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Today, when Vietnam is going to market economy, three different types of business that operated for profit: manufacturing, merchandising, and service business are more growing up rapidly. Each type of business has unique characteristics. Manufacturing businesses change basic input into products that are sold to individual customers, such as Thai Tuan Textile and Garment Corporation, Dong Tam Joint Stock Corporation…Merchandising businesses also sell products to customers. However, rather than making the products, they purchase them from other businesses (such as manufacturers). In this sense, merchandisers bring products and customers together, such as 3A Pharmaceutical Co., Ltd - Abbott Authorized Distributor, Thuy Loc Co., Ltd - Shiseido Authorized Distributor in Viet Nam or Metro Cash & Carry… Service businesses provide services rather than products to customers, such Equinox Hair & Beauty, YKC Beauty Spa… One of the key factors underlying the growth of the Vietnam economy is the trend toward selling goods and services on credit. Because, in today’s global marketplace, competitive pressure and industry practice mandate that products and services be on a credit vs. cash-on-delivery basis. This practice often produces a receivable asset is one of the largest tangible assets on a company’s balance sheet. A review of the 2004 Fortune 500 certainly reveals this truth. Receivables ranked among the top three tangible assets for 75% of the top 100 companies. Surprisingly, management of this multi-million (or multi-billion) Vietnam Dong asset rarely receives much senior management attention, except when a serious problem develops. The custodians of the receivables asset are similar to umpires of a football game; they are not noticed unless they do a bad job. As you see above, merchandising is the type that is less complicated than manufacturing, but more complex than service. So we choose merchandising business
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to discuss the importance of receivable management. This is the AAA Pharma Co., Ltd – John & John Authorized Distributor in Viet Nam. 1.2. Significance and contribution of the thesis: It can be argued that revenue generation is the most critical function of a company. Any business tries to expense their substantial resources to generate increasing levels of revenue. But this revenue must be converted into cash since cash is lifeblood of a company. In the result, every Vietnam Dong of a company’s revenue becomes a receivable that must be managed and collected. 1.2.1. Benefits to the society: The good receivable management can be able to: • • 1.2.2. Decrease the risk of bankruptcy from receivable failure. Increase the trading environment well among business because of higher credit. Benefits to the business: Effectively managing the receivables asset is: • • • • • • • 1.2.3. To Increase cash flow. To get higher credit sales and margins. To reduce bad debt loss. To get lower administrative cost in the entire revenue cycle. To decrease deductions and concession losses. To decrease administrative burden on sales force. To enhance customer service.
Benefits to myself: Doing my thesis for two months, I get deeply inside receivable
management. It let me know how it affects on cash flow, runs effectively, and also gives more ways to improve cash inflow. It means that the way I can increase revenue, enhance customer satisfaction and reduce expense.
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1.3. important by • • • • • • •
Objectives of the thesis:
After studying in real case, you may know how receivable management is Identifying accounts receivable in merchandising business. Describing how accounts receivable are recognized, valued and disposed in the accounts. Interpreting the statement presentation and analysis of receivable. Illustrating receivable asset management effectively. Optimizing receivables. Providing proven principles for achieving benefits such as increased cash flow, higher margins, and a reduction in bad debt loss. Supporting technology. 1.4. Scope of the thesis: By time: 1.4.1.
AAA Pharma has expended their business more than ten years with many changes in receivable management. Because of limit time, I just focus within two years to analyze and improve it for current and coming year. 1.4.2. By space: AAA Pharma has not only a head quarter at Ho Chi Minh City but also many branches in all three areas in Vietnam: Ha Noi, Da Nang, Can Tho, Nha Trang, Hai Phong, Dong Nai, Nghe An and a representative office in Hue. Because of limit space, my major is receivable management at head quarter in Ho Chi Minh City. 1.4.3. By topic: The focus is primarily on commercial receivables management (business to business, and business to consumer) and fast-growing consumer product.
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CHAPTER 2 LITERATURE REVIEW i. Identify account receivables in merchandising business:
2.1.1. Types of receivables: The term “receivables” refers to amounts due from individuals and other companies. They are claims that are expected to be collected in cash. Receivables are frequently classified as (1) accounts, (2) notes, and (3) other. Accounts receivable are amounts owned by customers on account. They result from the sale of goods. These receivable generally are expected to be collected within 30 to 60 days. They are the most significant type of claim held by a company. Notes receivable are claims for which formal instruments of credit are issued as proof the debt. A note receivable normally extends for time periods of 60-90 days or longer and requires the debtors to pay interest. Notes and accounts receivable that result from sale transactions are often called trade receivable. Other receivables include nontrade receivables. Examples are interest receivable, loans to company officers, advances to employees, and income taxes fundable. These are unusual. Therefore they generally classified and reported as separate items in the balance sheet. 2.1.2. Reasons to offer credit: (chấp nhận cho nợ) Most of companies want to sell for cash at that time they provide goods because cash sales are normally rung up on a cash register (cashbox) and recorded in the accounts. But competitive pressure in the world economy mandates that goods are sold on credit as promotion, customer convenience. You may thinks this credit they offer is to bring more benefits only for customers. That is not enough. The more customers you have, the more profit you earn and the higher market share you get in
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competitive pressure. Credit had existed in business environment for long time ago; therefore it is available to customers and become a criterion they make buy decision. ii. accounts receivable: 2.2.1. Recognizing accounts receivable: Every sales transaction should be supported by a business document that provides written evidence of the sales. A sales invoice provides support for a credit sale. Two entries are made for each sale. The first entry records the sale: • • • • thu) Once receivables are recorded in the accounts, the next question is: how should receivables be reported in the financial statements? They are relatively liquid assets, usually converting into cash within a period of 30 to 60 days. Therefore accounts receivable from customers usually appear in the balance sheet as current asset. But determining the amount to report is sometimes difficult because some receivables will become uncollectible. Reflecting Uncollectible Accounts in the Finance Statements Each customer must satisfy the credit requirements of the seller before the credit sale is approved. Inevitably, though, some accounts receivable become uncollectible. For example, one of your customers may not be able to pay because of a decline in sales due to a downtown in the economy. Similarly, individuals may be laid off from their jobs or be faced with unexpected hospital bills. Credit losses are recorded as debit to Bad Debts Expense (or Uncollectible Accounts Expense). Such losses are considered a normal and necessary risk of doing business on a credit basis. Page 5 of 54 Accounts receivable is increased by a debit. Sale is increased by a credit. Cost of goods sold is increased by a debit. Merchandise inventory is decreased by a credit. 2.2.2. Valuing accounts receivable: (đánh giá khoản phải Three primary accounting issues are associated with
The second entry records the cost of goods sold:
Two methods are used in accounting for uncollectible accounts: 18.104.22.168. Direct write-off Method for Uncollectible Accounts: (phương pháp xóa sổ nợ khó đòi) When a particular account us determined to be uncollectible, the loss is charge to Bad Debts Expense. The entry is: • • Bad Debts Expense is increased by a debit. Accounts receivable is decrease by a credit.
