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Chapter I – Project CharterPROJECT BACKGROUNDThis chapter introduces the Accounts Payables and Account Receivables with Treasury Management System (APART MS) under Service Management System. As we are in a new era of an advanced high-tech environment, the business world is also entering into an era of fierce competition noticed by takeovers and mergers. This illuminates the type of dynamic and complex business environment that companies have to face.The rapid change in the environment reminds us that, for a business to survive, it has to focus on its core competencies and discover in order to keep ahead of the competitors. The field of Service Management system has evolved mainly in accordance to the fact that financial accounts need to be managed strategically for the firm to enjoy sustainable competitive advantage over competition. Several scholars have noted the complex structures of financial account management in the present-day Industry. Firms that learn how to manage their financial accounts well takes advantage over others in a long run. The point is, the goal of producing a consistent management of financial accounts must be attained.PROBLEM / OPPORTUNITY PROBLEMThe following will be the problem/s to be resolve:Time Consuming TaskPresent application software being used is not sufficient to execute core processes.Needs a definite accounting process that makes the system more reliable.Needs integration/interconnection with related Information Management Systems. It must have a unified and secured data management control.BENEFITSWhen the APARTMS has been implemented, chances are, it provides the following advantages to the client(s):A user will have an efficient updating and processing of accounts (esp. AR and AP), with a detailed reports and easy solving-related processes.It displays Accounting processes which are compose of Journal Entries, T-Accounts or Ledger and Trial Balance.Daily update of Treasury and funds.Income Statement and Financial Report has been displayed.In addition, the APARTMS are intertwined and interconnected with other related SMS subsystem, with an effective data cycle. Also, it has a unified Database management control.Import / Exports data with General Ledger and BCMS.It cut cost and time.AP and AR Accounts are managed easily.It will provide up-to-date account reports.any transaction that has been process is automatically added to the Journal Entries.Higher data security compared to the existing system.Uses MySQL for data management.GOALSTo achieve the potential progress of their existing IS, while rendering the foundational aspects of business flows and laws.To monitor the Assets, Liabilities, Equity, and Expenses of the Clients and at the same time, provides its report that can be satisfactory valid and legal.Easily updates the Clients/users on what has been paid and defines if the company maintains or loses financial resources.Income Statement and Balance Sheet has been processed automatically.To solve some minor Financial Management errors/mishandling.Unified Database with other related SMS subsystem.STAKEHOLDERS AND CLIENTSMarban Security Agency (Client)Dennis Gonzales (Project Study I Adviser)JunpyoManayan (Project Manager)Mac Douglas Goron (System Analyst)Joefel Langcauon (Programmer)Jayson Cabigas (Business Analyst)Mark Christian San Diego (Document Specialist)PROJECT SCOPEAPARTMS covers the Information management of financial accounts, especially Accounts Payables, Receivables, and Treasury fund.OBJECTIVESThe main purpose of APARTMS is to manage and provide statement of account, especially AP/AR and helps the accounting personnel to update assets and treasury. The goal of APARTMS is:It provides Financial Statement where a client is being informed how the Financial Resources are managed.It defines the Economical status of the client, where it gains or loses money.It distinguishes balances, credits, debits, and payables and at the same time, describes the monetary unit being involved.APART MS can be accessible in selected personnel whether Admin or Accountant use.It also manage the Treasury Information, where a journal entry and check preparation has been produced, along with Financial statement Reports.DELIVERABLESThe APART MS will help the company to monitor and manage financial process, and allows the user to have an update with its core transactions. It also gives a proficient tasking to the company who will use the proposed MS.Journal Entry FormT-Accounts or LedgerTrial BalanceIncome Statement Report FormBalance Sheet Report FormCheck/Voucher FormPlanning PhaseThe APARTMS undergoes SDLC method, along with other manipulativeways of gathering data.System DevelopmentSystem DesignSystem AnalysisTesting and IntegrationImplementationOperation and MaintenanceOUT OF SCOPEElectricity Issues: The APARTMS cannot be used in the midst of power shortage.Banking and other bank-related process is yet to be executed due to the system requirements.APARTMS is yet to be connected online.PROJECT PLANApproach and MethodologyConduct a planning/strategy measures on how to obtain resources or information.Mapping or tracingFormal interviews/surveying/actualizationRelated Literature (Foreign and Local) review.Research papers and forms for other information needed.Simulation of the process flow being generated.Project TimelineIDTask NameStartFinishDuration1Conducting of preliminary meeting12:00 NN4:30PM4HRS2Information Gathering5:00PM9:00PM4HRS3Finalizing the system’s technical features9:00 AM5:00PM8HRS4Identifying System Design Specification1:00 PM2:00 PM1HRS5System Coding9:00AM, Sept. 21, 201410:00 PM, Sept. 28,20147 Days6System Design PrototypingN/A7System ModellingN/ASuccess CriteriaThe APARTMS must attain the following criteria:It monitors/manages the financial statement efficiently, provided with a exact and tallied reports (20%)It has a fast processing speed (5%)Functionality (10%)User-Friendly features (15%)Import/Export execution (40%)Zero-Data Redundancy system (10%)Issues and Policy ImplicationsFor legality issues, al reports being produced by APART MS must be valid and detailed.APART MS is not allowed to be duplicated for own purposes. It was created for business and school use only.Selected personnel will be allowed to manage and maintain the application software, with the approval of the stakeholdersAny technicalities being encountered in using APART MS software must be addressed immediately, with the approval of the stakeholders.In case of system upgrade, a contract