in filing,

record keeping, inspecting the credit worthiness of customers, reminder or follow-up

later etc. are important aspects in determination of the size of receivables (Garg, 2015).

A firm practicing lenient or relatively liberal credit policy will have a comparatively

larger size of receivables than a firm with a more stringent or restrictive credit policy.

This is because of two prominent reasons; Firstly, a lenient credit policy leads to

greater defaults in payments by financing weak customers resulting in bigger volume

of receivable and secondly a lenient credit policy tends to encourage even financially

sound customers to delay payments again resulting in the increase in the size of

receivable. Firms may offer cash discounts to debtors to encourage them to pay their

dues early, this helps in reduction of investment in accounts receivable. Also, the

impact of cash discount offered when accepted by the customers, is immediately felt by

the quickening of cash inflows and reduction in the size of accounts receivables. Thus,

a firm that offers competitive discount rates will have a comparatively smaller size in

receivables.

Credit period is the period for which credit is extended to customers. If the credit

period is extended, the possibility of increasing sales associated with increases in both

its collection costs and bad debts loss may occur. Thus, a firm with long or extended

credit periods will tend to have a large size of receivables.

A firm with a weak or lax collection policy will tend to have high levels of investment

in accounts receivables. „The second major factor affecting receivable management is

the collection and monitoring policies because all customers do not pay bills on time.

These delayed payments affect investment in receivables.

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2.2.9 Accounts Receivable Management

Having accounts receivables is both good and bad. It is good because it means that you

have sales and customers. It is bad because it is cash that you don’t have now, and

there is always a possibility that you won’t collect. When you offer credit terms to your

customers, it is extremely important to have a system in place to manage your accounts

receivable.

The function of accounts receivable management emanate from its goals which is

stated simply as setting out credit terms, selecting the customers, installing appropriate

collection and monitoring system and financing receivables for maximizing the value

of the firm (Grag, 2015).

The first issue for the management of trade debtors is to decide whether to grant credit

at all. However, credit is inevitable. The global market runs on credit, goods and

services are routinely delivered with the expectation that payment will be made

according to the agreed payment terms. If a firm decides that it is in its best interest to

allow delayed payment, then it needs to set up a system of rules and guidelines which

will amount to a debtor policy.

Although accounts receivable are short term in nature the policy decisions that create

them often have a long-term impact on the organization and its financial structure

because, once a receivables policy is determined it is difficult to come out of it except

at the cost of adverse market reactions. Credit policy decisions are part of an integrated

approach, and interface actively with production, marketing, and finance functions of

an enterprise (Garg, 2015). The process of accounts receivable management is truly a

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misnomer; that in a perfect word, accounts receivable would require nothing more than

collection not management or process. With growing complexity, payment ambiguity

and other factors that drive up costs in service delivery, the management of accounts

receivable process continues to demand more attention.

Management of the receivable’s asset is a demanding task. The vast majority of

companies expect that over 99.9% of all billings will be collected. Companies will

tolerate bad debt expense of several tenths of a percent of revenue, but not much more.

Which other departments are expected to perform at 99 plus percent effectiveness? It is

generally expected that a high percentage of invoices will be paid on time and over

90% within thirty days of the due date (Garg, 2015).

Management expects that the asset of accounts receivable will be managed to promote

sales and that all customers will be served promptly, courteously, and professionally.

Astoundingly, most firms also expect this all to be accomplished for a cost equal to

about two to three tenths of a percent of revenue. Management of the receivable’s asset

is a complex task; it addresses the ramification of practices and processes usually

outside the span of the responsible manager. It requires balancing of opposing priorities

from the sales, marketing, and finance functions (Garg, 2015).

2.2.10 Objectives of Accounts Receivables Management

The primary objective of accounts receivable management is to maximize the value of

the enterprise by striking a balance between liquidity, risk, and profitability. A

significant part of accounts receivables management involves the proper selection of

customers because every credit sale involves the risk of delayed payment or non-

payment of the value involved.

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The main purpose of maintaining receivables is not, sales maximization nor is it for

minimization of risks involved by way of bad debts. Had the main objective been

growth of sales, the concern would have opened credit sales to all sorts of customers.

Contrary to this, if the aim had been minimization of risk of bad debts, the firm would

not have made any credit sale at all. That means a firm should indulge in sales

expansion by way of receivables only until the extent to which the risk remains within

an acceptably manageable limit. The basic target of management of receivables is to

enhance the overall return on the optimum level of investment made by the firm in

accounts receivables. This optimum investment is determined by comparing the

benefits to be derived from a level of investment with the cost of maintaining that level.

Thus the objectives of management of accounts receivable may be viewed as to; attain

not maximum but optimum volume of sales, exercise control over the cost of credit and

maintain it on a minimum possible level and to keep investment at an optimum level in

the form of accounts receivables.

Granting of credit and its proper and effective management is not possible without

involvement of any cost. These costs include administration costs, capital costs,

production and selling costs, delinquency costs, default costs and opportunity cost

(Garg, 2015). These costs cannot be possibly eliminated altogether but should

essentially be regulated and controlled. ‟Elimination of such costs simply mean

reducing the cost to zero i.e. no credit grant is permitted to the debtors In that case a

firm would no doubt escape from incurring these costs yet the other face of the coin

would reflect that the profits foregone on account of expected rise in sales volume

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made on credit amounts much more than the costs eliminated (Garg, 2015). Thus, a

firm would fail to materialize the objective of increasing overall return on investment.6

2.2.11 Principles and Practice of Accounts Receivable Management

There are three factors that affect accounts receivable and that should be the focus in

account receivable management. These are credit extension policy, credit collection

policy and monitoring receivables investment. In order to add profitability, soundness

and effectiveness to receivables management an enterprise must make it a point to

follow certain well established and dully recognized principles of credit.

The first of these principles relate to the allocation of authority pertaining to credit

extension and collection to a specific management. The second principle puts stress on

the credit extension policy. The third principle emphasizes a thorough credit

investigation and analysis before a decision on granting a credit is taken. And the last

principle touches upon the establishment of sound collection policies and procedures.

In the light of these quotations the principles of accounts receivables management are

discussed below.

2.2.11.1 Credit Extension Policy

A credit policy is the blueprint used by a business in making its decision to extend

credit to a customer. The primary goal of a credit policy is to avoid extending credit to

customers who are unable to pay their accounts. The credit policy for larger businesses

can be quite formal while that of a small business tends to be quite informal with a

6
Working capital Management educreation Pub. 9, 2015 Manika Garg

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number of small business owners relying on their instincts (Grag, 2015). A good

credit policy should help attract and retain good customers without having a negative

impact on the cash flow Grag, 2015) advocates at least four reasons to have a written

credit policy and that they add to the productivity of the entire organization. These

reasons are seriousness of this undertaking, need for consistency among departments,

need for consistent treatment towards customers and finally it provides recognition to

the credit departments as a separate entity.

A firm‟ credit policy is the primary determinant of accounts receivable and it is under

the administrative control of the chief finance officer. Moreover, credit policy is a key

determinant of sales, so sales and marketing executives are concerned by this.

Determination of credit policy involves a trade-off between the profit and additional

sales that arise due to credit being extended on the one hand and the cost of carrying

those debtors and losses suffered on account of bad debts on the other hand. A credit

extension policy has the following important variables.

2.2.11.2 Credit standard

Credit standard refers to the required financial strength of acceptable credit customer.

Also, credit standard refers to the minimum quality of credit worthiness of a credit

applicant that is acceptable to the firm. A firm‟ credit standard can either be liberal or

restrictive.