Under the direct write-off method, Bad Debts Expense will show only actual losses from uncollectible. Accounts receivable will be reported at its gross amount. Although this method is simple, its use can reduce the usefulness of both the income statement and balance sheet. Moreover, Bad Debts Expense is often recorded in a period different from the period in which the revenue was recorded. No attempt is made to match bad debt expense to sale revenues in the income statement. Nor does the direct write-off method show accounts receivable in the balance sheet at the amount actually expected to be receivable. Consequently, unless bad debts losses are insignificant, the direct write-off method is not acceptable for financial reporting purposes. 22.214.171.124. Allowance method for Uncollectible Accounts: (Phương pháp dự phòng nợ khó đòi) The allowance method of accounting for bad debts involves estimating uncollectible accounts at the end of each period. This provides better matching on the income statement and ensures that receivables are stated at their cash (net) realizable value on the balance sheet. Cash (net) realizable value is the net amount expected to be receivable in cash. It excludes amounts that the company estimates it will not collect. Receivables are therefore reduced by estimated uncollectible receivable in the balance sheet through use of this method. The allowance method is required for financial reporting purposes when bad debts are material in amount. It has three essential features:
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• Uncollectible accounts receivables are estimated. This estimate is treated as an expense and is matched against sales in the same accounting period in which the sales occurred. • Estimated uncollectibles are debit Bad Debts expense and are credited to Allowance for Doubtful Account (a contra asset account) through an adjusting entry at the end of each period. • When a specific account is written off, actual uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable. 126.96.36.199.1. Recording estimated uncollectible: To illustrate the allowance method, assume that AAA Pharma has credit sales of 120 million VND in 2002. Of this amount, 20 millions VND remains uncollected at Dec 31. The credit manager estimates that 12 million VND of these sales will be uncollected. The adjusting entry to record the estimates uncollectible is: • • Bad debts expense is increased by 12 millions debits. Allowance for Doubtful Accounts is increased by 12 millions credits. Bad debts expense is reported in the income statement as an operating expense. Thus, the estimated uncollectible are matched with sales in 2002. The expense is recorded in the same year the sales are made. Allowance for Doubtful Accounts shows the estimated amount of claims on customers that are expected to become uncollectible in the future. This contra account is used instead of direct credit to Account Receivable because we do not know which customers will not pay. The credit balance in the allowance account will absorb the specific write-off when they occur. It is deducted from accounts receivable in the current assets section of the balance sheet. Allowance for Doubtful is closed at the end of the fiscal year. 188.8.131.52.2. Recording the write-off an uncollectible account: Companies use various methods of collecting past-due accounts, such as letters, calls, and legal action. When all means of colleting a past-due account have been exhausted and collection appears impossible, the account should be written off. Page 7 of 54
To illustrate a receivable write-off, assume that CFO of AAA Pharma authorizes a write-off of the 5 millions VND balance owed by Tien Viet Company on March 1, 2003. The entry to record the write-off of is • • Allowance for Doubtful Account is decreased by 5 million debits. Account receivable is decrease by 5 million credits.
Bad debts expense is not increased when the write-off occurs. Under allowance method, every bad debt write-off is debited to the allowance account rather than to Bad debts expense. A debit to Bad debts expense would be incorrect because the expense has already been recognized when the adjusting entry was made for estimated bad debts. Instead, the entry to record the write-off of an uncollectible account reduces both Account Receivable and the Allowance for Doubtful Accounts. A write-off affects only balance sheet accounts. The write-off the account reduces both Accounts Receivable and Allowance for Doubtful Accounts. Cash realizable value in the balance sheet, therefore, remains the same. 184.108.40.206.3. Recovery of an uncollectible account: Occasionally, a company collects from a customer after the account has been written off. Two entries are required to record the recovery of a bad debt: (1) the entry made in writing off the account is reversed to reinstate the customer’s account. (2) The collection is journalized in the usual manner. Recovery of a bad debt, like the write-off of a bad debt, affects only balance sheet accounts. The net effect of the two entries is debit to Cash and a credit to Allowance for Doubtful. Receivable is debited and the Allowance for Doubtful is credited in entry (1) for two reasons: First, the company made an error in judgment when it wrote off the account receivable. Second, after customers did pay, Account receivable in the general ledger and customer’s accounting the subsidiary ledger should show the collection for possible future credit purposes. 220.127.116.11.4. Bases used for allowance method: Company must estimate the amount of the expected uncollectible if they use the allowance method. Two bases are used to determine this amount: (1) percentage of sales, and (2) percentage of receivables. Both bases are generally
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accepted. The choice is a management decision. It depends on the relative emphasis that management wishes to give to expenses and revenues on the one hand or to cash realizable value of the accounts receivable on the other. The choice is whether to emphasize income statement or balance sheet relationships.
Figure 1: Percentage of sales In the percentage of sales basis, manager estimates what percentage of credit sales will be uncollectible. This percentage is based on past experience and anticipated credit policy. The percentage is applied to either total credit sales or net credit sales of the current year. For example, AAA Pharma estimated 1 percentage of net credit sales will become uncollectible. If net credit sales for 2002 are 800 million, the estimated bad debts expense is 8 million (1% * 800 million). This basis of estimating uncollectible emphasizes the matching of expenses with revenues. As a result, Bad Debts Expense will show a direct percentage relationship to the sales base on which it is computed. When the adjusting entry is made, the existing balance in Allowance for Doubtful Account is disregarded. The adjusted balance in this account should be a reasonable approximation of the uncollectible receivable. If actual write-off differs significantly from the amount estimated, the percentage for future years should be modified.
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Figure 2: Percentage of receivables Under the percentage of receivable basis, manager estimates what percentage of receivable will result in losses from uncollectible accounts. An aging schedule is prepared, in which customer balances are classified by the length of time they have been unpaid. Because of its emphasis on time, the analysis is often called aging the account receivable. After the accounts are aged, the expected bad debt losses are determined. This is done by applying percentages based on past experience to the totals in each category. The longer a receivable is past due, the less likely it is to be collected. So, the estimated percentage of uncollectible debts increases as the number of days past due increase. An aging schedule for AAA Pharma is shown:
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Table 1: Aging schedule Total estimated bad debts for AAA Pharma (2,228 millions) represent the amount of existing customer claims expected to become uncollectible in the future. This amount represents the required balance in Allowance for Doubtful accounts at the balance sheet date. The amount of the bad debt adjusting entry is the difference between the required balance and the existing balance in the allowance account. If the trial balance shows Allowances for Doubtful account with a credit balance of 528 million, an adjusting entry for 1,700 million (2,228-528) is necessary. Occasionally the allowance account will have a debit balance prior to adjustment. This occurs when write-off during the year have exceeded previous provision for bad debts. In such a case the debit balance is added to the required balance when the adjusting entry made. Thus, if there had been a 500 million debit balance in the allowance account before adjustment, the adjusting entry would have been for 2,728 million (2,228+500) to arrive at a credit balance 2,228 millions. The percentage of receivable method will normally result in the better approximation of cash realizable value. But it will not result in the better matching of expenses with revenues if some customers’ accounts are more than one year past due. In such a case, bad debts expense for the current period would include amounts related to the sales of a prior year. 2.2.3. Disposing of Account Receivable: In the normal course of events, accounts receivable are collected in cash and removes from the books. However, as credit sales and receivables have grown in significance, their “normal course of events” has changed. Companies now frequently sell their receivables to another company for cash, thereby shortening the cash-to-cash operating cycle. Receivables are sold for two reasons. First, receivable may be sold because they may be the only reasonable source of cash. When money is tight, companies may not be able to borrow money in the usual credit markets. Or, if money is available, the cost of borrow may be prohibitive.
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A second reason for selling receivables is that billing and collection are often time consuming and costly. It is often easier for a retailer to sell the receivable to another party with expertise in billing and collection matters. A common sale of receivable is sale to a factor. A factor is a finance company or bank that buys receivable from businesses and then collects the payments directly from the customers Factoring arrangements vary widely. Typically the factor charges a commission to the company that is selling the receivables. This fee ranges from 1-3 percent of the amount of receivable purchased.
Figure 3: Sales of receivable to factor iii. The statement presentation and analysis of receivable: 2.3.1. Receivables on the balance sheet: All receivable that are expected to be realized in cash within a year are presented in the Current Asset section of the balance sheet. It is normal to list the assets in the order of their liquidity. This is the order in which they are expected to be converted to cash during normal operations.