between the stakeholders and the proponents must be provided and must follow the legal issues of software by-laws.Risk ManagementRisk FactorProbability(H-M-L)Impact(H-M-L)Risk Management ActionEconomical ChangesHHProper Budgeting CompetitionHHCheaper SoftwareUser DemandsMMUser-relatedTechnical related risksMMBack-upsService TransitionThese are the following activities that the company will surely comply regarding with the system’s software, hardware, system specifications, computer personnel, system requirements and implementation procedure.The company must invest new desktop/ Laptop computers.At least one (1) Printer for each departmentOne computer administrator per departmentHigher Specification of hardware for each computer unitConducting a proper training for the employees when the system has been implementedRegular Maintenance of the system softwareUpgrade of the system software (depends on the client)Implementing the accessibility to the system according to the position of the company (user, admin, manager etc.)Option AnalysisTECHNICAL FEATURESLogin Information, accessed only by the Administrator and User.Form which includes payables table, with amount, date, and description label.Treasury and fund viewing, in which the amount is defined in Peso.Report form, ready to print.PROJECT ORGANIZATION AND STAFFINGROLENAME AND CONTACT INFORMATIONRESPONSIBILITIESProject ManagerManayan, JunDeveloping the project planManaging the project stakeholdersManaging CommunicationManaging the project teamManaging the project riskManaging the project scheduleManaging the project budgetManaging the project conflictsManaging the project deliverySystem AnalystLangcauon, JoefelIdentify, understand and plan for organizational and human impacts of planned systems, and ensure that new technical requirements are properly integrated with existing processes and skill sets.Plan a system flow from the ground up.Interact with internal users and customers to learn and document requirements that are then used to produce business requirements documents.Write technical requirements from a critical phase.Interact with designers to understand software limitations.Help programmers during system developmentPerform system testingDeploy the completed system.Document requirements or contribute to user manuals.Whenever a development process is conducted, the system analyst is responsible for designing components and providing that information to the developer.Business AnalystCabigas, JaysonBusiness focusedDomain specific knowledgeSolve operational problemsSolves business process problemsRefines the business modelProgrammerGoron, Mac DouglasSystem CodingHandling System SoftwareProgram DevelopmentPerform System AnalysisTrain subordinates in programmingDevelops programming methodsCorrect errors on the system codingDocument SpecialistSan Diego, Mark ChristianDocumenting the processCraft the right messageDistil the message into effective documentsRelease the documentationEvaluate the resultsPROJECT BUDGETBudget ItemsDescriptionBudget CostOne – Time Cost?PS1 Payment?Payment for the defense of the PS1 documentation of the proponents. PS1 expenses are compulsory payment of the proponents.Php 1,000 *5PS1 Manual / Book?This manual is used as a preference of the proponents in developing the PS1 documentation.?Php 300 *5Total One – time Cost?Php 6,500Budget ItemsDescriptionBudget CostOngoing Cost?Food?Food expenses are absolutely important for the proponents to avail. This will also included into the ongoing cost for the project development.Php 1,500 / monthElectricity?Electricity expenses also included in the ongoing cost. This includes the usage of the electricity service for the development of APARTMS.Php 1,000 / monthPrinting of Documents?The development of the APARTMS must be documented. Therefore, this includes the printing expenses of the documents that will be presented upon defense.Php 1,000 / semTransportation?Transportation expenses when the proponents are going to meet the client or going from other place in relation of the project development.Php 2,000 / month?Total Ongoing CostPhp 5,500Chapter II – Related Studies and Systems1.0INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS DETERMINANTS OF ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: A CASE OF PAKISTAN TEXTILE SECTORABSTRACTThe objective of this study is to analyze the determinants of Pakistani listed companies’ accounts receivable and accounts payable focusing the textile sector. It is evident from the findings that accounts receivable are strongly affected by the firm’s incentive to use trade credit as a means of price discrimination and level of internal financing. Additionally, the size of the firm also affects the level of accounts receivable a firm maintains. Whereas, most significant determinants of accounts payable are size of the firm, level of purchases and market interest rate.INTRODUCTIONIn corporate finance trade credit has been supposed to be a nonissue for a long time, at least in the context of perfect markets (Sartoris and Hill, 1988). Nevertheless, it is observed that a significant quantity of cash is invested in accounts receivable and an enormous amount of accounts payable, as a source of financing in nearly all non-financial firms (Deloof and Jegers, 1999). Significance of trade credit differs among the countries and it is expected to be higher in the countries which produce more manufacturing products, although there is substantial difference across them (Marotta, 1998). Rajan and Zingales (1995) compared non-financial companies in the G7 countries and found that relative part of accounts receivable differs between 29% Italy and 13% Canada, on the other hand, the respective limits for accounts payable were 17% France and 11.5% Germany. Mian and Smith (1992) reported that in 1986 US manufacturing firms had 21 percent of accounts receivable of their total assets and about 40% of account payable of their total liabilities. Deloof and Jegers, (1999) reported that in 1995 Belgian non-financial firms’ accounts receivable were 16% of total assets, and accounts payable 12% of total liabilities. Several studies have been conducted to simply analyze the existence of trade credit (see a.o. Schwartz, 1974; Feriss, 1981; Frank and Maksimovic, 1998; Long, Malitz and Ravid, 1993; Brennan, Maksimovic and Zechner, 1988; Brick and Fung, 1984; and Emery, 1984 and 1987), but very few studies have discussed the reason behind the trade credit is offered or which corporations use it or delivers it most (Petersen and Rajan, 