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Chapter 1

THE PROBLEM AND ITS BACKGROUND

Introduction Management of Accounts Receivable is defined as the process of making decisions relating to the investment of funds in this asset which will result in maximizing the overall return on the investment of the firm. Thus, the objective of receivables management is to promote sales and profits until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit (i.e., cost of capital). In the commercial world, the way in which organizations manage their accounts receivable has significant implications for the financial health of those organizations. This creates an imperative to ensure the management of receivables is both efficient and effective. The practices used in common business processes such as accounts receivable management have universal application and are not industry specific. In this regard there are lessons to be learned by others from the practices followed by organizations for which accounts receivable is a core business process.

2 Effective management of accounts receivable presents important opportunities for agencies to achieve strategic advantage through improvements in customer service, cash management and reductions in cost.

The primary objective of accounts receivable in the Philippine public sector is to collect monies due and to assist in meeting cash flow requirements. An effective accounts receivable function can assist in achieving the desired cash flow outcome through the timely collection of outstanding debts. All agencies also have an objective of continually improving customer service. A large number of agencies operating as businesses are required to perform public services under a full or partial cost recovery arrangement. Effective accounts receivable management can assist agencies improve customer service through providing timely information on customer requirements and by making dealing with the agency as easy as possible. Today, theres a need for more brilliant and new ideas to address the problems associated with accounts receivable management of many companies within various industries in the country, one of which is CEVA Animal Health Phils., Inc., which maintains and further enhances its position as one of the leading global veterinary health company in the Philippines, to be a dynamic entity that will be the preferred choice of selected target markets to achieve an optimal increase in the Companys capital and to increase shareholder value.

3 Background of the Study Accounts receivable can be one of the most important assets on an organizations balance sheet. As a percentage of total assets, accounts receivable has been estimated to constitute 20% for large organizations and 30% in small/ medium sized organizations and up to 80% of business transactions between corporations are conducted on credit. It is important that this asset is appropriately managed. A common goal of accounts receivable management is to ensure debts are collected within specified credit terms. Another is the identification of delinquent accounts to reduce the total trade credit which is written off as a bad debt. The study aimed to evaluate the efficiency of CEVA Animal Health Phils., Inc collection of accounts receivable. The measures of the efficiency of accounts receivable indicate the performance of accounts receivable processes and the success of the collection policies applied by the company.

Theoretical Framework The Theory of Constraints is a systems-management philosophy developed by Eliyahu Goldratt in the early 1980s. The fundamental thesis of TOC is that constraints establish the limits of performance for any system. Most organizations contain only a few constraints. It is based on the application principles and logic reasoning to guide human-based organization. TOC is geared to help organizations continually achieve their goals.

Strategic Questions

Focusing Steps

Sales and Marketing

Operation

Buy in Processes

Theory of Constraints

Project Management

Finance Effect Cause Effect Thinking Process

Cash management

Distribution

Figure 1. Theory of Constraints

TOC is based on a set of basic principles (axioms), a few simple processes (Strategic Questions, Focusing Steps, Buy-In Processes, Effect Cause Effect), logic tools (the Thinking Process or TP), and through local derivation of these some applications to specific fields (Operations, Finance, Distribution, Cash Management, Project Management, and Sales and Marketing. In most companies, the sales strategy and/or the front-end operations are outside the direct management control of the person responsible for receivables management results. In such cases, the manager is measured on the results of a process that he or she does not fully control. In response to this, enlightened

5 companies will place the entire revenue cycle (order to cash cycle) under the control of a single executive, as a process owner.

Front-End Operations Order Processing and Contract Administration Credit Verification and Controls Billings Receivables Collection Account Reconciliation Dispute and Deduction Management Cash Application Terms and Conditions o Prepayments o Due Dates Past Due

Current

Figure 2. Drivers of Improved Receivable Management

The steps in applying TOC are as follows: (1) Identify the systems constraints, (2) Decide how to exploit the systems constraints. Once it is decided how to manage the constraints in the system, how about the majority of the resources that are not constraints? The answer is to manage them so that they just provide what is needed to match the output of the constrained resources. (3) Subordinate everything else to the above decision in step 2. Since the constraints are keeping us from moving toward our goal, all the resources are applied that can assist in breaking them. (4) Elevate the systems constraints. If we continue to work toward breaking a constraint (also called elevating a constraint), at some point, the constraint will no longer be a constraint. The

6 constraint will be broken, and (5) If the constraint is broken, return to step 1. When that happens, there will be another constraint, somewhere else in the system that is limiting progress to the goal. The process must be reapplied, perhaps many times. It is very important not to let inertia become a constraint (McNair, 2000). According to theory of constraints: Every organization has at any given point in time at least one constraint which limits the systems performance relative to its goal. These constraints can be broadly classified as either an internal constraint or a market constraint. In order to manage the performance of the system, the constraint must be identified and managed correctly. Over time, the constraint may change and the analysis starts anew.

(http://en.wikipedia.org/wiki/Theory_of_Constraints. Retrieved September 19, 2013) TOC brings in the powerful five focusing step methodology to identify the constraint in the company and systematically attack the associated problems. The result is dramatic improvements of throughput (or contribution) and customer due date performance, and inventory reduction.

Conceptual Framework The conceptual framework discusses the flow of the study to be taken. The system of three frames, systems approach is used in the study. The system includes the inputs which undergo different processes to arrive at the output.