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Table 2: Balance sheet (partial) 2.3.2. Evaluating liquidity of receivable: Business that grant long credit terms tend to have relatively greater amounts tied up in accounts receivable than those granting short credit terms. In either case, it is desirable to collect receivables as promptly as possible. The cash collected from receivable improves solvency and lessens the risk of loss from uncollectible accounts. Two financial measures that are especially useful in evaluating the efficiency in collecting receivables are (1) the receivable turnover ratio, (2) the number of days’ sales in receivable or average collection period. The receivable turnover ratio measures how frequently during the year the account receivable are being converted to cash. For example, with credit terms of 2/10, n/30 days, account receivable should turn over less than 36 times per year. Receivable turnover ratio is computed as follow:
The average net receivable can be determined by using monthly date or by simply adding the beginning and ending account receivable balances and dividing by two.
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The number of days’ sales in receivable or average collection period is an estimate of the length of time the account receivable have been outstanding. With credit term of 2/10, n/30 days, the number of days’ sales in receivable should be more than 10 days. The number days’ sale in receivable is computed as follows:
An average daily sale is determined by dividing net sales by 365 days.
For the measures to be meaningful, a company should compare its current measures with those from prior periods and with industry figures. An improvement in the efficiency in collecting accounts receivable is indicated when the receivable turnover ratio increases and the numbers of days’ sales in receivable decreases.
Table 3: Evaluate the liquidity of receivables
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Account receivable management:
Figure 4: Receivable management process 2.4.1. Receivables Antecedents: Receivables antecedents are defined as all the up-front operations required creating a receivable. The antecedents are absolutely critical to the management of the receivables asset. They directly impact the quality and collectability of the asset and are the key driver of the cost to manage a company’s revenue stream. A simple formula to illustrate this point is: High customer satisfaction + Accurate invoice = Excellent receivables results This formula holds true even if the core receivables management functions (i.e., credit control and collections) are lacking. Excellent order fulfillment drives high customer satisfaction. In combination with accurate invoicing, the cost of delinquency, concessions, and management of the receivables asset can be dramatically reduced. When competent credit control and collections are added, the total receivables management benefits are maximized. 18.104.22.168. Quotation:
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Quotation is the process of extending a formal offer for a product or service to a prospective or existing customer. A clear, complete quotation lays the foundation for excellent fulfillment of a customer order and accurate invoicing. The two key attributes of a quotation that promote excellent receivables results are: • Feasibility/deliverability of offering. • Clear commercial terms and conditions agreed by both parties. The six elements of a quotation that affect receivables results are: 1. The unit and total price (clearly stated including all discounts) 2. Applicable sales or use tax 3. Freight/delivery (actual versus allowance, who pays it) 4. Payment terms (when is payment due?) 5. The timing of issuing the invoice (upon shipment, at the start or completion of a project, on reaching a milestone) 6. Description of product or service offered (product number, layman’s description, proper or trademarked product name).
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22.214.171.124. Contract administration: From a receivables management perspective, contract administration is all about charging the correct price on the invoice. Price discrepancies are the leading cause of disputed invoices, which result in delayed payments, short payments, and substantial rework. Contracts are used for larger customers who will receive frequent shipments of products and/or delivery of services over a period of time and are looking to ensure supply and receive the lowest price. Infrequent customers are usually served via individual orders covered by their written, electronic, or verbal purchase order. Contracts govern the commercial terms and conditions of the orders (or releases against the contract) that are received during the time period in which the contract is in effect. As we said in the “Quotation” section, it is vital that the contract clearly define the agreed commercial terms and conditions. In addition, the time period covered by the contract must be specified. 126.96.36.199. Pricing administration:
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Price discrepancies are the leading cause of invoice disputes. This is not surprising when you think of all the pricing incentives and promotions offered to give a company a competitive advantage and/or to affect customer buying behavior. Examples of pricing mechanisms designed to alter buying behavior are:
• Shifting orders from a busy season of peak demand to a slow season • Increasing individual order or shipment size • Increasing total volume purchased within a specified time period and so
on. Many of these pricing incentives overlap and can be quite complex, causing confusion among the supplier’s pricing and billing staff and the customer’s accounts payables and procurement staff. System tools may not be able to accommodate complicated pricing schemes and accurately price invoices. Unfortunately, the results can be very damaging.
188.8.131.52. Credit controls: The objective of credit controls is to manage the risk inherent in the extension of credit to promote sales. This risk is known as credit risk, and is the same risk incurred by lenders of money, such as banks. A company that sells only on cashin-advance or cash-on-delivery terms and requires a secure form of payment has no credit risk. However, global marketplace runs on credit. Goods are routinely delivered
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with the expectation that payment will be made according to the agreed payment terms. Credit risk has two dimensions: The first is the risk that payment will never be made. The second risk is that payment will be made late.
Credit Limits: Credit limits quantify the VND amount of risk a
company is willing to bear with an individual customer. It is analogous to the size of a loan or line of credit a bank would extend to one of its customers. In principle, it is a “line in the sand” beyond which the risk is intolerable. • Establishing Credit Limits for New Customers: investigation is necessary to establish a credit limit for a new customer. o Start with a credit application from the customer to your company requesting a credit account. o Investigate the applicant’s credit, secure payment, default, litigation reliable payment history information. o If you are unable to establish a credit limit with the above sources of information, proceed to check the trade and bank references. o Evaluate the information and assign a credit limit and a date the limit expires or is to be reevaluated. Financial strength (financial ratio analysis). Exposure calculated by the sum of estimated A credit
monthly sales and customized inventory to be held for the customer, multiplied by the payment terms. The exposure to any related parties must be added to aggregate total exposure to an entity. by credit reporting service. • Profitability of sales to customer. Building a Specific Reserve for High-Risk Customers Building a Specific Reserve for High-Risk Customers: Payment history with other suppliers as reported
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If management still wants to sell on credit beyond the limits the credit investigation indicates is prudent, an innovative technique is to provision the bad debt reserve for a specific customer at higher rates until the reserve is adequate to cover the risk of the exposure of that customer. Thus, the sale is made, but the added risk is recognized, and over time, the reserve is built up to cover any bad debt loss incurred from the customer(s). For example, management wants to sell VND 100,000 millions per month to a very high-risk customer on net 30-day payment terms. A credit investigation judges a VND 30,000 millions credit limit to be prudent. To enable this trading and cover the risk, all sales to this individual customer would be accompanied by an additional provision to the bad debt reserve of 25% of sales. Over a period of four months, assuming no bad debt loss and the customer paying promptly, thereby maintaining its receivable at VND 100,000 millions, a specific reserve would exist sufficient to totally cover the VND 100,000 millions exposure to bad debt loss. At that point, the specific provisioning would be tailored to maintain the reserve at the same level as the receivable. The company will have gained the profit from the additional sales yet still have recognized the risk of a potential bad debt loss. Credit management forwards these to the designated managers for approval with a summary of the financial impact of the nonstandard terms expressed in:
• The cost of financing the receivables for the extended period of time • The incremental exposure to bad debt loss and the additional expense for
the provision for bad debt loss
• The cost of prompt payment discounts • The profitability of the sales to the customer
Updating Existing Credit Limits:
In many respects, updating a credit limit involves repeating the steps taken in establishing the initial credit limit. However, there are two significant differences: (1)You have the customer’s historical payment performance for your invoices. This may be the most reliable and valuable data you have, particularly the trend in that payment performance.
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(2) You may have better access to the customer’s financial statements (if privately held) and better insight into its operations and financial strength. For example, if the volume of orders to you is rising, you can discuss with the customer how its business is progressing, new customers, sources of capital, and so on. As a supplier extending credit and bearing risk, you have a legitimate interest in this proprietary information. • Credit Control over Ongoing Business: The speed and volume of business today combined with lean staffs makes it easy for credit controls to be evaded or ineffectively applied. To counteract this pressure, two principles must be followed:
Some controls should be absolute and enforced by the system. Controls requiring manual involvement should be periodically
evaluated to ensure the staff time they consume is worth the benefits they generate. The most important control in the category of manual involvement is the limitation of risk exposure to customers who are over their credit limit and/or delinquent. 184.108.40.206. Order processing: Order processing is all about fulfilling a customer order properly, quickly, and invoicing it accurately. This creates a happy customer, and sets the stage for a prompt, full payment. Failure to fulfill and bill an order accurately guarantees a delayed and/or short payment, a dissatisfied customer, and the extra cost of reworking the order, processing a return, issuing a credit, reinvoicing, and so on. In other words, it is a mini business disaster. The longer-term effect is to drive customers to the competition, which will fulfill and bill their order properly. 220.127.116.11. Invoicing: The purpose of presenting an invoice to a customer is to secure payment for having provided a product or service. Accurate invoicing directly drives:
• Lower receivables delinquency and increased cash flow. • Reduced exposure to bad debt loss. • Lower cost of administering the entire revenue cycle.