1997). Storey (1994) analyzed earlier work on the financing patterns of UK small companies and found that for small firms trade credit is more valuable than for large firms. Whereas Walker (1991) investigated the US small firms and found that US small firms are also relying on trade and bank credit and these two financing sources are being used as substitutes.Furthermore, it is always argued that borrowing at rational rates is an issue for corporate decision makers. Berger and Udell (1998) suggested that when borrowing outside the firm, small firms face particular restrictions. Borrowing a small amount of capital from external capital markets becomes their obstacle, which is usually called as Macmillan gap, and for this reason they are being offered higher interest rates (Storey, 1994). While market imperfections, just as, agency costs and asymmetric information, are the reasons of these issues as proposed by several economic theorists. Even risky debt has a preference when information asymmetries are not favorable. Mayers (1984) pointed out this situation as ‘pecking order’ theory of financing in which a firm first raises capital internally by reinvesting its net income and selling off its short-term marketable securities. When that supply of funds is exhausted, the firm will issue debt and perhaps preferred stock. Only as a last resort will the firm issue common stock. Whereas, it has also been reported by several studies that close bank-borrower association improves credit accessibility (Niskanen and Niskanen, 2006). Other studies propose that the availability of credit is affected positively by bank-borrower relationship (Petersen and Rajan, 1994).LITERATURE REVIEWDanielson and Scott (2004) investigated the effect of bank loan availability on the trade credit and credit card demand of small firms and found that firms increase their demand for trade credit and credit card debt when facing credit constraints are imposed by banks. Deloof and Jegers (1999) investigated the role of trade credit as source of financing for Belgian firms focusing accounts payable and found that trade credit plays a significant role in the corporate financing policy. They found that the amount of trade credit a customer takes is determined by the need for funds and by the internally available funds. Finally they found that trade credit can act as a vital substitute for short term as well as long term financial debt. Atanasova (2007) tested for the existence of creditconstraints and their effect on the corporate financing policies and found that credit constrained firms substitute trade credit to institutional finance especially during tight money periods. Huyghebaert (2006) tested hypothesis that why firms use trade credit on business start-ups and find that more trade credit is used when firms face financial constraints and suppliers have a financing advantage over banks in financing high risk firms. Niskanen and Niskanen (2006) analyzed credit policies of Finnish small firms functioning in bank dominated environment. Creditworthiness and access to capital markets were found as important determinants of trade credit extended by the sellers. Firm’s age, size and level of internal financing were found to be negatively correlated to the trade credit usage, whereas level of current assets to total assets and loan availability were found negatively correlated with the trade credit usage. In addition to it, the level of purchases was found positively correlated with level of accounts payable. Niskanen and Niskanen (2000b) analyzed the accounts receivable and accounts payable of Finnish listed firms and found that accounts receivable are most likely to be influenced by the firms’ incentive to use trade credit as a means of price discrimination. Through increased demand for the trade credit level of accounts receivable increases with the increase in the interest rate level. Additionally, they found that the level of accounts payable is affected by the firm size, supply of trade credit, interest rate level, the ratio of current assets to the total assets, and insufficient internal financing. Blasio (2005) tested the Meltzer (1960) trade credit – bank credit substitution hypothesis on Italian manufacturing firms’ inventory behavior and found that during money tightening Italian manufacturing firms are more constrained than normal macroeconomic conditions.THEORIESAND EMPIRICAL EVIDENCES ON TRADE CREDITVarious theoretical studies have tried to investigate the reason of providing intermediary services by suppliers to their customers and to find out the rationale to use trade credit as a substitute of less costly bank debt.Transaction CostTransaction Costs have been declared to be one rationale to sustain credit sales. Transaction costs theory describes that paying at once for several shipments collectively saves transaction costs and permits flexibility in payments (Ferris, 1981).Furthermore, money can be saved by keeping smaller cash balances.Financial ModelsFinancial models are based on capital market imperfections concerning information asymmetries. These imperfections lead to the phenomena in which firms, with lower cost of financing due to their better access to capital markets, tender trade credit to other financially constrained firms (Schwartz, 1974). Furthermore, trade credit facilitates firms to support the growth of their clients. It is also believed that trade credit can serve to alleviate credit rationing problems as trade credit plays as a signal on the buyers’ good quality to the financially intermediary (Frank and Maksimovic, 1998; Biais and Gollier, 1997).Financial theory proposes that the seller has a lead over financial institutions in information gaining and controlling the consumer. In European countries, all these gains speak about the nearer and greater relationship between buyer and seller than between the financial institutions and buyers. That is supplier have a threatening tool to stop future supplies when consumer does not pay in time. On the other hand a financial institution may not have a device like this to have power over consumers, while warning to depart future lending may not have instant consequence on the consumers’ attitude (Petersen and rajan, 1997).Price DiscriminationPrice discrimination is a possibility of charging dissimilar prices for dissimilar consumers. This can happen in a situation when credit conditions include discounts on paying before time. These conditions are mostly presented by leading firms in the industry (Brennan et al., 