In a liberal or lenient credit standard the firm relaxes its minimum conditions to be met

by the credit applicant. A firm with a liberal credit standard may likely portray the

following indicators: The firm stimulates sales and attracts more customers; increased

sales may be accompanied by added costs such as clerical expenses involved in

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investigating additional accounts; It involves a larger working capital investment in

receivables; There is a higher rate of default because of the inability of the customer to

pay their accounts and extension of credit facility to less credit worthy customers; The

average collection period may be long and lastly increased profit due to increased sales.

In a Restrictive or strict credit standard, the firm raises the minimum required condition

for the credit applicant. A firm adopting a stricter credit standard is likely to be faced

by the following effects: Decrease in sales as few customers are attracted; Reduced

incidences of bad debt loss; decrease in the amount of working capital requirement to

finance receivables; credit standards of the firm are normally high; Low costs of

maintaining accounts receivable; Extension of credit facilities to more credit worthy

customers only; Decrease in profit due to decreased sales. From these dimensions, it is

observed that if credits standards are relaxed, the volume of sales are expected to

increase. On the other hand, if credit standards are tightened, the expected volume of

sales will decline. The effect of liberalizing the credit standard on profit may be

estimated on the basis of matching between the profits or incremental earnings

resulting from increased sales and the costs to be incurred or associated with relaxation

of the credit standards. Accordingly, with the help of analysis of profitability versus

required return in evaluating a credit standard change, then the financial manager

should strive to determine the appropriate credit standard for the firm.

2.2.11.3 Credit Terms

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Credit terms refer to the stipulations under which the firm sells on credit to customers.

Thus, the size of the account receivable is also affected by the terms of credit (Grag,

2015). Credit period is the length of time buyers are given to pay for their purchase.

Naturally, customers prefer longer credit periods; so, lengthening the period will

stimulate sales. However, a longer period lengthens the cash conversion cycle, hence it

ties up more capital in receivables which is costly. Moreover, the longer a receivable is

outstanding the higher the probability that the customer will default and that the

account will end up as a bad debt. To maintain the tradeoff between costs and

profitability the financial manager should formulate on optimal credit period for the

firm.

Discounts are price reduction given for early payment. The discount specifies what the

percentage reduction is and how rapidly payment must be made to be eligible for the

discount. A discount term of 2/10 net 30 means that 2% discount will be offered if

payment is made within ten days, and the maximum period of credit is thirty days

(Grag, 2015).Offering discounts has two benefits; first, the discount amounts to price

reduction which stimulates sales. Secondly, discounts encourage customers to pay

earlier than they otherwise would, which shortens the cash conversion cycle (Grag,

2015).However, discounts mean lower prices and lower revenue unless the quantities

sold increases by enough magnitude to offset the price reduction. The benefits and

costs of discount must be balanced when establishing the credit policy.

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2.2.11.4 Credit Collection Policy

A credit collection policy are the procedures used by a company to collect overdue or

delinquent accounts receivables. A credit collection policy manual are the procedures

used to collect past due accounts including the toughness or laxity used in the process.

At one extreme, the firm might write a series of polite letters after a long delay; at the

other extreme, delinquent accounts may be turned over to a collection agency relatively

quickly (Grag, 2015).

Businesses today cannot afford excessive write-offs or large numbers of delinquent

accounts. Lack of operating cash was the primary “cause of death” for many U.S “dot-

coms” in the early 2000‟s. Poor cash flow management continues to result in the

collapse of business enterprises, large and small worldwide. One of the most common

cash-traps is uncollected sales, i.e. accounts receivables.

A company can improve its cash flow by reducing its Days Sales Outstanding (DSO)

which is attained by training customers to pay on time. This requires constant attention

and follow up. Firms should be somewhat firm, but excessive pressure can lead

customers whose business is profitable to take their business elsewhere. Thus, a

balance must be struck between the costs and benefits of different collection policies

(Grag, 2015).

A company must determine what its collection policy will be and how it will be

implemented. As is the case of credit standards and credit terms, the approach may be a

function of the industry and the competitive environment.

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For any overdue or delinquent accounts, a reminder form, letter, telephone call or visit

may facilitate customer payment. At minimum, the company should generally suspend

further sales until the delinquent account is brought current. Should these actions fail

to generate customer payment, it may be necessary to negotiate with the customer for

past-due amounts.

A firm should have invoices printed and mailed as quickly as possible and look for

ways to improve invoice accuracy without delaying the presentation date. The sooner

you can get the accurate invoice to the customer, the sooner they will pay you; offer

financial inducements to customers who agree to pay your invoices electronically; with

customers, who have a history of paying late, begin collection efforts before the due

date. Call to inquire whether they have the invoice and if everything is in order, resolve

any problems quickly at this point and if a customer indicates it has a problem with

part of the invoice, authorize partial payments.

When a firm identifies a customer, whose account is overdue it may take the following

sequence of steps: The firm mails a delinquency letter notifying the customer of the

past due account. Frequent follow up of delinquent accounts greatly increases chances

of collecting them. People will often prioritize payment based on how much of a hassle

they expect to receive. The firm may send a polite friendly reminder to those customers

who are just a few days late with their payment. Letters with a more serious tone may

follow as the receivables remain outstanding for longer periods (Grag 2015). The firm

calls the delinquent customer to discuss payment. The firm may agree to extend

payment period if the customer has a reasonable excuse. The firm may also send a

representative to meet with the delinquent customer. Again, the firm may decide to

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grant a credit extension to customer with a reasonable excuse for the delinquency

(Grag, 2015).

Penalize the delinquent accounts. Penalizing delinquent accounts can be an effective

way to ensure timely payments. This can be done by levying interest on overdue

balances. Where goods were sold with a lien attached, collateral was pledged against

the account or additional corporate or personal guarantees were given, the company

should utilize these options for obtaining payment.

The firm employs a collection agency. If despite all efforts the company is unable to

collect, it should submit the account to a collection agency. Through this is not ideal,

but collection agencies tend to be quite aggressive in their collection efforts. Also, they

usually charge based on amounts collected so there is no upfront cash outlay required.

If the company had written off the amounts, then the amounts collected are somewhat

of a bonus.

The firm takes legal action against the delinquent customer. The firm may seek legal

judgment against the debtor. However, because of the substantial expense involved this

action is appropriate only for the larger outstanding amounts. In addition, legal action

could force the delinquent customer into bankruptcy, without securing the guarantee of

eventual payment. Obviously, a cost-benefit analysis should be made at each stage to

compare the cost of further collection actions against the cost of simply writing off the

account as a bad debt.7

7
Working capital Management educreation Pub. 9, 2015 Manika Garg
https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/finance/ca-en-FA-strategies-for-
optimizing-your-accounts-receivable.pdf

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There are five activities within the accounts receivable functions that, if optimized,

can help your free up cash and strength your capital: (Deloitte)

1. Customer credit Approval

First off, you need a process – clear and concise policies for issuing credit and

recovering debt in a timely fashion. To do this, you need to:

Set responsibilities. Solicit input from the sales team when setting

policies to ensure market realities are reflected. For instance, you need

to understand when to grant credit, circumstances that may merit

overriding credit limits and situations that would justify placing

accounts on hold. Once those policies are established, however, the

finance team must enforce them, and sales should not be authorized to

issue credit or change terms without pre-approval. The aim is not to

have finance interrupt the sales process, but to acknowledge as an

organization that not all customers are good customers.