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• Fewer concessions of disputed items. • Enhanced customer service and satisfaction
Collection process: Management of the receivables asset begins when all of the antecedent
functions are completed and a receivable is posted to the detailed accounts receivable ledger (a comprehensive list of all amounts owed the company). The receivables begin aging immediately, increasing the cost of financing them and increasing the risk of nonpayment. Management of this asset (which is one of the largest assets of the company) involves safeguarding the asset and accelerating cash inflow (increasing asset turnover). If you view this asset as a vault of cash, think of the precautions a bank takes to protect its cash reserves. However, receivables are much more fluid and an integral part of doing business, so the safeguarding and acceleration of turnover must be accomplished:
• At low cost
• Without strangling sales volume
• Without alienating customers and colleagues.
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Figure 5: Collection Timeline The starting point for the collection process is the collection timeline. The collection timeline defines which steps are taken at which points in time and by whom in both:
• The normal collection process. • The increasingly severe actions that will be taken with a customer who is
seriously past due. It is important that this timeline is agreed to by all of senior management, so that when it is time to invoke its more severe remedies, sales, general management, and finance present a united front to the customer. Customer Contact Timing: The general rule of thumb for collection contact is: More (contact) is better than less, and earlier (contact) is better than later. Best Practice for collection contact is proactive collection contact; that is, calling the customer prior to the due date. The major benefit of this approach is to identify problems with an invoice prior to the due date, in the hope they can be resolved quickly and payment received within terms. The basic principles of proactive collection contact are:
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• It is customer service–oriented, to promptly identify and resolve any
discrepancies with the order fulfillment or invoice. If no problems exist, inquire if the invoice is scheduled to be paid by the due date.
• It occurs prior to the due date, so resolution can be effected to ensure that
payment can be received by the due date. It also educates the customer that you are serious about enforcing your payment terms.
• It is still a collection call. Ask for the payment on the due date.
Proactive contact should be focused on large balance accounts, as it is more time consuming than a “straight” collection call on past due invoices. Customer Contact Methods: The most effective method of customer contact is made via telephone, which can elicit a timely or, it is hoped, immediate response. Once you have the proper person on the phone, you are well positioned to secure a commitment to pay or determine the reason for nonpayment. E-mail is a very effective method of communicating with accounts payable departments. Many people respond more promptly to e-mails than voice mails, and the e-mail message is much better at conveying invoice numbers, amounts due, and so on. Collection letters have limited effectiveness. They are best used with lowpriority, small-balance accounts that probably will not receive a call or personalized e-mail. For such accounts, a collection letter is better than no contact at all. Negotiation Skills and Empowerment: In practices, collection process includes empowering collectors to negotiate and to concede charge during negotiation. Limits must be placed on the amount that can be conceded. Concessions can also be limited to late payment fees and unearned prompt payment discounts. However, to achieve best results most efficiently, a collector must be empowered to write off certain amounts. This empowers collectors with the customer and eliminates the time required to secure approvals. 2.4.3. Evaluating the liquidity of receivables:
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As I mention in part 2.3.2, we have to evaluate the efficiency in collecting receivables by (1) the receivable turnover ratio, (2) the number of days’ sales in receivable or average collection period. After evaluating liquidity of receivable, we get two points: (1) how much money we are able to collect at due day, (2) how much money we have to collect for past due invoices, then making critical collection process. 2.4.4. Financing of the receivable asset: There are various techniques for using the receivables asset to obtain accelerated funding instead of waiting for customers to pay the invoices. All of these techniques:
• Involve an incremental financing or borrowing cost. • Impose duties and restrictions on the borrower. • Are structured differently.
Sales of receivables: This is the simplest form of financing, where a company sells its receivables asset to a financing entity. The financing entity takes title to the asset and pays a lump sum in return. Of course, the seller does not receive 100 cents for every dollar of receivables sold. The purchase price is reduced for:
• The interest value of the money advanced by the buyer. The rate is based
on prevailing interest rates, the length of time the lender expects to wait before receiving payment for all invoices purchased, and the risk premium the lender perceives for the risk of nonpayment of the purchased receivables.
• Expected dilution (deductions, discounts, etc.) incurred in collecting the
• The cost to the buyer of collecting the receivables. Since the receivables
have been sold to the buyer, the buyer will have to collect them. Usually, the seller mails a letter to customers informing them of the assignment of the receivables to the buyer and how to pay (payee name, address).
• Aprofit element.
In addition, the buyer may not purchase all of the receivables offered.
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The buyer may eliminate receivables owed by high-risk customers, either individual customers or a class of customers, such as foreign accounts. The advantage to the seller is that it receives the funds in a matter of days instead of waiting 30 or more days. However, this can be an expensive way to obtain financing. Factoring receivable: Factoring of receivables is very similar to the sale technique described above. The major difference is that factoring is a continuous, ongoing purchase of receivables, compared to a transaction for a finite portfolio of receivables. The factor serves as the seller’s receivables management function, performing credit, collection, and payment processing functions. However, the factor will purchase receivables from only customers whose creditworthiness has been vetted and approved. If the seller sells to customers not accepted to the factor, the seller has to perform the receivables management function itself. Collateralizing Receivable: Collateralizing receivables involves pledging the asset as collateral for a loan. The simplest form is pledging them as a condition for obtaining a term loan. The company continues to administer them as always, except there will be covenants specifying standards of aging, concentration, and so on to be met, and reporting requirements from the lender. Often the lender will exclude receivables over 90 days past due and expected dilution from the collateral valuation and reduce the amount financed. Another form of collateralization is securitization, where the receivables asset is used to secure commercial paper or other financing instrument issued to thirdparty investors. Securitization is an ongoing financing instrument with acceptable receivables purchased by the financing entity on a continuous basis. The seller manages the asset as always, but with additional procedural and reporting duties and covenants. The cost of all of these financing techniques is inversely related to the quality of the receivables asset. The discount or interest rate used will be based on the
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factors described in the “Sale of Receivables” section. Evaluation of the cost involves two key elements:
The cost of the funds obtained through receivables financing compared The cost of managing the receivables asset and complying with the
to the cost of funds obtained through other financing techniques
financing entity’s requirements compared to the cost of managing the asset without receivables financing arrangements Financing receivables is often used when other financing sources are unavailable or exhausted. It is difficult to justify incurring significant costs to receive the cash from receivables 30 to 50 days earlier. Remember, when receivables are financed, it is usually most or all of the asset. In conclusion, the financing of receivables can be an important source of funds, but it can be expensive and should be evaluated carefully. CHAPTER 3 COMPANY PROFILE • Company overview:
AAA Pharmaceutical Co., Ltd is the authorized distribution of Johnson & Johnson in Viet Nam from June 15, 1997. AAA Pharma headquarter is located at 18 Luy Ban Bich street, Tan Thoi Hoa Ward, Tan Phu District, Ho Chi Minh City. Their business is to distribute a wide range of branded high-quality consumer products such as Johnson’s Baby Care, Johnson’s Skin & Hair Care, Oral Healthy Care, Women’s Health… In additional, they also distribute some specific pharmaceutical products for internal hospital uses only and some types of medical devices. Johnson & Johnson is a global American pharmaceutical, medical devices and consumer packaged goods manufacturer. It was founded by Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson in 1886 with 14 other members on a revolutionary idea: “Doctors and nurses should use sterile sutures, dressings and bandages to treat peoples’ wounds.” Since then, they have brought the