1988; Mian and Smith, 1992). These firms have an advantage to collect extra sales to existing clients without decreasing price. As a result these firms extend high priced trade credit which is not acceptable for creditworthy customers. While for low rating companies this credit may be acceptable as it might be less costly than borrowing from financial intermediary (Brennan et al., 1988; Petersen and Rajan, 1997). Additionally, trade credit offers a facility to gauge the quality of products earlier than paying for it so this becomes an inherent guarantee for the seller’s manufactured goods (Lee and Stowe, 1993). For small and less reputable sellers this facility of trade credit may have a great importance (Frank and Maksimovic, 1998).Macroeconomic ConditionsMacroeconomic conditions have also an effect on trade credit usage and conditions which cannot be ignored and has been highlighted by many researches. Kashyap et al., (1993) investigated the effect of macroeconomic factors on trade credit and found that under restrictive monetary policy and controlled money supply smaller firms are ready to extend trade credit on the given conditions as increasing borrowing rates create trade credit a supplementary viable type of short term funding. Petersen and Rajan (1997) highlighted the same issue and found that firms extend trade credit when loan from financial intermediaries is not present. They further added that, in this scenario, the role of financial intermediary will be performed by larger suppliers as firms having no access to institutionalized financial markets will borrow from these larger firms.Data Description and Dependant VariablesThe data sample of this study comprises of financial accounting information of the firms listed at Karachi Stock Exchange during 2004 to 2009.This accounting data is extracted from the Balance Sheet Analysis published by the State Bank of Pakistan. After excluding missing firm year data from analysis 891 observations were analyzed from 151 firms.Results:DETERMINANTS OF ACCOUNTS RECEIVABLECarrying receivables has both direct and indirect costs but it also has an important benefit that is increased sales. Receivable management begins with the credit policy, but a monitoring system is also important. Corrective action is often needed, and the only way to know whether the situation is getting out of hand is with a good receivables control system.Demand for Trade CreditA firms’ decision on how much to lend to its customers is determined from the level of firms’ accounts receivables. Still the quantity of trade credit, a firm offers, is influenced by a demand component (Petersen and Rajan, 1997). This demand on the whole is not possible to compute directly as approaches of nearly all firms’ consumers to trade credit varies. This is due to the reason that, just for example, a retail company can contain thousands of credit consumers which can be either persons or other firms. Whereas, the accounts payable of a particular company, can be similar in greater part as they are payable to the other companies which are comparatively little in number in any particular industry. As the demand curve for trade credit is not identified, interpretation of estimated coefficients can help in understanding this problem.Petersen and Rajan (1997) found that large firms maintain higher accounts receivables. One reason for this result can be, the greater access of larger firms to capital markets which makes them less capital reserved. Second reason can be the demand component from capital rationed firms that causes the accounts receivable of larger firms higher than average.Creditworthiness and Access to Capital MarketsFirm size and age are used to compute the firm’s creditworthiness and access to capital markets. The natural log of firm age (Ln(1+ firm age)) is used as proxy for creditworthiness and natural log of total assets (Ln(book value of assets)) is taken to proxy the suppliers’ access to external capital. The results in the Table 1 show that size is significant variable with (p = 0.000102129). These results are consistent with earlier studies like Petersen and Rajan’s(1997).Internal FinancingThe study uses operating cash flow (earnings before depreciation and interest minus taxes) divided y assets to gauge the firm’s capability to produce cash from internal sources to fund the trade credit which it extends to its customers. The results indicate that internal financing effects positively to the level of accounts receivables. The variable is positive and significant at (p= 0.00000000) which indicates that the larger the positive cash flow the supplier has, the higher the trade credit he is ready to offer to its customers. The results are consistent with findings of Niskanen and Niskanen (2000) and are contradictory to the findings of Petersen and Rajan (1997).Model I:AR = β0 + β1CF + β2CM + β3GR + β4KIB + β5SIZETable 1: Dependant Variable: Accounts Receivable/Assetsβ0β1β2β3β4β5Coefficient-42.7021.457*-698.612*0.05330.63415.291*S.E26.6900.110123.9760.1791.1973.892P-Value(0.110)(0.000)(0.000)(0.766)(0.596)(0.000)R-Square0.384F-Value 45.596*Adjusted-R20.376(0.000)DW1.037*Significant at α = 0. 01 ** Significant at α = 0. 05Price DiscriminationPrice discrimination is an act of billing the same product to different clients with different prices, even when the costs of supplying them are same. This practice is mostly observed by monopolists as they exploit their leading power for discrimination. This study uses ratio of contribution margin (sales minus variable costs) to assets to proxy for monopoly power to carry out price discrimination. In our sample of all textile firms existing on Karachi Stock Exchange, it is found that a significant but a negative relationship exist between price discrimination and accounts receivable management policies which is validated by a p value of (p= 0.00000004). These results are contradictory to the findings of Niskanen&Niskanen (2000).Cost Of Alternative CapitalThe study uses annual average three month KIBOR rate to compute the basic cost of capital. A positive relationship is expected between accounts receivable level and level of interest rate. The reason behind this can be the demand for trade credit which can be expected to be high when the cost of alternative capital is increased. An insignificant coefficient is found in the results Table 1 with value of (p= 0.59654834).GrowthNormally firm’s target growth rates are attached with its trade credit policies. Generally, credit conditions just as discounts and duration