Determine when to assess credit limits. If a new customer is buying low

volume items on short terms, a simple internal scorecard may be

sufficient to assess their creditworthiness. Conversely, if a new

customer is interested in purchasing large volumes on a regular basis,

you may need a more stringent process, such as full background and

credit history checks.

Commit to approving or rejecting credit applications within a certain

time period. Often, companies lack policies around how long it should

take to turn around credit applications. If the time frame lags, it could

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result in lost sales and put a strain on the relationship between sales and

finance – a relationship that demands cooperation if companies hope to

realize long-term success.

Regularly review the credit approval process. As customers and

industries change, risk profiles change as well. If customers are in a

high-growth industry, or one struggling against economic conditions,

you may want to alter their credit terms. That means you will need to

review your credit approval process on a regular basis and set policies

around this too. For instance, will you ask for financial statements from

customers? Will you grant terms for only limited time periods?

2. Customer master data

Once you assign credit limits, payment terms, discounts, tax rates and return

policies, and any other relevant terms (i.e. delivery address, e-mail address etc.)

to specific customers, those terms must be accurately reflected in your billing

and collection systems. Customer master data should indicate what the

customer can purchase, any dollar limits that apply, payment terms, whether

they get volume discounts or advertising credits, and any other relevant terms.

Getting this wrong is more than a data entry glitch. For instance, if you enter an

incorrect address, invoices go to the wrong place and receivables slow down.

Likewise, if your master data indicates payment terms of 60 days when it

should be 30, you won’t be paid on time. Recognize, too, that the master data

must be updated if a customer’s credit profile changes. For instance, if you

grant additional credit to a customer, this should be reflected in the system.

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Companies have a habit of assuming the master system trumps all, but that’s

only true if data accuracy is being maintained.

To get the most out of your data, you need to:

Centralize the master data process and identify who should ultimately

manage customer data*

Conduct regular audits of master data to identify customers with

abnormal credit limits, payment terms, and/or discount rates

Document and communicate all changes to customer data. Changes

should be approved by Finance and operations as they can have a

significant impact on cash-flow forecasting

Implement controls to ensure data accuracy and permit read-only access

to staff to ensure they can’t override customer data without proper sign-

off

3. Invoicing/billing

You would imagine that billing is straightforward, but companies often struggle

in this area. Some make consistent invoice errors regarding units of measure,

price, customer accounts or other inaccurately reflected master data. Some fail

to generate invoices in a timely fashion – or at all. Sometimes, team members

make an end-run and bill outside the system. In other cases, companies bounce

back and forth between mailed and electronic invoices, resulting in confusion.

The key here is to establish a billing process that ensures accurate invoices are

sent on a timely basis.

4. Cash application process

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Another area that causes trouble arises when customers pay their bills. As

payments come in, it is essential they be applied both to the right customers and

to the specific customer invoices they relate to. And this needs to be done on a

timely basis so you always know which accounts are up-to-date and which are

outstanding. Otherwise, it is impossible to track which customers paid on which

invoices – making follow-up on late payments a virtual nightmare. Companies

that get this wrong often waste considerable time and resources reissuing

invoices and even amending reconciliation reports where their systems can’t

“reverse” incorrect cash applications. To avoid this, you need to:

Allocate payments to specific invoices rather than simply crediting the

customer account

Apply payments to the appropriate invoices, not just the oldest invoices

Apply payments to each account on the day they are received, to

maintain system accuracy. This can be complicated if the company

accepts many different forms of payment, such as pre-authorized debit,

cheques, wire transactions, electronic funds transfer or even payment

over the phone. In these cases, it may make sense to limit the payment

methods customers can use.

Post journal entries well before system cut-off dates

Reconcile accounts on a timely basis by quickly and consistently

following up on unidentified cash receipts rather than dumping them

into suspense accounts and letting them languish

5. Collection process

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While every business enjoys collecting revenues, not all organizations take a

proactive approach to ensure receivables are collected on a timely basis. This is

often due to weak processes. For instance, a lack of reporting can make it

difficult – or impossible – to determine which amounts are collectible and

which may be in danger of default. Similarly, failure to adhere to the

company’s credit or collection policies makes it harder to determine which

payments are late and which will never arrive. Of course, before they can

follow up on late payments, your staff members also need assurance that the

accounts receivable reports are accurate as of today and that there aren’t days,

or even weeks, worth of cash receipts that have not yet been applied to

customer accounts. This requires a robust accounting process. Other ways to

maximize collection of receivables include:

Engaging in frequent and consistent collection efforts. This includes

bolstering staff skills if they lack knowledge on how to collect amounts

owing from recalcitrant customers

Negotiating payment plans that align to corporate collection policies

Ensuring any discounts offered benefit the company and are

implemented accurately

Strengthening processes to permit accurate reporting

Automating processes to avoid manual entry errors

8

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2.2.12 Empirical Review

2.2.12.1 Inventory Turnover Period and Financial Performance

(Shardeo 2015) study examined the impact of inventory management on the

financial performance of the firm. All data for this paper is secondary data and taken

from the various sources. Some of the sources are from journals, articles, magazines

and referred books from the library. A correlation was carried out on inventory

turnover with profitability and a Pearson correlation coefficient was done to show the

impact of inventory management on financial condition of the firm.

2.2.12.2 Average Payment Period and Financial Performance

( Bertoneche, 2016) carried out a study on effect on working capital management on

the financial performance of the pharmaceutical firms in Nigeria. The study covers a

period of eight years 2006 to 2013. Data for the study were collected through

secondary sources using annual financial reports and bulletin of Nigeria stock

exchange of the various firms covering the period under study. The study found the

average payment period was significantly and positively related with financial

performance.

(Bertoneche, 2016) study investigated the impact of working capital on financial

performance of Gulf Cooperation Council Firms for the period of 2008-2014. Four

hypotheses pertaining to average payment period components were investigated using

linear regression models. The study identified positive relationship between average

payment period with profitability and a negative relationship amid average collection

period and firm profitability. The result of regression model indicated average payment

period to the most significant factors followed by average payment period.

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(Madugba and Ogbonnaya 2016) study investigated the effects of average payment

period and financial performance: evidence from manufacturing companies in Nigeria.

The study employed multiple regressions in analyzing the data sourced from the

published financial statement of the firms under the study. A significant outcome of the

study is that Average Payment Period impacts on both earnings per share and return on

capital employed. The implication is that efficient management average payment

period will improve the financial performance of the manufacturing firms, hence the

study recommends that professionals should be hired by these firm to ensure proper

management of stock to avoid stock out. Conclusively, the study has shown that good

management of average payment period will keep manufacturing firm a float.

2.2.11.3 Cash Conversion Period and Financial Performance

(Bertoneche 2015) study investigates the effect of cash conversion cycle on the

profitability of firms listed on the Nairobi Securities Exchange. The relation between

the firm’s cash conversion cycle and its profitability is examined using dynamic panel

date analysis for a sample of firms listed on The Nairobi Securities Exchange for the

period from 2008 to 2012. The analysis is applied at the levels of the full sample and

divisions of the sample by industry and by size. The results indicated that there is a

significant and negative relationship between the cash conversion cycle and return on

asset. The firms with shorter cash conversion cycles are more likely to be profitable

that firms with longer cash conversion cycles.