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world new ideas and products that have transformed human health and well-being. Every invention, every product, every breakthrough has been powered by generations of employees who are inspired to make a difference. They credit their strength and endurance to a consistent approach to managing their business, and to the character of their people. They are guided in everything they do by Their Credo, a management document authored more than 60 years ago by Robert Wood Johnson, former chairman from 1932 to 1963, and by four strategic principles. (See in Appendix) The corporation's headquarters is located in New Jersey, United States. The corporation includes some 250 subsidiary companies with operations in over 57 countries. Its products are sold in over 175 countries. Johnson & Johnson's brands include numerous household names of medications and first aid supplies. Among its well-known consumer products are the Band-Aid Brand lines of bandages, Tylenol medications, Johnson's baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses. Johnson & Johnson's commitment to innovative health care products has resulted in consistent financial performance. It has 75 consecutive years of sales increases and 45 consecutive years of dividend increases. Its common stock is a component of the Dow Jones Industrial Average and the company is listed among the Fortune 500. • Company milestones: AAA Pharma Co., Ltd was established under Business License No. 041476 dated June 5th 1997 by Department of Planning and Investment of Ho Chi Minh City and Establishment Permit No. 1155/ GP-UB dated May 26th 1997 by the People’s Committee of Ho Chi Minh City, which the original trading name was AAA Trading Company limited. AAA Trading Co., Ltd started operations on June 1997, which had a legal entity, private seal and independent bank account. The business scope which Board of Directors stated at the beginning was to import and to distribute Health Care products of Johnson & Johnson in Vietnam, but the company had to sell other products in order to avoid profit loss for beginning
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period. Thus they traded in handicraft, chemical cosmetics, textile, clothing, office stationery industry and trading services at first merchandising activities. Once the company recognized that revenues from these kinds of products would decrease in the near future because of strong competition of substitutes, moreover; the operation situation was strong enough to distribute Johnson & Johnson Health Care products as they stated at the beginning. Then the company changed gradually from unstable sources of these other products to target Johnson & Johnson products. Based on Vietnam law, distributors of medical products, like Johnson & Johnson health care product, have to pharmaceutical companies. So from July 2004, AAA trading company limited changed their name to AAA Pharmaceutical Company limited with their new logo:
Tax code: 030.1000.691 Email: firstname.lastname@example.org AAA Pharma was founded with VND 1.2 Billion charter capital in 1997. As Dec 2005, AAA charter capital mounted to VND 15 Billion. AAA Pharma Headquarter in Ho Chi Minh City plays the key function in operating all the main activities. And this is also the center of training and upgrading the staff quality for all of our nationwide branches. They have the most extensive infrastructure network in Vietnam with branches in Hanoi, Da Nang, Can Tho, Nha Trang, Hai Phong, Dong Nai, Nghe An and representative office in Hue. In response
1998 : Ha Noi Office 2006 : Hai Phong Office
2006 : Da Nang Office
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2006 : Dong Nai Office 1997 : HCM Headquarter 2004 : Can Tho Office
to their rapid growth, an expansion plan for the next coming years is to open more branches in some key provinces such as Thanh Hoa, Kon Tum, Vung Tau, etc… Figure 6: Distribution network • a. i. Company organization: Company structure: Board of directors: Head of the company’s managers is the Board of Directors. Chairman of Board of Directors is an operation manager, representative legal entity. He takes all responsibilities for results of merchandising business and fulfils obligations to Vietnam’s government. There are two vice directors and an assistant in operating the business. They can be as representative chairman in solving some problems, making contracts under their authorities. ii. Accounting-Finance department: (see figure xx in Appendix) The accounting department includes ERP, cashier and many accountants. Head is chief accountant that take responsibilities in - Recording all transactions incurred and doing financial reports about business performance and business situation. - Balancing capital sources, monitoring and allocating profit for the business. - Using both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations. - Gathering and reporting all information that is relevant and timely to the decision-making needs of management, and other involved appropriate authorities. - Implementing financial banking system, monitoring tax payment. - Supporting to make plan for importing goods, contracting with banking and preparing all relevant import documents. Monitoring imported tax, valued added tax to Vietnam’s tax authorities. - Receiving and storing all documents related to accounting activities. iii. Admin department: (see figure xx in Appendix) - Organize and implement work related to administration.
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- Implement and solve administrative formalities (internal and external). - Solve problems related to administration happened. Ensure admin activities are to support other departments. - Examine all business contracts, ordering and buying POP used in operation. - Monitor documents in and out, materials, and files; deliver them to right place. Take responsibility in maintaining and storing documents, files is to ensure that all information is safe and security. - Organize to monitor and use all tangible assets, equipments in company such as car, truck, official equipments, and communication equipments… - Create comfortable working environment followed by board of directors. - Gather and report organization and administrative things to board of directors. iv. Marketing department: - Take all responsibilities in building and improving company’s image. - Find out alternative solutions to support sales department to increase sale volume. - Propose and implement promotional programs to end user and wholesalers. • DGT (Demand Generation team): - They are sales promoters. They market J&J products in hospitals, pharmacies …in order to create the demand. In addition, they also report their activities and results monthly to their CD Sup. - They frequently make a proposal, plan to sales departments. v. Sales department: 18.104.22.168.1. Customer Develop Director (CD Director): Head of sales department is CD director. His main role is to monitor whole sales system in order to fulfill sales targets by planning, organizing, controlling and evaluating them. - Together with board of directors, they make sales strategies. Page 31 of 54
- Specific sales plans and tactics to implement their strategies. - Set up sales target; analyze and forecast to order and monitor credit customers. - Deploy sales plan to CD Sup. 22.214.171.124.2. targets for CD Rep in their areas. - Make a plan to control and assess effectiveness of CD Rep. - Motivate juniors and monitor credit customers. - Juniors of CD Sup are CD Rep, CD Rep Supermarket, and DGT. 126.96.36.199.3. Customer Develop Representative (CD Rep): - CD Rep is middle point between CD Sup and agency. - Each CD Rep manages each agency and takes responsibility in monitoring and assessing taskforce to implement sales target that CD Sup requires. 188.8.131.52.4. Customer Develop Representative supermarket (CD Rep Supermarket): - CD Rep is middle point between CD Rep Supermarket and Supermarket. - Responsibilities of CD Rep Supermarket are the same to one of CD Rep. - Also manage promoters at supermarket. 184.108.40.206.5. Promoter: - They are youngest and account for most of staffs in the company (40%). They are students that are studying and working as part-time job. They have good communication skill and well-informed about company’s products thorough training programs. - Support promotional program from J&J to taskforce and DGT. - Weekly reports about sale volume of supermarkets, shops and outlets that they manage to their CD Rep. 220.127.116.11.6. Taskforce: - They play role in selling, marketing, distributing from the company to wholesalers and retailers. And they have to seek new customers. Customer Develop Supervisor (CD Sup): - Receive sales plan, target form CD Director, then set up and deploy sales
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- Direct contact to customers, satisfies customers’ demand, and explains all information that customers need. - Periodic reports about sale operation to their CD Rep. - Support promotional program from J&J. vi. Inventory: This department consists of chief inventory, warehouse-keeper, labors in sticking line, inbound, outbound and delivery team…They take responsibilities for - Managing all activities in inventory followed specific functions and missions delegated to get best results. - Supervising imported products from ports and air to inventory. Receiving, storing and delivering goods, arranging workforce in inventory, ensuring goods in and out to follow business’s plan. - Arranging and storing goods is followed right standard of product. - Following to deliver goods to branches. - Be responsible for the quantity and quality of goods in warehouse. Conserve and arrange goods to ensure that they are easy to find, look, take and check. - Implementing all the labor regulations and internal rules in the warehouse. - Building up and continuously improving the warehouse’s operations in order to get more professional and effective. - Coordinate to other departments to insure an effective working process. b. Company workforce: At AAA Pharma, they consider human resources as their utmost important key for success. AAA Pharma invests in the development of workforce through a combination of classroom learning and online training that offers high quality course curriculum that facilitates continuous learning. These training resources for our valued employees are designed to enhance the mastery of vital competencies for career development. There were a few of staffs that operated separately at first, now AAA Pharma is proud of younger staffs that are active, sincerity, honest…. There are 700 staffs (full time-520, part time-180, 70% female)
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All staffs recruited have to follow recruitment process, and get consistent training, advanced training and updated learning to adapt environment working, company’s culture.