INPUT Profile of Employees Age Gender Civil Status Highest Educational Attainment Number of Years in the Present Position Accounts Receivable Management Credit Policies Billing procedures Collection Procedures Receivable Control Problems Encountered

PROCESS Survey Questionnaire Observation Documentary Search Unstructured Interview Statistical Analysis Frequency and Percentage Ranking Weighted Mean T Test Likert Scale ANOVA

OUTPUT Recommendation for: Enhancement of the companys existing credit policies. To minimize the cost incurred by company caused by the receivables. Proper handling and collection of accounts receivable. Encourage positive connections between customer and the company Minimization of problems encountered can be achieved through strict compliance of the rules set by the management.

Feedback

Figure 3. Conceptual Paradigm

The input contains the leading variables regarding the efficiency on collection of accounts receivable of CEVA Animal Health Phils., Inc. It includes the profile of the employees of the company, as well as the companys accounts receivable management. The input also includes the problems encountered by

8 the company and the expected result and actual outcome of accounts receivable collection and the significant differences among the variables. The second frame contains the methods and procedures to be used to analyze those variables by making questionnaires, conducting interview, research, and the use of statistical tools. The third frame is output. It contains the recommendations by the researchers suggested for the improvement of collection of the receivables. The arrows include the workflow of information in the research process. The feedback loop connects the output to the process involved as well as to the input. It made the system continuous.

Statement of the Problem This study focused mainly on the assessment of the efficiency of CEVA Animal Health Phils., Inc. Accounts Receivable Collection. Specifically, it sought answers to the following questions: 1. What is the profile of the respondents in terms of the following variables: 1.1 Age 1.2 Gender 1.3 Civil Status 1.4 Highest Educational Attainment 1.5 Number of Years in Present Position 2. How do the respondents asses the efficiency of the companys receivable management in terms of:

9 2.1 Credit Policies 2.2 Billing Procedures 2.3 Collection Procedure 2.4 Receivable Control 3. What are the problems encountered? 4. Is there a difference between respondents assessment or views on the accounts receivable management procedure when grouped according to profile in terms of: 4.1 Credit Policies 4.2 Billing Procedures 4.3 Collection Procedure 4.4 Receivable Control

Hypothesis The null hypothesis tested is: There is no significant difference between the respondents assessments or views on the accounts receivable management procedure when grouped according to profile in terms of: a. Credit Policies b. Billing Procedures c. Collection Procedure d. Receivable Control

10 Scope and Limitations of the Study This study will look into the efficiency of accounts receivable management of CEVA Animal Health Phils., Inc. This was done to have an understanding of the collection mechanism and receivable control implemented in CEVA Animal Health Phils., Inc. The researchers identified receivable management variable that would recognize efficient and thorough understanding of the system. The respondents of the study were composed of 33 personnel working in the company including management people. The questionnaires were

administered in September 12, 2013 and retrieved on the day of the survey while others on the following week.

Significance of the Study This study was anticipated to contribute additional information to serve the following individuals and organizations: Future Managers. This research will provide relevant information to the future managers who would like to indulge with the business in the same industry to better facilitate the management of receivable especially trade ones that will help that will help the business owners to successfully manage their companies if proven to be working efficiently with CEVA Animal Health Phils., Inc. Professors of Accountancy. This study will also be important to instructors/teachers/professors of Accountancy since the respondents of this study were taken from the point of view of those who are in practice of their profession in receivable management in the company.

11 Other Business Owners. For other business owners who would like to check on some inadequacy regarding receivable management, then it could be better addressed through this research especially that this paper will lead to responsible and accountable management of receivable in various businesses within various industries in the country. Students. The findings also hope to benefit students as they could use them in further research for more effective approach to receivable management policies. The students may be encouraged in making follow-up studies on the receivable management policies of other companies and will also give more insights to students who want to conduct the same study. Researchers. This study served as a great part for the completion of the researchers course requirements. This has given them a lot of challenge in meeting new faces and acquaintances and being aware of the systems implemented on companies receivable management department. This also led them to discover new knowledge that can be used for their careers in the future.

Definition of Terms The following terms were conceptually and operationally defined to create better understanding of the terminologies used in this study. Age. It refers to the respondents who below 20 years old, 21 to 25 years old, 26 to 30 years old, 31 to 35 years old, 36 to 40 years old and 40 years old and above.

12 Average Collection Period. It shows the average time (in days) taken by the debtors in making the payments. Bad Debts. It refers to the uncollected accounts. Billing Procedures. It refers to the processes made by CEVA Animal Health Phil., Inc. with regards to billing their customers. CEVA Animal Health Phils., Inc. It is the subject of study. Civil Status. It refers to being single, married, separated or widower in the profile of the respondents. Collection Procedure. It refers to the processes made by CEVA Animal Health Phil., Inc with regards to collection of accounts from their customers. Credit Policies. It refers to the policies maintained by CEVA Animal

Health Phil., Inc with regards to their receivables. Gender. It refers to the classification of respondents as to male or female in the profile of the respondents. Highest Educational Attainment. It refers to College Graduate, Masters Unit, Masters Degree, Doctoral Units, Doctoral Degree in the profile of the respondents. Number of Years in the Company. It refers to the span of time the respondents have rendered their service in the company with ranges of less than one year, from 1 up to 5 years, from 6 up to 10 years, from 11 up to 15 years and more than 15 years. Problems Encountered. These are the identified problems that may occur in the process of managing and controlling accounts receivable.

13 Receivable Control. It refers to the processes used by CEVA Animal Health Phil., Inc. with regards to their receivables such as, aging of accounts receivable.