(Muturi 2015) study investigated the effects of cash conversion cycle on profitability of

Tea Factories in the country for the period of five years starting from 200 to 2013. The

correlation and regression analyses were used to analyze and describe the nature of the

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relationship between (CCC) and the firm’s profitability. A lot of literature has pointed

out that the efficient management of cash has significantly influenced the firm’s

profitability. The study found out that the CCC significantly negatively affects the tea

firm’s profitability.
9

2.2.12.4 Average Collection Period and Financial Performance

Knight (2015) investigated the relationship between working capital management and

firm’ profitability in the oil and gas sector in Nigeria. The study is based on secondary

data collected from sample of two listed oil firms in Nigeria for the period 1995 to

2011. The results of correlation analysis and OLS estimation technique provide that

firm’s profitability in Nigeria is affected by; the working capital management

components which are cash conversion cycle, average days’ receivables, average days

payables, average days inventories. Second, size of the firm is equally another

important variable found to affect the profitability of firms.

Knight (2015) examines the impact of working capital management on corporate

profitability of 7 listed firms in Nigeria for the period of 2008 to 2012. The results of

descriptive statistics and GLS regression analysis confirm a positive relationship

among Average Collection Period (ACP), Current Ratio (CR) and the size of the firm

(LOGSIZE) with Profitability and a negative relationship with Inventory Period (ITP)

and Average Payment Period (APP).

2.2.12.5 Financial Performance

9
Financial Performance by Rory knight, Marc Bertoneche 2015

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Knight (2015) study investigated on the relationship between investment and financial

performance of Insurance Companies in Kenya. The study established insurance

companies in Kenya invest their funds in terms of investment; investments in deposits

with other financial institutions where the firms hold certificates of deposits and

investment in Government securities.

Knight (2017) study examined the effect of firm performance on impact investment in

Kenya: A case study of Jamii Bor Bank. Findings indicated that there is a strong

positive correlation between operational efficiency and impact investment in Jamii

Bora Bank. In other words, an increase in operational efficiency leads to an increase in

impact investment. From the findings, operational efficiency explains 77.3% of the

variation on impact investment at Jamii Bora Bank.10

2.2.13 Balance Scorecard

According to intrafocus The Balanced Scorecard, referred to as the BSC, is a

framework to implement and manage strategy.  It links a vision to strategic objectives,

measures, targets, and initiatives. It balances financial measures with performance

measures and objectives related to all other parts of the organization. It is a business

performance management tool. It was originally published by Dr Robert Kaplan and Dr

David Norton as a paper in 1992.  And then formally as a book in 1996. Both the paper

and the book led to its widespread success. It is interesting to note that although Kaplan

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Financial Performance by Rory knight, Marc Bertoneche 2015
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and Norton published the first paper, they were anomalously referenced in a work by

Art Schneiderman who is believed to be the BSC creator.

The Basics

So, it’s more than just financial measures?

Correct! The major difference that Kaplan and Norton introduced into this

methodology is the ‘balance’ across all organizational functions. The problem back

then, and still today, is that most companies focus on financial measures. For example,

revenue growth and profitability.  By looking at an organization across four

‘Perspectives’ a causal relationship between investment and financial outcome can be

defined, measured and managed.

Okay, it is a scorecard

The BSC is not just a scorecard, it is a methodology. It starts by identifying a small

number of financial and non-financial objectives related to strategic priorities. It then

looks at measures, setting targets for the measures and finally strategic projects (often

called initiatives). It is in this latter stage where the approach differs from other

strategic methodologies. It forces an organization to think about how objectives can be

measured and only then identifies projects to drive the objectives. This avoids creating

costly projects that have no impact on the strategy.

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The ‘balance’ is brought about by a focus on financial and non-financial objectives that

are attributed to four areas of an organization. These are the Perspectives. They are:

Financial, Customer, Internal Processes and Organizational Capacity.

In brief, the four scorecard perspectives are:

Financial

The high-level financial objectives and financial measures of the organization that help

answer the question – How do we look to our shareholders? Financial objectives are

usually the easiest to define and measure. However, creating a financial objective, for

example, Improve Profit, rarely provides a clue as to how to achieve the objective. by

linking objectives from the lower levels in the model, we begin to see exactly where to

define projects and make investments.

Customer

Objectives and measures that are directly related to the organization’s customers,

focusing on customer satisfaction. To answer the question: How do our customers see

us? It is always important to take a step outside and view your company or

organization from your customers viewpoint. You need to understand what they want

from you, not necessarily, what you can do for them.

Internal Processes

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Objectives and measures that determine how well the business is running and whether

the products or services conform to what is required by the customers, in other words,

what should we be best at? Some of the biggest cost items can be reduced by

streamlining internal processes. This is also the best area to focus on new and creative

ideas.

Organizational Capacity

Objectives and measures concerning how well our people perform, their skills, training,

company culture, leadership, and knowledge base. This area also includes

infrastructure and technology. Organizational Capacity tends to be the area where most

investment takes place. It answers the question: How can we improve and create value

The real value of the Perspective approach is that it provides a framework to describe a

business strategy. It focuses on objectives and measures that both inform us about

progress and allow us to influence activities to achieve the strategy.11

2.2.14 Accounting and Marketing Relationship

Although accounting departments and marketing departments are separate and distinct,

they must work together to monitor sales trends and to manage the effectiveness of

marketing campaigns. When the two departments work collaboratively, sales trends are
11

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tracked, marketing campaigns are budgeted wisely, resources are allocated efficiently,

and the business runs more smoothly. Accounting departments and marketing

departments are connected in that an accounting department determines a business's

financial condition, which in turn gives a marketing department a budget in which to

operate. By keeping track of sales trends, accounting departments inform senior

management as to whether the business can allocate more to marketing. Every business

has some type of accounting system that monitors the business's financial well-being.

By compiling financial statements, the accounting department assists management in

determining the business's profitability. Marketing departments create sales strategies

and programs aimed at increasing sales through promotions and advertising. Marketing

departments are responsible for compiling reports that include information about the

success or failure of specific campaigns and sales strategies.

12

2.2.15 Strengthen the relationship to client

Clients are arguably one of the most important factors of starting and sustaining a

successful business. Without clients—especially those who return to hire you again and

again—your business would be non-existent. This is why the more successful you are

at understanding and forming relationships with your clients, the more successful you

will be at growing your small business.

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Anticipating Customer Needs

Not only is developing relationships with your clients a smart move from a marketing

standpoint, but it also helps you to anticipate client needs and perform ongoing

adjustments so you can improve your business over time.

When you take time to understand your clients' needs, you will be in a better position

to ensure client satisfaction with your products or services and align yourself for new

opportunities. You may even increase the possibility of referrals and increased word-

of-mouth marketing. Here are some ways you can work on strengthening your

relationships with your clients.

Get to Know Your Clients

Even if you think you have a good understanding of where your clients are coming

from and what they need from you, you may be surprised at the many ways you can get

to know them better. Consider letting your conversations get a little personal by

sharing what you do during your off-hours, information about your family, etc. It

doesn't have to be intrusive but sharing non-work information occasionally can

strengthen your clients' relationships.

Do Exceptional Work

It is obvious that when building relationships that the quality of the work you do should

be exemplary. If you are not making your clients happy, it will be virtually impossible

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to forge long-lasting relationships. Aim to exceed their expectations whenever possible

and demonstrate how you can become a valued extension of your clients' businesses.

Communicate with Your Clients Regularly

Consistent and effective communication is important in all relationships, particularly

relationships with your clients. You can create the habit of practicing good

communication by being responsive to client calls and emails, scheduling regular

check-ins, sharing company news, and interacting with your clients across social

media, if appropriate. In general, remaining in regular contact and keeping your clients

in the loop can go a long way.