Special training program: career day and management trainee.
- In order to build up workforce, AAA Pharma organizes often career day in Ho Chi Minh City and these provinces that company has its branch. This is not only an opportunity that students have a job to get income but also opportunity that orient students’ career and work in real through part time job. - In response to their rapid growth, AAA Pharma set up Management trainee program for supporting the middle managers. The first program is done in Ho Chi Minh City with the first upgraded students at International University. This takes one year to train, then based on their results and abilities; they are allocated in specific department. • 1. Merchandizing operation: Products:
AAA Pharmaceutical Co., Ltd is the authorized distributor of health care J&J products in Vietnam. They divide products into three groups: - J&J group: including products used in baby care such as body wash, shampoo contained anti-infective ingredients that not make allergic to baby’s body, skin and eyes; powder classic, powder prickly heat, powder double protect blossom and Cologne blossom, …these are main goods in AAA Pharma, they are accounted for 65% of sales volume. - Beauty group: including products used in skin care, oral care, such as CLEAN & CLEAR Facial wash, CLEAN & CLEAR Acne Clearing Cleanser, CLEAN & CLEAR Balancing Moisturizer, CLEAN & CLEAR Deep Action Cleanser…These are potential goods in AAA Pharma, but they are new kinds in Vietnam, so they just are accounted for 18% of sale volume. - Consumer Health Care group: including products used in women’s health care fields such as tampon, feminine hygiene solution under Carefree and
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Modess. Like Beauty group, these are potential goods, but they just are accounted for 17% of sale volume because of entrance in Vietnam. 2. Distribution network: AAA Pharma distributes goods thorough 2 channels:
- General Trade channel: is a channel that AAA Pharma uses to
distribute their goods to whole national retailer: shops, outlets, retailers, pharmacy…. This is main channel, and accounted for 76% whole distributed goods. Because 7075% Vietnamese lives in countryside and they are not familiar with shopping in supermarket. So AAA Pharma considers General Trade as main channel for a long time.
- Modern Trade channel: is a channel that AAA Pharma uses to
distribute their goods to whole national supermarkets and bookshops such as Metro, Big C, Co-op Mark, Maximax, Citimax, Vinatex…This is a potential channel because sale volume of each supermarket is greater than one of retailer and always stable. Now, this channel is accounted for 24% whole distributed goods and so increase more in large city Nha Trang, Ho Chi Minh, Ha Noi, Hai Phong, Can Tho, Da Nang. • Orientations from now to 2010: 3.5.1. Infrastructures:
Company’s development plan from today until 2010: - Focus on invest in infrastructure of office and storage at Dong Nai branch. .This will be main office to develop market of company in future. - Implement and finish project that move main office of the company to Cat Lai – Binh Duong (5ha) in 2015.On the other hand, office at HCM city will become branch at HCM cit - Improve continuously office and warehouse at HCM city to meet current development demand of the company. 3.5.2. Developing Strategies: Human resource: Board of Director always improves effective in human resource management. It is core element in every plan, restructure and operation of
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company. Developing strongly human resource program is to bring high efficient. Invest much in training specialize knowledge and integrity for employees. In 2008, the company is implementing and applies Quality Control Management ISO 9001:2000. The objectives that board of Directors plan in applying and implementing International Quality Control Management:
Figure 7: Company’s Vision 3.5.3. Products: - The company‘s objective is that focus on traditional product J&J (account for 65%), on the other hand, develop products in Beauty and CHC - In 2008, the company will distribute one more product – Listerine. This is a familiar product with consumer that had market and market shares. So, the Company believes that this product will contribute in development of the company. Distribution channel: - In response to our rapid growth, an expansion plan for the next coming years is to open more branches in some key provinces such as Thanh Hoa, Kon Tum, Vung Tau, ect … - The objective is that hold market of GT channel because this is competitive advantage of AAA Pharma compare with competitors about: physical Merchandizing activities:
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system, manpower and relations. Besides, the company focus on develop of MT channel (this channel have stable revenue and development ability) - Today until 2010, the company will build 1 new distribution channel, this is distribution channel that distribute all pharmaceutical products – OTC channel. Physical system and human resource that serve for this channel are being prepared. CHAPTER 4 EMPIRICAL STUDY The operating cycle of AAA Pharma: consists of the following basic transactions: (1) purchases of merchandise, (2) sales of merchandise, often on account (3) collection of the account receivable from customers. As the word cycle suggests, this sequence of transactions repeats continuously. Some of the cash collected from the customers is used to purchase more merchandise, and the cycle begins new. This continuous sequence of merchandising transactions is illustrated below:
By recognizing the importance of accounts receivable management, I want to analyze and improve accounts receivable management in specific case, AAA Pharma Co., Ltd.
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Firstly, I analyze receivable policy for each type of customers in distribution network. Secondly, I estimate how these receivable policies affect on cash flow by: • • • • • • Aging report. Receivable turnover ratio.
Thirdly, I evaluate each receivable policy by: How are order taken? Credit processing. Credit decision. Collection efforts • • • • b. Sales Director. Account receivable manager in ERP and accounting department. CD rep. Chief financial officer. EMPIRICAL STUDY
After having the view in general, I make an interview with:
As I mention above, AAA Pharma distributes goods thorough 2 channels:
- General Trade channel: is a channel that AAA Pharma uses to distribute
their goods to whole national retailer: shops, outlets, retailers, pharmacy…. This is main channel, and accounted for 76% whole distributed goods.
- Modern Trade channel: is a channel that AAA Pharma uses to distribute
their goods to whole national supermarkets and bookshops such as Metro, Big C, Coop Mark, Maximax, Citimax, Vinatex… Now, this channel is accounted for 24% whole distributed goods. 4.2.1. Receivable policy in AAA Pharma: In Modern Trade channel: including Supermarket such as Coop, Big C, Fivimart, Van Lang, Maxi, Vinatex, Binh Dan… and Hypermarket such as Metro. This is a potential channel because sale volume of each supermarket is greater than one of retailer and always stable. So they have to get the contract signed, they give
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more benefits or accept some of requirements in contract. For example, advertising support, incentive rebate, additional bonus, opening support, renovation support, damaged goods allowance, barcode charge, transportation and installation support, and quality assurance support. Credit line Discount Payment term Payment method On-time payment incentive Hypermarket No limit on 3% pretax price 45 days from invoice date bank transfer 3% on invoice paid by 45 days Supermarket No limit on 4% pretax price 15 days from invoice date bank transfer 2% on invoice paid by 15 days 3% on invoice paid by 7 days 4% on invoice paid on delivery 0.75%/month on overdue 0.75%/month on overdue invoice value if overdue invoice value if overdue exceeds 45 days from exceeds 45 days from invoice date. invoice date.
Overdue payment penalty
Table 4: Receivable policy in Modern Trade channel In General Trade channel: because of focus of Trade marketing, they divide GT channel into 2 types of trade. (See figure xx in Appendix) Firstly, Trade Systems are Distribution Accounts that focus on Revenue base. It is like AAA Pharma but at smaller size. In Ho Chi Minh network, for example, they divide Sales Organization into many branches based on administrative division, which means Districts. In every district, they choose one large Distribution Accounts to manage whole this area. Secondly, Trade Sales are DNAs (Developed new accounts) that focus on purpose base. It is so flexible to develop new accounts and enlarge their size, volume for entering trade systems; or to cover the market for higher market share. Trade Sales is including direct sales and retailers.