of payments play a role of competitive instruments. In order to increase sales, firm may select a policy of offering trade credit with delayed due periods than its competitors are offering. This proposes that there is a positive relationship between growth and the level of accounts receivable. Though, trade credit may be used to boost sales of those firms which could not maintain a smooth rise in their sales. Even in conditions of declining sales a firm may offer more trade credit than an average company in the industry (Petersen and Rajan, 1997).This study computes growth by the annual sales growth percentage. Empirically, it is found that sales growth is insignificant (p= 0.766271766) which can be interpreted as the sales growth does not affect the level of trade credit offered.DETERMINANTS OF ACCOUNTS PAYABLE (TRADE CREDIT)Firms generally make purchases from other firms on credit, recording the debt as an account payable. Accounts payable, or trade credit, is the largest single category of operating current liabilities, representing about 40% of the current liabilities of the average US nonfinancial corporations. The percentage is somewhat larger for smaller firms. Because small companies often do not qualify for financing from other sources, they rely especially heavily on trade credit. Table 2 presents the outcome of proposed determinants on which the accounts payable is regressed. This model uses the same variables (including the control variables) used for accounts receivable model. Besides these variables, two more variables are added in this model. First, to determine the asset maturity RATIO OF CURRENT ASSETS (INVENTORIES AND FINANCIAL ASSETS) TO TOTAL ASSETS is used. Second, to assess the supply of trade credit PURCHASES TO TOTAL ASSETS is used.Supply of Trade CreditNiskanen and Niskanen (2000) use the annual purchases as a proxy for the supply of trade credit making an assumption that all purchases are on credit. They believe that this assumption is not very restrictive, as large companies normally do not pay their purchases in cash. This study also uses the purchases as proxy to supply of trade credit and considers the same assumption. The result relating the supply of trade credit is same as expected: a significant and positive coefficient is obtained (p= 0.0005) which indicates that an increase in the supply of trade credit increases the level of its use.Creditworthiness and Access to Capital MarketsResult concerning asset size is quite significant in explaining the accounts payable level. The coefficient is positive and significance level is also quite high (p= 0.0000). This positive sign shows that financing of larger firms is comprised of more trade credit than smaller firms. This may be due to their greater access to capital markets. This finding is consistent with Niskanen and Niskanen (2000) where as Petersen and Rajan (1997) found a weak positive relationship between the firm size and accounts payable.Model No II:AP = β0 + β1GR + β2CA + β3SIZE + β4KIB + β5CF + β6PURTable 2: Dependant Variable: Accounts Payableβ0β1β2β3β4β5β6Coefficient-1273.161-0.8482862.221409225.90929.6902880.4263060.103077S.E89.494210.2657050.59259614.852212.5131710.1562190.029441P-Value(0.0000)(0.0015)(0.0002)(0.0000)(0.0001)(0.0066)(0.0005)R-Square0.643790F-Value 157.5394*Adjusted-R20.639704(0.000)DW0.839276*Significant at α = 0. 01 ** Significant at α = 0. 05GrowthTheory suggests that healthier investment opportunities are available to the firms which are growing and these firms require increased financing for these new investment opportunities. It is assumed that trade credit may be used as fractional source of financing for these growing firms. However, opposite is found from empirical results. Sales growth is found to have a negative but significant coefficient (p= 0. 0015) which implies that faster a firm is growing the less it uses trade credit in its financing. Hence, firms growing slowly or not growing at all utilize the trade credit most. Furthermore, these results are consistent with Niskanen and Niskanen (2000) and contradictory to the findings of Rajan and Zingales (1997).Internal FinancingThe results reveal that operating cash flow is a significant variable in explaining the accounts payable level with p-value of (p= 0066).Asset MaturityIn explaining the level of accounts payable the asset maturity, measured by the ratio of current assets to the total assets, is found to have a greater proportion with a significant positive variable (p= 0002). This finding is consistent with the view that firm’s assets are financed with funds having same maturities. This is carried out to plan repayments of the funding to match with the decline in the value of firm’s assets (Diamond, 1991). As a result, short-term assets are usually financed with short-term debt just as accounts payable, while long-term assets are financed with long-term debt or equity.Cost of Alternative CapitalMarket interest rate, measured as average 3 month KIBOR rate, is appeared to be quite significant explanatory variable in explaining accounts payable (p= 0001). Positive coefficient of market interest rate shows that higher the interest rates the higher the demand for trade credit will be. As it is vivid from the results that market interest rate is not significant in accounts receivable model, this may support the idea that demand side is more affected by the fluctuations in the market interest rate.CONCLUSIONThis study empirically analyzed the determinants of Pakistani listed firms accounts receivable and accounts payable management policies. The results show that accounts receivable are strongly affected by the firms’ incentive to use trade credit as a means of price discrimination and level of internal financing. Furthermore, size of the firm also affects the level of accounts receivable a firm maintains. The results of the accounts payable model show that all the variables, which were taken to determine the level of accounts payable, were statistically significant. Additionally, most significant determinants of accounts payable were size of the firm, level of purchases and market interest rate. Dissimilarity in the results of this study to earlier studies may greatly be due to the variation among Pakistani, U.S., UK and Finnish capital markets. As it is evident, that ban-borrower relationship, when analyzed as financial intermediaries, is supposed to be a substitute source of capital for trade credit. This relationship can be studied as further research line in this area. But the