Ask for Feedback

It's important to ask for client feedback after individual projects or when reaching

milestones in long-term projects. You can take a formal approach by using a client

satisfaction survey or ask them informally during a conversation. The most important

step of getting client feedback, however, is having a plan for addressing any concerns

or criticisms and being committed to improving your business processes.

Rely on Your Expertise

Many times, your clients will welcome and appreciate suggestions on how to do things

better or more effectively. Use your experience and in-depth knowledge of the work

you do in your business to help your clients develop solutions that surpass their initial

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expectations. This can be accomplished by comprehensive consulting, or even more

informally, such as by sharing tips, advice, and resources that will help your clients in

their own businesses.

Cultivate Partnerships

By considering each client relationship as an ongoing partnership, you can move the

relationship to a collaborative, mutually beneficial partnership. This focus can make

you more successful at building a sustainable relationship instead of simply doing the

work and moving on. And you never know where you might find an opportunity to

create a joint venture and work together in a whole new way.

These tips will help you solidify your client relationships and create a strong

foundation that will help you grow your business to new levels.13

2.3 Operational Framework/Process Design

2.3.1 Theoretical Framework

2.3.1.1 Operational Motives Theory

The operational motive theory by Knight (2015) stresses the role of trade credit

in smoothing demand and reducing cash uncertainty in the payments. In the absence of

trade credit, firms would have to pay for their purchases on delivery. This makes it

possible to reduce uncertainty about the level of cash that needs to be held to settle

payments and provides more flexibility in the conduct of operations, since the capacity

to respond to fluctuations is provided elsewhere. This was supported by Knight (2015),

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who found that firms with variable demand granted a longer trade credit period than

firms with stable demand. The existence of sales growth in a firm is also a factor that

positively affects the demand for finance in general, and for trade credit in particular.

This theory was relevant to the study as it shows that when credit is tight, financially

stable firms will increasingly offer more trade credit to maintain their relations with

smaller customers, who are “rationed” from direct credit market participation.

Consequently, it should be expected that firms with greater increases in sales will use

more trade credit in order to finance their new investment in current assets. This theory

explains inventory turnover period variable.

2.3.1.2 Transactions Cost Theory

Transactions cost theory by Knigth (2015) show that trade credit reduces

transactions costs by allowing the parties to separate payment and delivery cycles when

delivery is uncertain. The customer can lower the transactions demand for cash if

payment can be separated from delivery. Incorporate this basic idea in a formal two

period model which incorporates the trade-off between inventories and trade credit

under conditions of stochastic demand. Using this model, they derive empirically

testable propositions with respect to accounts payable and accounts receivable and their

relationship with changes in costs of inventories, profitability, risk profile, liquidity

position of firms and bank loans. Knight (2015) argued that, all other things being

equal, buyers with low effective tax rates would prefer trade credit and therefore are

more likely to have higher levels of accounts payable relative to similar buyers with a

higher effective.

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This theory was relevant to the study as it concerns itself with efficiency especially in

the realm of transaction costs. TCT requires the organization to weigh all costs

involved and then compare the costs of production and transaction within their

organization versus the production and transaction costs associated with outsourcing.

This theory explains average payment period variable.

2.3.1.3 Cash Conversion Cycle Theory

The cash conversion cycle, which represents the interaction between the

components of working capital and the flow of cash within a company, can be used to

determine the amount of cash needed for any sales level. Knight (2015) developed cash

conversion cycle as part of operating cycle which is calculated by adding inventory

period to accounts receivables period and then subtracting accounts payables from it.

Its focus is on the length of time between the acquisition of raw materials and other

inputs and the inflows of cash from the sale of finished goods and represents the

number of days of operation for which financing is needed.

The cash conversion cycle theory is a dynamic measure of ongoing liquidity

management since it combines both balance sheet and income statement data to create

a measure with a time dimension. While the analysis of an individual firm ‘s CCC is

helpful, industry benchmarks are crucial for a company to evaluate its CCC

performance and assess opportunities for improvements because the length of CCC

may differ from industry to industry. Therefore, the correct way is to compare a

specific firm to the industry in which it operates.

The cash conversion cycle is used as a comprehensive measure of working capital as it

shows the time lag between expenditure for the purchase of raw materials and the

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collection of sales of finished goods (Knight, 2018). Day-to-day management of a firm

‘s short term assets and liabilities plays an important role in the success of the firm.

Firms with growing long-term prospects and healthy bottom lines do not remain

solvent without good liquidity management.

This theory is relevant to the study because it directly affects the liquidity and

profitability of the company. It deals with current assets and current liabilities. Since

every corporate organization is extremely concerned about how to sustain and improve

profitability, hence they must keep an eye on the factors affecting the profitability. In

this regard, liquidity management having its implications on risks and returns of the

corporate organizations cannot be overlooked by these organizations and hence cash

conversion cycle being indicator of the liquidity management needs to be explored as

to how it may affect the profitability of the corporate units. This theory explains cash

conversion period variable.14

2.3.1.4 Account Receivable

Accounts receivables are debts owed to the firm by customers arising from sale

of goods or services in ordinary course of business (Emery 2019). Hence accounts

receivables are asset accounts representing amounts owed to the firm because of the

credit sale of goods and services in the ordinary course of business. There have been

many theories proposed for trade credit. The Financial theory argues that firms able to

14
Financial Performance by Rory knight, Marc Bertoneche 2015

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obtain funds at low costs will offer trade credit to firms facing higher financing costs.

Thus, for sellers, trade credit is a more profitable short-term investment than

marketable securities.

2.3.2 Conceptual Framework

A conceptual framework refers to a group of concepts which are systematically

organized to provide a focus, a tool and rational for interpretation and integration of

information and is usually achieved in pictorial illustrations (Mbula, Dr. Memba, Dr.

Nyeru, 2015). The variables indicate the statistics that were related to this study.
15

Other, Conceptual Framework from the study of (Ngugi, 2015) the independent

variable is determinant of account receivable. These determinant factors are divided

into five variables technology, organization size, marketing channels, management

structure and policies. On the other hand, the dependent variable is account receivable

which will be expected to improve if the determinants factors are well implemented.

Effect of Accounts Receivable on Financial Performance of Firms Funded by Government Venture

15

Capital in Kenya, Kilonzo Jennifer Mbula, Dr. Memba S.F., Dr. Njeru A, 2016

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16

From the study of (Waweru, 2015) the researchers conceptualize or represent the

relationship between diagrammatically. The purpose of the conceptual framework is to

help the reader to quickly see the proposed relationship. Intervening variables,

Inflation, the changers in prices may affect the value of the account’s receivable held

by the firm since when the customers finally pay their accounts; the purchasing power

of the money will be weaker. Information asymmetry, when evaluating the credit status

of potential customers, the firm may overlook or lack adequate information regarding

the customers, the firm may overlook or lack adequate information regarding the

customer. This may lead to an otherwise good customer being denied credit and/or

wrong customer being granted credit.

Determinants of Accounts Receivables Management in the hotel industry in Kenya, Simon Kimani
16

Ngugi, 2015

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17

2.3.3 Operational Framework

The operational framework for Rakso Computer Technology Inc illustrating the

best process toward an excellent financial performance.

Principles and Practice of Effective Accounts Receivable Management in Kenya: A Case of Selected
17

Manufacturing Firms in Thika Municipality, Kimani Joseph Waweru, 2015

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Credit Collection Policy

A credit collection policy that facilitates low average collection period will

ensure the company healthy cash flows and improve liquidity position. Improved

liquidity will enable the firm to meet its financial obligations as and when they fall due

and be able to seize opportunities that may arise in the market.