Total 6 Cities - Val% - Baby Segment Johnson's Baby Pigeon Pureen DEC05 66,6 17,0 16,3 DEC06 68,9 19,5 11,4 DEC07 67,8 18,6 11,0 MAR08 70,2 16,3 11,1
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Table 5: Market share in baby segment
Total 6 Cities - Val% - Total Shower Gel Johnson's Baby Lux Dove Enchanteur X-Men Double Rich Lifebuoy Romano Pigeon Palmolive
DEC05 11,9 12,1 11,4 7,4 6,3 3,8 1,6 4,0 3,0 4,3
DEC06 13,3 10,2 10,1 7,3 5,6 4,3 2,1 3,5 3,7 2,9
DEC07 12,0 10,4 9,1 6,9 6,7 4,9 4,5 3,7 3,3 3,2
MAR08 10,9 10,1 8,8 8,6 5,7 4,7 4,6 3,2 NA 3,1
Table 6: Market share in Shower Gel The receivable policy in Trade Systems is similar to Supermarket, except they have credit line based on their area and sales strategy of company and discount on 5% pretax price. To trade Sales, they have specific for each type: Credit line Discount Payment term Payment method Collectors 4.2.2. flow: Items that affect Cash flow from Accounts Receivables: • • Competition. Written corporate policy that include: - Terms of sales. - Collection techniques incorporated. Page 40 of 54 Retailer Limit No discount 1 days from invoice date Cash on delivery Sales men Market Limit on 2% pretax price 1 days from invoice date Cash on delivery Sales men
Estimate how these receivable policies affect on cash
- Support by upper management of its credit department versus sales department. • Corporate customer philosophy referring to how a customer is treated. • • • • Size and kill/experience level of the individuals in the credit and collections areas. Lack of computer systems that are conducive to improving cash flow efforts Sales support of cash flow as well as cooperation with the credit area and their integrity plus incentive to cooperate. Actual top management support of cash flow, not just a written policy and procedures manual. Receivable Turnover ratio:
2005 82.946.213.00 9 5.662.719.98 9 14,64776877 2006 18.104.22.168 7 8.912.647.72 4 12,02080318 2007 135.344.029.28 6 17.968.700.85 5 7,532210057
Net Sales Average receivable Receivable turnover
Table 7: Receivable turnover in 2005, 2006, and 2007 As you know that, the payment term is 45 days for Metro, 15 days for Supermarkets and wholesalers, and 1 day for retailer. In their distribution, Supermarket and wholesalers are accounted for 58% volume sold; Metro is accounted for 14% and Retailers for 28%. Receivable turnover in 2005, 14.6 times is less than payment term for Metro, Supermarket and wholesalers. This receivable turnover decreased (14.6-12.02) nearly 3 times in 2006, and (14.6-7.53) 7 times in 2007. Day Sale Outstanding:
2005 7.124.871.41 6 227.249.89 9 2006 10.700.424.03 2 293.526.53 2 2007 25.236.977.67 8 370.805.56 0
Account receivable Average daily sales
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Table 8: DSO in 2005, 2006, and 2007 You see that DSO is increasing from 2005 to 2007. DSO in 2007 is double DSO in 2005. It means that many invoices were past due. From this point, we may think that receivable management is not good. Now we turn to see Bad debt at 12/31/2006 and at 12/31/2007(see full table xx in Appendix)
2005 53.671.54 2 7.124.871.41 6 0,75% 2006 11.196.85 7 10.700.424.03 2 0,10%
Bad debts Account receivable % Bad debt
Table 9: Percentage bad debts of Account Receivable
2005 53.671.54 2 82.946.213.00 9 0,06% 2006 11.196.85 7 22.214.171.124 7 0,01%
Bad debts Net Sales % Bad debt
Table 10: Percentage bad debts of Net Sales
2004 14.678.53 8 2005 53.671.54 2 2006 11.196.85 7 2007 0
Table 11: Bad debt in 2004, 2005, 2006, and 2007 based on invoice day Bad debts percentage of Account Receivable and Net Sales was decreasing. And these bad debts are in accepted limit. 4.2.3. Evaluate each receivable policy: a. How are order taken? (Receivable Antecedents) To Metro, Supermarket, and wholesales they receive order via fax. To retailers, they receive form sales men. In 2005 and 2006, they had taken an order for 2 days, 3-4 days if so far. They use Rhub to make a tax invoice. Rhub is software used to manage good inventory, make an
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invoice based on what information you had input already: price, tax rate, discount, customer’s address, payment term… b. Credit processing: From Credit application to credit –Approved Customers, they take 8 days to 15 days making decision. The CD Sup receives Credit application, assesses Credit application, then make a proposal to Sales Director. Sales Director review and assess this proposal, then discuss to CFO and Marketing Director to giving Credit line if approved. It has been approved by Sales Director, CFO and Marketing Director. c. Credit decision: The main Credit decision makes on Credit line. It is calculated by a special formula of CD Sup including target sales, market share at this area. To wholesaler, after calculating, they assign target sales to customers within 4 weeks, and then they divide by 4. It is an amount the customers have to take a deposit with the company or letter of credit from banks. The triple of the amount is credit limit that is the largest of volume customers can make an order. d. Collection efforts The system provides a list of customers that are past due as of day; call a past due notice to them, followed by form letters, followed by a call and more form letter; end by either collecting or placing for collection.
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CHAPTER 5 DISCUSSION i. If it was easy, everyone would do it (well): Management of the receivables asset is a demanding task. The vast majority of companies expect that over 99.9% of all billings will be collected. Collecting ninety five percent of revenue is not good enough. 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 15 days of the due date. Management expects that the asset 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. Quite a bargain! Management of the receivables asset is a complex task. It addresses the ramifications of practices and processes usually outside the span of control of the responsible manager. It requires balancing of opposing priorities. It is affected by the state of the domestic and global economy, interest rates, foreign exchange rates, banking regulations and practices, business law, and other factors. Excellence in receivables management is a combination of art as well as science; it involves business process, technology tools, staff skills, motivation, company culture, changing behavior of customers and coworkers, the right organization structure and metrics, incentives, and flexibility to deal with changing external influences. ii. Influences outside the control of the responsible manager:
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The receivables asset is sometimes called the garbage can of the company. This is because the receivables asset reflects the quality of the entire revenue cycle operation. If an error is made in taking an order, fulfilling it, invoicing it, applying the customer payment, or if the customer is dissatisfied with the product or service, it will manifest itself as a past due or short payment in the receivables ledger. The quality of the receivables asset is an excellent barometer of customer service. It is feedback the customer willingly and quickly gives. It is tempting to call it a free quality control measurement system, except it is not free. The firm does not have to pay customers for the feedback, but it does incur costs in remediating the problems.
Excellence in receivables management requires trade-offs between conflicting goals. The trade-offs are best balanced in accordance with the company’s overriding strategic objectives. To optimize the trade-off, the relative ranking of these strategic objectives must be understood:
• Sales growth • Profitability • Cash generation • Market share
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• Risk tolerance
The conflicting objectives are to:
• Loosen credit acceptance criteria and controls to boost sales versus
tightening credit controls to minimize the investment in receivables and the exposure to bad debt loss.