unavailability of data on this relationship makes it bit a difficult task as statistics regarding relationship between banks and firms are not publicly available.REFERENCE: journal-archieves14.240-251.pdf2.0 IMPACT OF ACCOUNTS RECEIVABLE MANAGEMENT ON THE PROFITABILITY DURING THE FINANCIAL CRISIS: EVIDENCE FROM SERBIAABSTRACT:The competitive nature of the business environment requires firms to adjust their strategies and apply financial policies to survive and enable growth. In most firms, receivables represent large financial sources invested in asset and involve significant volume of transactions and decisions. This paper investigates how public companies listed at the regulated market in the Republic of Serbia manage their accounts receivables during the recession times. A sample of 108 firms is used, which are the most successful Serbian firms listed at the Prime and Standard Listing as well as the Multilateral Trading Platform of the Belgrade Stock Exchange. The accounts receivables policies are examined in the crisis period of 2008-2011. In order to explore the relation between accounts receivables and firm’s profitability, the short-term effects are tested. The study shows that between accounts receivables and two dependent variables on profitability, return on total asset and operating profit margin, there is a positive but no significant relation. This suggests that the impact of receivables on firm’s profitability is changing in times of a crisis.INTRODUCTIONAccounts receivable measures the unpaid claims a firm has over its customers at a given time, usually comes in the form of operating line of credit and is mainly due within a relatively short time period (up to one year). The volume of accounts receivable indicates firm's supply of trade credit while accounts payable shows its demand of trade credit. The study of accounts receivable and accounts payable during periods of financial crisis is an important topic, particularly when the global economy is going through a credit shock. During global financial crisis, characterized by high liquidity risk faced by the banks, trade credits may increase, operating as a substitute for bank credits, or decrease - acting as their complement. Bastos and Pindado (2012), for example, suggest that credit constraints during a financial crisis cause firms holding high levels of accounts receivable to postpone payments to suppliers, which act in the same manner with their suppliers. This gives rise to a trade credit contagion in the supply chain characterized by a cascading effect. The current financial crisis provides economists a unique opportunity to study the role of alternative financial sources during periods of breakdown of institutional financing.Accounts receivables are one of the most important part of working capital. Receivables often represent large investment in asset and involve significant volume of transactions and decisions. However, there are considerable differences in the level of receivables in firms around the world. Demirgü?-Kunt and Maksimovic (2001)present evidence that in countries such as France, Germany, and Italy accounts receivable exceeds a quarter of firms' total assets, while Rajan and Zingales (1995) find that 18% of the total assets of US firms consists of receivables. In different theories, the existence of receivables is explained by commercial reasons, transaction-cost motivations, and financial incentives (Bastos&Pindado, 2007; Deloof&Jegers, 1999; Marotta, 2005; Petersen &Rajan, 1997).Accounts receivable management is a crucial filed of corporate finance because of its effects on a firm’s profitability and risk, and consequently on the firm's value. Yet, the main body of the literature of accounts receivables focuses on studying the relation with firm’s profitability at the developed capital markets and during the non-crisis period.Understanding the effects of a financial crisis on receivables management is especially important to Serbia as a transition country. Trade credit is an important source of finance for Serbian firms and, therefore, it can make a strong contribution to firms' profitability and the development of the whole economy. In this context, the aim of this paper is to examine the impact of accounts receivable management on the profitability of the Serbian companies during the financial crisis, in the period 2008-2011. The study investigates whether companies have to change their non-crisis accounts receivables management policies when the economy is into a recession. In order to test the relation between accounts receivables and a firm’s profitability, the short-term effects will be tested in times of a crisis.The contribution of the paper is twofold. Firstly, it extends the existing empirical literature on relationship between firm's profitability and accounts receivables in developing and transitional economies in the crisis period, by focusing the analysis on the Serbian listed firms where, up to now, no research has been conducted. Secondly, this study verifies some of the previous findings by testing the relationship between accounts receivables management and the profitability of the sample firms, and thus broadens the possibilities for cross-country comparisons in the field of profitability determinants.The structure of this paper is as follows. In Section 1,a summary of previous research on the effects of accounts receivable management on firm's profitability is given. In the next section we describe the sample, define the measures of profitability as well as the explanatory variables, and finally, test the potential determinants of on profitability. In Section 3we provide conclusions, emphasize some limitations of the study and propose the objectives of future research.LITERATURE REVIEWThe goal of accounts receivables management is to maximize shareholders wealth. Receivables are large investments in firm's asset, which are, like capital budgeting projects, measured in terms of their net present values (Emery et al., 2004). Receivables stimulates sales because it allows customers to assess product quality before paying, but on the other hand, debtors involve funds, which have an opportunity cost. The three characteristics of receivables – the element of risk, economic value and futurity explain the basis and the need for efficient management of receivables. According to Berry and Jarvis (2006) a firm setting up a policy for determining the optimal amount of account receivables have to take in account the following:The trade-off between the securing