Credit Monitoring Control

Establishment of an autonomous credit control department with its functions of

establishment of credit terms and limits, assessment of credit risk, monitoring and

controlling of debts, maintenance of the sales ledger and collection of payments will

lead to improved operational efficiency in terms of high receivables turnover, lower

average collection period and improved customer satisfaction. Managing accounts

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receivables is a unique discipline that involves a combination of accounts, sales, and

marketing skills. Thus, department should have personnel who are trained on credit

control as opposed to having personnel only trained accountancy.

The ongoing or continuous review of a firm’s account receivable to determine if

customers are paying according to the stated credit terms will help the management to

identify customers who have difficulty in paying and those who have surpassed their

credit limits. This will help in mitigating the likelihood of delinquency and default in

good time and thus take the appropriate action. Credit monitoring will also enable a

firm to establish the overall guide in making important credit decisions such as credit

terms and limits.

2.4 Analysis of Existing Business Process/Operations

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This process starts with the creation of contracts of CE (Cost Estimates) by

Marketing. In contracts scheduled payments are specified while in CE, no planned

payments are indicated. After that, the Marketing will now process with the execution

of the Contract/CE. And once a task is done, they will now request invoice to the

Marketing Resource Management Officer (MRMO) who is in-charge of recording and

checking the invoices to the Invoice Resource System (IRS). Afterwards, if there is a

prompt in the system, the Accounting in charge will just create the invoice from the

Quickbooks and upload it to the IRS. The MRMO will then check if the invoice is

correctly done according to the Marketing’s request.

Meanwhile, before sending the invoice to the client, the Marketing will send a

report to be followed by sending of invoice of the Accounting. Through this,

Accounting can communicate with the client about the accuracy of the invoice. Once

verified, the RCTI- Accounting will start counting a 30-day period for its date. If the

client has no response within the 30-day period, the Accounting or Marketing will

follow-up the for the collection of payment. And after an agreed schedule of payment

is settled, The Accounting can finally collect the payment. Based on RaksoCT process

the bottle neck of the problem is in the first step. The CE has no terms of agreement

while the contract has an agreement, but, both parties do not follow of what stated in

the contract. See Annex a& b. The result based on ASF 2015-2019 AR vs cash ratio;

the average account receivable is 3.25 higher than cash on hand. See graph below:

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Account Receivable vs Cash

30,000,000.00
25,000,000.00 25,292,829.00
23,700,939.00
20,000,000.00
18,213,163.00
15,000,000.00
10,000,000.00 9,555,743.00 9,511,387.00
5,000,000.00 5,226,594.00
4,743,709.00 5,073,674.00 4,966,376.00
3,093,614.00
-
1 2 3 4 5

Account Receivable Cash

The other impact of not following the contract and no terms in the CE the collectibles

will suffer; based AR aging summary 44% or 11.8M is over 61days is uncollected that

affect the day to day transaction of the company.

The research is contemplating for a proposal to the management that the company AR

aging easily to convert in cash at the same time will not hurt the yearly target sales.

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III. METHODOLOGY

3.1 Description of Research Method

This chapter provides details about the methodology adopted of assisting in achieving

the research objectives. According to Newing 2016, a research methodology is

concerned with what you will do to address the specific objectives and research

questions you have developed. People often equate “methodology” with the list of

individuals methods that will used – questionnaires, semi- structured interviews and so

on. However, the methodology must also include an overall strategy that fits all the

different methods together into a coherent design. This involves deciding on a research

design structure, choosing the specific methods, and developing a sampling strategy. It

also involves describing what analyses to be carried out. This chapter covers research

design incorporating type of research, population, sampling technique, sample size,

instruments, pilot test and data analysis.

3.2 Respondents of the Study, Sample Size, and Sampling Technique

The researcher is targeting a respondent from the upper management of RaksoCT.

3.3 Research Locale

This study was conducted at Rakso Computer Technology Inc, this place was selected

for knowing the root cause of the problem of the company. This study has been

implemented on the 2nd year 3rd semester of master’s in business management student

thru online research due to COVID 19.

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3.4 Research Instrument Used

The researcher will conduct an online interview to collect a data. It helps in acquiring

quality data as it provides a scope to ask detailed questions and probing further to

collect rich and informative data.

3.5 Data Gathering Procedure

The researcher made a letter of approval to conduct a capstone study at Rakso

Computer Technology Inc through Mr. Allen Kristian Vasquez, President of RCTI.

The study was then conducted for two months. After collecting all data with the help of

Accounting and upper management thru interviews, Audited Financial Statement, and

other accounting report, the result would hopefully be the basis of effective Account

receivable management.

IV PRESENTATION, ANALYSIS, INTREPRETATION OF DATA

4.1 Sample CE with costing
Based on CE#100119-356 the supplier obliged RCTI to pay 50% DP upon the
date of the event and 50% final payment at the end of month so they can deliver
the video output ahead of time to RCTI client which is Zesto Corporation.
Based on the table below RCTI paid the supplier on the said terms of agreement
while it takes 113days before RCTI collect the payment from the client.

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4.2 AR aging as of December 31, 2019

Based on December 31,2019 AR Aging Report 60% of the total account

receivable is on the 60 days and above which means RCTI has a difficulty in

collection specially to those who have big account in RCTI.

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4.3 Leverage of the RCTI

Overall, the leverage ratio of RCTI is good. The company has a lower debt equity

which means in any aspect of leverage the company has a capacity to pay.

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4.4 Financial Ratio: Advertising Industry vs RCTI

4.4.1 Activity Ratio

The Asset Turnover days is more efficient in asset utilization while the receivable

turnover days is getting worse compared to advertising standard.

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4.4.2 Solvency Ratio

RCTI has an ability to meet the long-term obligation.

4.4.3 Liquidity Ratio

Due to lack of cash, RCTI is unable to meet its short-term liabilities.

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4.4.4 Profitability Ratio

RCTI has a capacity to make profit.

4.4.5 Interview

The researcher conducts an interview to better understand and explore

research subjects’ opinions, behavior, and experiences.

4.4.5.1 How RCTI Treat Client?

In Rakso CT, we treat our clients as business partners. It is a top priority

that we make our clients valued. The nature of our business is primarily

anchored to client servicing; thus, we ensure that everyone is client-oriented

and practicing the following traits:

1. Listens to client needs.

2. Identify and anticipate needs.

3. Gives additional value to everything we do.

4. Asks for feedback.

4.4.5.2 Does RCTI impose credit policy to its clients?

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Based on the sample CE/contract given by the Accounting Department from

their responses, RCTI is not imposing strict policy of collection because

they are afraid of losing the client.

4.4.5.3 How does RCTI respond on late payments for clients?

The Accounting department will seek help from the Marketing first for

easier communication with clients. But if there are still no response from

them, Accounting will now head up the RCTI President. They will provide

SOA so the president can directly follow-up the client and later will draft a

letter that indicates the number of receivables in case of no further action

from the client.

4.4.5.4 Credit Period Given

Credit Period Given

33%

50%

17%

7 days 15days 30 days over 31 days No

Based on the graph 50% of the respondent indicate that RCTI do not

have credit period.