• Achieve strong receivables management results and provide excellent
financial service to your customers versus minimizing the cost of the function. iv. Credit policy: The global marketplace runs on credit. Goods and services are routinely delivered with the expectation that payment will be made according to the agreed payment terms. Credit risk has two dimensions. The first is the risk that payment will never be made. This loss is known as bad debt. The second risk is that payment will be made late; that is, beyond agreed payment terms. This loss is known as delinquency. It is considered a loss on the basis that a company will have to borrow money and pay interest to replace the funds not received on time. Naturally, bad debt loss is the more devastating of the two losses and the risk that receives the most management attention. The critical task to managing credit risk is to balance the need for credit sales, and the profit earned on those sales, against the perceived risk of extending credit to a customer. There is no easy answer or magic formula for balancing these factors. The proper balance varies by individual company and is based on a firm’s profit margins, strategic goals, and whether a product can be repossessed and resold. There are many techniques and tools to investigate, evaluate, and monitor credit risk; however, balancing that risk against the other company priorities is unique to each firm, requires judgment, and is never easy. v. Bookkeeping for Accounts Receivable: Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an allowance account from the accounts receivable account. The first method is the allowance method, which establishes a contra asset account as the offset to accounts receivable in the balance sheet. The amount of the allowance can be computed in two
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ways; through the analysis based on sales method and analysis based on accounts receivable method. The reason a contra asset receivable account is necessary is to adhere to the matching principle of accounting, which mandates that accrual basis companies match all revenues and expenses with the period in which they are earned and incurred, respectively. The second method, the direct write off method, is simpler than the allowance method in that allows for one simple entry to reduce accounts receivable to its net realizable value. For tax reporting purposes, the direct write-off method must be used; however, for financial reporting purposes, it is necessary to use the allowance method because it matches a period's revenue with associated expenses-a fundamental concept of accounting known as the matching principle. vi. Organization structure: The “right” organizational structure is one that will:
• Deploy the proper skills to each of the functions within receivables
management to maximize effectiveness
• Staff the positions with the appropriate level of knowledge and
experience to be cost efficient
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CHAPTER 6 CONCLUSION AND RECOMMENDATION 1. Internal control in receivable management: The principle of the internal control can be used to establish controls to safeguard receivables. For example, the four functions of credit approval, sales, accounting, and collections should be separated. The individual responsible for sales should be separate from the individuals accounting for the receivables and approving credit. By doing so, the accounting and credit approval functions serve as independent checks on sales. The employee who handles the accounting for receivable should not be involved with collecting receivables. Separating these functions reduces the possibility of errors and misuse of funds. 2. Bookkeeping for Accounts Receivable: AAA Pharma still uses direct write-off method for uncollectible Accounts. Although this method is simple, its use can reduce the usefulness of both the income statement and balance sheet, as we mention above.
So now is the time to change into Allowance method and analysis based on receivable method.
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Monthly estimates of credit losses: At the end of each month, management should again estimate the probable amount of uncollectible accounts and adjust the Allowance for Doubtful to this new estimate. Based on past experience, the uncollectible accounts expense is estimated at percentage of receivable by Rhub software. The computer software is quickly and easily prepares monthly aging schedules of account receivable. With this method, it is useful to management in review the status of individual accounts receivable and in evaluating the overall effectiveness of credit and collection policies. The longer an account is past due, the greater the likelihood that it will not be collected in full. Base on past experience, the credit manager estimates the percentage of credit losses likely to occur in each the age group of account receivable. This percentage, when applied to the total amount in the age group, gives the estimated uncollectible portion for that group. By adding together the estimated uncollectible portions for all age groups, the required balance in Allowance for Doubtful Accounts is determined (see in table 1). It is related to taw government; the company has prepared for at least 2 years to change in this method.
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REFERENCE 1. Johnson & Johnson homepage at http://www.jnj.com/connect/ 2. John G. Salek,(2004) Wiley Best Practices, Accounts Receivable Management Best Practices 3. Weygrandt, Kieso, Kimmel.(2003), John Wiley & Sons, Financial Accounting 4. Warren Reeve Fess, (2005), Thomason 21e, Accounting 5. Williams Haka Bettner Carcello, (2008), Mc Graw-Hill, Financial Accounting 6. Michelle Dunn , (2006), Entrepreneur Magazine’s, Credit and Collections handbook 7. Pay Attention to Internal Collections- Darin Ball, January 16 2008. www.collectionadvisor.com 8. Seven Habits - and Rewards - of Highly Efficient Collections Operations Lois Brown, January 17 2008 9. Optimizing Receivables - Yu-Soon Koh, January 28 2008 Source: CreditandCollectionsWorld.com 10. Best Practice in Consumer Collections - Astrid Rial, January 21 2008
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Invoice day Delivery pay day m ent
Custom name er
PHUÙ THÒ AN NH PHUÙ THÒ AN NH TM-DV COÂ G NGHEÄ N TRÍ VIEÄ T TM-DV CONG NGHEÄ Â TRÍ VIEÄ T TM-DV CONG NGHEÄ Â TRÍ VIEÄ T TM-DV COÂ G NGHEÄ N TRÍ VIEÄ T TM-DV COÂ G NGHEÄ N TRÍ VIEÄ T DNTN NGUYEÃ PHUÙ N ANH LUAÂ (KIEÂ GIANG) N N TRÖÔNG THÒMYÕ NGUYEÂ N THANH HÖÔNG NHAØ PHAÂ PHOÁ HOAØG ÑAÊ G N I N N NHAØ PHAÂ PHOÁ HOAØG ÑAÊ G N I N N
8867 13/10/200514/10/2005COD 10579 11/11/200512/11/2005COD 3782 28/01/200529/01/2006COD 3805 29/01/200529/01/2006COD 3806 29/01/200529/01/2006COD 4055 16/02/200516/02/2005COD 4056 16/02/200516/02/2005COD 19226 21/09/200411/07/2006COD 12084 23/04/200423/04/2004COD 1951 08/12/200409/12/2004COD 3581 21/01/200522/02/2005COD 16933 29/04/200617/06/2006COD 18554 16/06/200617/06/2006COD
477.489 828.289 14.101.542 1.778.159 3.251.526 21.101.006 406.441 6.810.315 310.108 7.558.115 11.727.092 9.153.975 1.310.687 732.195
443 414 336 336 336 683 683 173 982 752 677 197 197 156
DNTN THAØH ÑÖÙ/ TRAÀ THÒTHÔM71040 28/07/200628/07/2006COD N C N
Table 11: Bad debts at12/31/2006
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py e am C st m r n e u o e am In o v ice In o v ice d ay D liv ry e e d ay n t mt o eh d 7 .4 6 1 2 2 .5 4 PHU AN THÒ Ù NH PHU AN THÒ Ù NH TM-DV CO G NGHEÄ VIEÄ Â N TRÍ T TM-DV CO G NGHEÄ VIEÄ Â N TRÍ T TM-DV CO G NGHEÄ VIEÄ Â N TRÍ T TM-DV CO G NGHEÄ VIEÄ Â N TRÍ T TM-DV CO G NGHEÄ VIEÄ Â N TRÍ T TRÖ NG THÒ Ô MYÕ U N NG YEÂ THANH HÖ NG Ô NHAØ N PHO HO NG ÑAÊG PHAÂ Á AØ I N NHAØ N PHO HO NG ÑAÊG PHAÂ Á AØ I N DNTN THAØH ÑÖ / TRAÀ THÒ M N Ù C N THÔ 8867 13/10/2005 14/10/2005 CO D 10579 11/11/2005 12/11/2005 CO D 3782 28/01/2005 29/01/2006 CO D 3805 29/01/2005 29/01/2006 CO D 3806 29/01/2005 29/01/2006 CO D 4055 16/02/2005 16/02/2005 CO D 4056 16/02/2005 16/02/2005 CO D 1951 08/12/2004 09/12/2004 CO D 3581 21/01/2005 22/02/2005 CO D 16933 29/04/2006 17/06/2006 CO D 18554 16/06/2006 17/06/2006 CO D 71040 28/07/2006 28/07/2006 CO D 477.489 828.289 14.101.542 1.778.159 3.251.526 21.101.006 406.441 7.558.115 11.727.092 9.153.975 1.310.687 732.195 808 779 701 701 701 1.048 1.048 1.117 1.042 562 562 521 A /R A in g g
Table 12: Bad debts at12/31/2007
Figure 8: Chart of accounting department
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Figure 9: Managing distribution network
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