of sales and profits and the amount of opportunity cost and administrative costs of the increasing account receivables.The level of risk the firm is prepared to take when extending credit to a customer, because this customer could default when payment is due.The investment in debt collection management.Academicians have studied accounts receivable individually, but mostly as a part of working capital management, from various points of view. Bougheas et al. (2009), for example, focuses the research on the response of accounts receivable to changes in the cost of inventories, profitability, risk and liquidity. The other authors explore the impact of an optimal receivables management, i.e. the optimal way of managing accounts receivables that leads to profit maximization. Researches realized by Deloof(2003), Laziridis and Tryfonidis (2006), Gill et al (2010), Garcia-Teruel and Martinez-Solano (2007), Samiloglu and Demirgunes (2008) andMathuva (2010) done in Belgium, Greece, USA, Spain, Turkey, and Kenyarespectively, all point out to a negative relation between accounts receivables and firm profitability (Table 1). In other words, having an accounts receivable policy which leads to a low as possible accounts receivables has as a result the highest profitability. Contradicting evidence is found by Sharma and Kumar (2011), who find a positive relation between ROA and accounts receivables.Table 1: Summary of previous research on the effects of receivables turnover on firm’s profitabilityResearchSample, periodType of relationDeloof (2003)1009 large Belgian non-financial firms for theSignificant negative1992-1996 periodrelation onprofitabilityLazaridis and131 companies listed in the Athens StockSignificant negativeTryfonidis (2006)Exchange (ASE) for the period of 2001-2004relation onprofitabilityGill et al (2010)88 American firms listed on New York StockSignificant negativeExchange for the period 2005 – 2007relation onprofitabilityGarcía-Teruel and8,872 Spanish SMEs for the period 1996-2002Significant negativeMartínez-relation onSolano(2007)profitabilitySamiloglu andIstanbul Stock Exchange (ISE) listedSignificant negativeDemirgunes (2008)manufacturing firms for the period of 1998-2007relation onprofitabilityMathuva (2010)30 firms listed on the Nairobi Stock ExchangeSignificant negative(NSE) for the periods 1993 to 2008relation onprofitabilitySharma and Kumar263 non-financial BSE 500 firms listed at theSignificant positive(2011)Bombay Stock (BSE) from 2000 to 2008relation onprofitabilityBaveld (2012)37 large firms in The Netherlands, during theSignificant negativenon-crisis period of 2004-2006 and during therelation onFinancial Crisis of 2008 and 2009profitabilityHowever, the main body of the literature of accounts receivables focuses on studying in the environment of developed capital markets and during the non-crisis period. The consequences of a financial crisis on receivables is of enormous relevance, since a crisis causes trade credit contagion as a consequence of financial contagion between financial intermediaries (Bastos and Pindado, 2012). Researches on trade credit during financial crises are done in case on Japan's crisis (Fukuda et al., 2006), for the Asian crisis (Love et al 2007) and for the recent global financial crisis (Yang, 2001, Bastos and Pindado, 2012). As to researches that study relationship between profitability and accounts receivables during current global crisis period, it is worth mentioning the study done by Baveld (2012). It this study that investigates how public listed firms in The Netherlands manage their working capital, two periods are compared - the non-crisis period of 2004-2006 and the financial crisis period of 2008 - 2009. Baveld'sstudy indicate a statistically significant negative relation between accounts receivables and gross operating profit during non-crisis period. On the other hand, during crisis period, no significant relation between these two variables is observed. This result may suggest that the relation between accounts receivables and firm’s profitability is changed in times of a crisis in the way that some firms should not keep their accounts receivables at minimum in order to maximize profitability during crisis periods.Taking into consideration the results of study done by Baveld (2012) and the others above mention studies, the aim of this research is to examine the impact of accounts receivable management on the profitability of the Serbian companies during the financial crisis, in the period 2008-2011.EMPIRICAL ANALYSISSample and Data DescriptionWe tested the regression model of profitability on the sample consisting of real-sector publicly traded companies whose shares are quoted on the regulated market of the Belgrade Stock Exchange. We compiled the basis of financial statements (source: Serbian Business Registers Agency - SBRA) for those publicly-listed companies that were quoted in all the segments of regulated stock exchange market, that met the size criterion in all analyzed years (meaning big or medium enterprises) and operated in real sector (financial firms are excluded from the sample). In such an initial stadium of defining the sample, we had 432 firms in total. After the Decision on Stock Exchange Reorganization, brought on 27/04/2012, we excluded from the sample all the companies shifted from OTC market to be quoted in MTP (Multilateral TradingPlatform) segment, since they did not belong to Regulated market and were not activein the previous 180 days regarding share trading of the particular issuer. We also excluded companies with consolidated financial statements in any of the analyzed years, as well as those companies whose loss was over the amount of capital so that they were practically financed only from borrowed sources, and accordingly, the value of financial leverage equals one.The sample contains the financial data for 4 years in sequence, in period from 2008 to 2011. The final sample, representing the basis for the empirical study, comprises a total of 108 big and medium publicly-listed non-financial companies, whose shares are quoted on the regulated segment of the Belgrade Stock Exchange. These companies are mostly the result of mass corporatization in Serbia at the beginning of 21st century, as a part of the process of Serbian transition to market economy and private property. The most significant share in the sample structure by the criterion of sector or business belongs to companies from processing industry (52%), agriculture, forestry and fishing (14,9%), transportation