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4.4.5.5 Credit Terms Agreement

Credit Terms Agreement

YES No

Marketing or Engine will receive incentive per project 100% 0%

for early collection (1%/31-45 days, .05%/ 46-60days)

Early Payment discount (2%/15, 1%/30 or free pro 67% 33%

cost)

Strict Credit Policy (Impose interest if unable to pay 17% 83%

on the said due date)

%
0%

0%

0%
20

40

60

80
10

12
100% of the respondents agreed to have an incentive per project for

early collections. They believe that engines’ incentive can reduce

receivable turnover without hurting sales. On the other hand, 67%

agreed to have an early payment discount to attract clients and boost

more sales but 33% disagreed because they are hesitant and cautious

of lower perceived sales or cutting of profit. Meanwhile,

respondents do not prefer to have a strict credit policy showing 83%

who disagreed over 17% who agreed.

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4.4.5.6 Other related interviews

YES NO

Are you willing to give up client who paid late? 33% 67%

Do you think that the early payment discount is effective in company’s working capital? 67% 33%

Does RCTI gives early payment discount?0% 100%

Do you think that the Credit Policy is effective in company’s working capital? 100% 0%

Does RaksoCT gives credit to their clients?0% 100%

Based from the responses of the interviewees, 67% are not willing to give up a

client even they are paying late compared to 33% who said yes. This shows that

RCTI is very understanding and is a client- oriented company. With regards to the

idea of early payment discount, it shows that RCTI does not give an early payment

discount to their clients but they believe that this method is effective in the

company’s working capital with 67% yes over 33% no. Overall, RCTI does not

give credit to their customers resulting to an excessive AR Aging.

V RESULT AND DISCUSSION

This chapter finalizes the study by providing the summary of key findings,

conclusions, and recommendations. The summary, conclusions and

recommendations are aligned to the specific objective of the study.

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5.1 Findings

5.2 Conclusion

Based on the data gathered from Audited Financial Statements and interview, the

study concludes that although there are existing practices in credit policy to clients,

their weak implementation as evidenced or either lack of or inconsistent

application of credit policy procedures as well as weak follow up strategies on

overdue accounts hampers an effective account receivables management. The

study further concludes that due to weak or inadequate credit control and

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monitoring procedures, RCTI continue to face a challenge and ineffectively

manage their account receivables. Finally, the study concludes that timely and

accurate invoicing to collection procedures are important component in effective

management of accounts receivable that would ensure a reduction in bad debts and

improved liquidity for RCTI.

5.3 Recommendation

From the findings of the study, the researcher makes the following

recommendations:

RCTI should create a credit collection policy that is suited for this kind of business

and setting out the procedures and practices to be used by RCTI to collect overdue

or delinquent account receivable. This policy should be done simultaneous with a

combination of several collection strategies which ensures that RCTI will not only

improves its cash flow by shortened average collection period but also does not

suffer debt losses. Here are the following recommendations based on the study.

5.3.1 The researcher makes an action plan to list the tasks that need to complete

in order to achieve the objective of the study.

ACTION PLAN
Responsible person/s,
Activity Department/s, Team/s Timeline
     
Create a credit policy
that suited for RCTI Management Team- RCTI June 1-21, 2020
Create a new process of
invoicing & collection
that is based in the
credit policy Marketing & Acctg Department June 22-July 5, 2020
Implement the credit Marketing & Acctg Department July 6, 2020

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policy
Assign or hire one
personnel focus on
monitoring of invoicing
and collection Acctg & HR Department July 6-12, 2020
Train the staff to lead
the new process Acctg Head- Acctg Department July 13-26, 2020
The staff still will make a
checklist per CE's if those
are billed, if the suppliers
are paid and if the July 27- October 25,
invoices are collected Acctg Department 2020
Report to the
management weather
the policy is effective or
not//Make
recommendation Acctg Department Ocotber 30, 2020

5.3.2 Balance Scorecard

The researcher recommends using a balance scorecard to identify and improve

various internal business functions and their resulting external outcomes. It also

used to measure and provide the feedback to organizations.

5.3.3New Process Design of invoicing to collection

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PROCESS DESIGN
6
7
STEP 1
Creation of a contract or C.E.

*If the client will pay

MKTG will The management will
ahead of time, the
offer a discount agree, if MKTG will
client will receive free
of collect the contract
1-month production
2/15 or 1/30 within
cost.
to client 30 - 60 days, he or she
*Offer Milestone of
can get 1% incentive.
Payment

STEP 2
MKTG proceeds to processing of
task/s indicated in the contract/C.E.

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Completed NO
task/s? Go back Step 2.

YES

STEP 3
MKTG requests
invoice to MRMO.

STEP 4
MRMO will check
the request and
record in the
invoice system.

STEP 5
If there is a prompt
in the system, Credit Collection
ACCTG will create Control Staff
invoice using
Quickbooks.

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STEP 6
ACCTG uploads Credit Collection
invoice in the IRS. Control Staff

STEP 7
MRMO will check
the IRS if invoice is
correct.

STEP 8
MKTG will email
report to client and
ACCTG.

STEP 9
ACCTG will send
invoice to client.

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NO If there is revision
Is invoice in invoice, go back
final? to Step 3.

YES

STEP 10
The Credit Collection Control
Staff will check the new credit
policy if it is implemented so he or
she can confirm with the client if
the invoice is for collection.

STEP 11
If the invoice is not collected
within 365 days, the Credit
Collection Control Staff will
report, and the management will
decide if it is subject for bad debts.

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STEP 12
ACCT. will collect
payment.

END

d. Account Receivable and Collection Policy

The researcher outlines a policy to establish the responsibilities, internal controls,

authorizations, accountability and procedures for the accurate and timely preparation of

clients’ invoices rendered to RCTI.

Policy

This policy applies to all Employees of RCTI who are responsible for invoicing clients

for services rendered and for collecting the payment owed to RCTI on account of these

invoices.

Accounts Receivable is an important asset of RCTI, and as such, should be safeguarded

by appropriate internal controls. This policy and procedures establish strong internal

controls over accounts receivable.

a. This policy and procedure apply to the following related parties

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Marketing Department

RCTI Engine

Accounting Department

RCTI Management

b. This Policy and procedures may supplement, as required, the following

accounts receivables as they are governed by separate legislation and/or policies

and procedure:

Invoicing

Collection

c. Where possible, written agreements should exist before services are provided to

the client. The written agreement must be signed by the representative of the

parties authorized to do so.

Responsibilities

The collection of accounts receivable is shared responsibility between the

Marketing Department, the engines, Accounting Department and the RCTI

Management. All staff will make every effort to collect outstanding accounts

receivable as efficiently and effectively as possible.

This section includes general responsibilities in relation to accounts receivable and

collection. Responsibilities specific to the department to maintained if they have

established their own internal policies and procedures.

a. The Authorized Person of Marketing Department or Engines is responsible

to:

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Ensure customers are invoiced in a timely and accurate manner.

Ensure communication to customers regarding collection occurs in a

timely and professional manner.

Review the aged Accounts Receivable report for their department on a

regular basis and follow up on Delinquent Accounts.

Provide information to Collection staff when requested.

Collaborate with Accounting Department in collection efforts. This may

include additional correspondence or other means of communication in

effort to collect the outstanding balances from clients.

Ensure where ongoing services are provided to a customer that has

become a Delinquent Account, to notify the customer that continued

access to the services may be denied, until payment in full is made, or

alternative repayment is arranged.

Ensure that clients that are not or are no longer eligible for credit that

payment in advance has been secured before receiving any future

services.

b. RCTI Management is responsible to:

Submit non collectible account receivable write off request to RCTI

President accordance with the guidelines established herein.

Approve all non- collectible accounts receivable write offs more than

365days.

