Surprisingly, management of this multi million (or multi billion) vietnam dong asset rarely receives much senior management attention, except when a serious problem develops

Therefore accounts receivable from customers usually appear in the balance sheet as current asset.. Direct write-off Method for Uncollectible Accounts: phương pháp xóa sổ nợ khó đòiWhen

CHAPTER 1 INTRODUCTION

1.1 Problem statement:

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

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:

• Decrease the risk of bankruptcy from receivable failure

• Increase the trading environment well among business because of higher credit

1.2.2 Benefits to the business:

Effectively managing the receivables asset is:

• 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

1.2.3 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

1.3 Objectives of the thesis:

After studying in real case, you may know how receivable management is important by

• 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

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

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 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 Three primary accounting issues are associated with 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:

• Accounts receivable is increased by a debit

• Sale is increased by a credit

The second entry records the cost of goods sold:

• 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 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

Two methods are used in accounting for uncollectible accounts:

2.2.2.1 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

2.2.2.2 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:

• 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

2.2.2.2.1 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

2.2.2.2.2 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

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

• 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

2.2.2.2.3 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

2.2.2.2.4 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 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

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:

Table 1: Aging scheduleTotal 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

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

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

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:

Table 3: Evaluate the liquidity of receivables

iv 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

2.4.1.1 Quotation:

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)

2.4.1.2 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

• 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

2.4.1.4 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 cash-in-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 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: A credit 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, litigationreliable 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 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

- Payment history with other suppliers as reported

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:

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

(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:

1 Some controls should be absolute and enforced by the system

2 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.

2.4.1.5 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

2.4.1.6 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

• Fewer concessions of disputed items

• Enhanced customer service and satisfaction

2.4.2 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

Collection Timeline:

Figure 5: Collection TimelineThe 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:

• 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

low-priority, 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:

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 receivables

• 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.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

third-party 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 factors described in the “Sale of Receivables” section Evaluation of the cost involves two key elements:

1 The cost of the funds obtained through receivables financing compared

to the cost of funds obtained through other financing techniques

2 The cost of managing the receivables asset and complying with the 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 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