Take whatever action is appropriate to bring the account into Good

standing, referred by the Acctg Department Head.

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Initiate legal proceedings for the purpose of collecting accounts

receivable.

c. Accounting Department Head is responsible to:

Manage the overall Accounts Receivable and Collection Policy and

Procedure.

Recommend to the Management/ President any write offs more than

365 days.

Approved change in payment terms from 30days to a longer term at the

request of the marketing department and engine.

d. The Credit and Collection Staff is responsible to:

Manage the daily functions relating to Accounts Receivable and

Collection including the MRMO.

Collaborate with Marketing Departments and Engines to resolve

disputed invoices/accounts, reconciling balances and resolving customer

issues.

Negotiate and recommend repayment arrangements.

Identify and recommend to the Department head of accounts to be

written off.

Monitor on a regular basis the activities of collection.

Collaborate with the marketing and engine in collection efforts

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Segregation of Duties

Segregation of Duties (SoD) separates roles and responsibilities to ensure that an

individual cannot process a transaction from initiation through to collection without the

involvement of others and thereby reduces the risk of fraud.

SoD is achieved for accounts receivable by the following duties being undertaken by

different individuals:

The billing for services is initiated by an employee in the marketing

department responsible for delivering he services.

The invoice should be prepared or approved by the MRMO.

Payment should be accepted and posted by the Credit collection staff.

Adjustment to customer accounts are recommended by staff and require

approval.

Collection steps are performed by the Marketing, engine, and

Accounting Department.

In limited situations, where it is not practical to meet the minimum requirements listed

in this policy, please contact the Accounting Department Head to establish alternative

procedures and mitigating controls such as increased supervision, job rotation or

regular review of transactions.

Accounts receivable Management

The fundamental rule of accounts receivables management is to minimize the time

between a sale and the cash collection for that sale. The longer it takes to collect the

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cash owed for the provision for services, the greater the risk that amounts owed will be

uncollectible.

The reduction of invoicing is a proactive measure to increase cash flow and prevent

Delinquent Accounts.

Policies to achieve the reduction of invoicing are as follows:

Offer discount for early payment

1. 2% discount if the invoices is paid within 15days.

2. 1% discount if the invoices is paid with 30days.

Offer freebies for early payment of contract

1. 1Million to 3million contract free 1-month production not exceeded

to 75, 000.00

2. 4 to 6 million contracts free of 1month production cost not exceeded

to PHP. 125, 000.00

3. 6 to 10Million contract free of 1month production cost not exceeded

to PHP. 200, 000.00

Offer milestone payment options (subject for changes based on the

agreement of the client and RCTI)

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Offer incentive for Marketing or Engine

1. 1% incentive if the invoices is paid within 31-45days.

2. .5% incentive if the invoices is paid within 46-60 days.

Procedures

Invoicing

Proper collection procedures begin with invoice preparation. Accuracy in invoicing

prevents delays that occurs when the clients disputes the invoice and returns it for

corrections, triggering a chain of events that is time- consuming and often costly.

Invoices should be prepared promptly and accurately based on supporting

documentation.

Marketing Departments should establish written procedures, including internal controls

to ensure the accurate, timely and completeness of their billing process. Contact

Accounting if assistance is required to draft these documents.

Invoicing should occur within 30day of the date of the delivery of

services or at the end of the billing period (i.e. for a month).

Invoices must be issued to the correct customer name and should follow

the guidelines as set in the Customer Master File Database Policy.

Supporting documents should be included with the invoice.

Credit/Refunds

A credit invoice should be used whenever an original invoice needs to be reduced or

cancelled because:

The customer did not receive the goods or service,

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The invoice was issued in error (i.e. wrong customer, quantity, or

amount)

Other valid reason (must be documented).

Collection Procedures

General Procedures

Customers with overdue accounts maybe contacted directly at any time

throughout the collection process to discuss payment of outstanding

accounts.

To keep customers advised of their account balances, monthly

statements will be mailed to all customers. The statement shall

summarize the amount owed, activity in the account during the month.

The Marketing department is primarily responsible for the collection of

amounts due. While the Accounting Department will assist the

marketing department in the collection of overdue accounts as required.

Allowance for doubtful accounts/Bad debt Expense

On an annual basis RCTI for a general allowance for doubtful accounts which is then

revised based a review of delinquent accounts. The formula to calculate the allowance

for doubtful accounts is based in part on the aging of Customers accounts:

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Monitoring

Aged receivable reporting

A successful collection policy requires that all problems be detected and acted on as

early as possible. Problems in individual accounts can be detected through a regular

analysis of an aged accounts receivable listing. An aged accounts receivable listing

divided each customer’s account into invoiced amounts that are: Current, 1-30days old,

31-60day old, 61-90days old, and 91 and over. The longer an account is pat due, the

higher the risk of default. Past due accounts can be identified quickly by reviewing an

aged accounts receivable listing, corrective action can be initiated promptly.

5.4 Areas for Further Study

A replica of this study can be carried out with a further scope to include more

advertising industry. A similar study can be done on other services-oriented

institutions and see whether the findings hold true. Future studies should apply

different research instruments like secondary data, focus group discussions to

involve respondents in discussions in order to generate detailed information

which would help improve effectiveness of account receivables management to

financial performance of the company.

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BIBLIOGRAPHY

Books

Financial Performance by Rory knight, Marc Bertoneche 2015

Financial Management volume 2 2015ed by Ma. Elenita Cabrera, Mba, Cma

Intermediate accounting 2019 by Zeus Vernon Millan

Original Financial Management volume 2 2015ed by Ma. Elenita Cabrera, Mba, Cma

Working capital Management educreation Pub. 9, 2015 Manika Garg

Other Related Research

Determinants of Accounts Receivables Management in the hotel industry in Kenya,

Simon Kimani Ngugi, 2015

Effect of Accounts Receivable on Financial Performance of Firms Funded by

Government Venture Capital in Kenya, Kilonzo Jennifer Mbula, Dr. Memba S.F., Dr.

Njeru A, 2016

Principles and Practice of Effective Accounts Receivable Management in Kenya: A

Case of Selected Manufacturing Firms in Thika Municipality, Kimani Joseph Waweru,

2015

Online

https://anytimecollect.com/advertising-media/

https://anytimecollect.com/accounts-receivable-tips-marketing-advertising-industry/

http://dijitalavrupa.bilgi.edu.tr/financial_accounting_ferris_second_ed_answers.pdf

https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/finance/ca-en-FA-

strategies-for-optimizing-your-accounts-receivable.pdf

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https://www.evokad.com/streamlining-policies-and-procedures-inside-an-advertising-

agency/

Financial accounting volume two valix-peralta-valix 2016

https://www.intrafocus.com/balanced-scorecard/

https://www.officialgazette.gov.ph/1992/04/13/republic-act-no-7394-s-1992/

https://www.thebalancesmb.com/how-to-strengthen-relationships-with-your-clients-

2951538

https://smallbusiness.chron.com/accounting-marketing-work-together-38276.html

APPENDICES

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a. Sample CE and contract

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b. ROA/ ROI/ Sales Growth

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c. Days Outstanding Sales = Average Account Receivables/Annual Total Sales *

365 days

d. Days Payable Outstanding = Average Account Payable/ (Cost of Sales

/Number of Days in Accounting Period

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e. Sample Computation for a Discount, Free Prod cost and Incentive

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F. Result of Interview

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f. DSO of Different Industry

Other Industry DSO

2019 2018 2017 2016 2015

600
400
200
0

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CURRICULUM VITAE

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