and storage (10,2%) and construction (8,4%).Financial statements of these companies are prepared following the International Accounting Standards (IAS), or International Financial Reporting Standards (IFRS).Total number of observations for each variable is 432 (108*4). When we consider the four-year value average or the value for one year only, total number of observations is 108. We have processed the data from companies’ financial statements and calculated dependent and independent variables within the regression model, which is defined in the following text.Descriptive statisticsThe ratio analysis mainly uses two types of profitability measures – margins and returns. Margins ratios(Gross profit margin, Operating profit margin, Net profit margin, Cash-flow margin)describe the firm's ability to translate sales into profits at various stages of measurement. Ratios that calculate returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders (Return on asset, Return on equity, Return on capital, Cash return on assets and so on). Many different measurements of firm profitability are used by the researchers who studied the relation between accounts receivable and profitability. The simplest and the most used ratio, that relates the profitability of a company with its assets, is Return on Assets (ROA). It is calculated as net income divided by total assets.Two profitability measures are used in this study: Operating Profit Margin (OPM), calculated as operating profit divided by total assets and Return on Total Assets (ROTA) calculated as earnings before interest and tax divided by total assets. ROTA measures the ability of general management to utilize the total assets of the business in order to generate profits, while Operating Profit Margin shows the profitability of sales resulting from regular business. Operating income results from ordinary business operations and excludes other revenue or losses, extraordinary items, interest on long term liabilities and income taxes.The descriptive statistics of two profitability measures and explanatory variables are reported in Table 2, while the correlation matrix is presented in Table3. The measures of profitability, as well as the explanatory variables (receivables turnover ratio, accounts receivable to revenue ratio, size and liquidity), are averaged for the period 2008-2011. Size is the natural logarithm of net sales. Liquidity is measured by current ratio (current assets/current liabilities). Receivables turnover ratio measures the average period for which sales revenue will be held in accounts receivable. This ratio is usually used to describe the efficiency and effectiveness of receivables collection. The trends in accounts receivable to revenue ratio highlight tendency in the degree of investment in accounts receivable.The results of dependent variables, Return on Total Assets (ROTA) and OperatingProfit Margin (OPM), exhibit that the mean of ROTA (OPM) of all firms analyzed is0.047 (0.032). The distribution of ROTA is positively skewed, with kurtosis of 0.083, which describes that the scores for the ROTAs are clustered around the mean in the right-hand tail. On the other hand, the distribution of OPM is negatively skewed, with kurtosis of 17.716, which indicates that the more peaked distribution is skewed to the left. It can be observed that the profitability of Serbian companies whose shares are traded on a regulated market is not at a significant level. But, having in mind the analyzed crisis period, the fact that they still operate in profit zone is indicative.The average number of days accounts receivables for the Serbian companies listed at the regulated market is 69,5 days. This is far below the value of RTR of the whole Serbian economy in 2011, which is, according to Euro stat data, 128 days. The natural consequence of crisis environment is a conservative behavior of Serbian companies. The most significant crisis effect is related to corporate growth and is reflected in the fact that companies postpone planned investments. All the attention is concentrated on providing cash, given that the real sector is primarily faced with liquidity risk, and the need for working capital is increasing in time of crisis. The difficulties in collection of receivables are becoming serious as the crisis progresses. The value of receivables turnover ratio continually increases in the analyzed crisis period, starting from 66, 4 days in 2008, and reaching 73,1 days in 2011. The increase in input prices and increased exchange rates, together with the problematic collection of receivables affected the operating result.Table2 Summary statisticsROTAOPMARRRRTRSIZELIQMean,044636,032373,19413869,509255,8640462,400914Median,035425,03137716,14375251,500005,8160001,587933Std. Deviation,067246,13817079,13612748,26746,4924332,478863Variance,005,019,019,100,2426,145Skewness,369-2,8831,1201,151,4082,850Std. Error of Skewness,233,233,233,233,233,233Kurtosis,08317,716,692,867,0169,891Std. Error of Kurtosis,461,461,461,461,461,461Minimum-,109028-,846249,02798410,00004,696000,233524Maximum,220683,377185,625985228,0007,25500015,843705The average value of accounts receivable to revenue ratio describes the accounts receivables management of Serbian companies in the crisis time too. The value of this ratio for the sample is 19,41%, telling that almost 20% of total sales revenue is related to the unpaid sales. As the crisis progresses, from 2008 to 2011, the value of ARRR increases (from 18% to 20,4%), indicating that theamount of cash that is tied up with the slow paying customers is growing. Yet, this numbers are still below the share of receivables in the net revenue of 25% evidenced in France, Germany, and Italy by Demirgü?-Kunt and Maksimovic (2001).The results on the average collection period for Serbian companies are higher than the findings of some studies done in non-crisis period. Deloof (2003) find an average of RTR of 54,64 days in Belgium, Gill et al. (2010) of 53,48 days in the US. On the other hand, Garcia-Teruel and Martinez-Solano (2007) present evidence on the average receivables turnover ratio for Spanish firms of 96,82 days, Samiloglu and Demirgunes (2008) and Lazaridis and Tryfonidis (2006) find average receivables turnover ratio in Turkey and Greece is 139,07 and 148,25 respectively.Table 3 shows correlation coefficients of all variables. ROTA and OPM are dependent variables. Concerning the explanatory variables, relatively high correlation coefficients (higher than 0.5) are observed only in case of ARRR and RTR. The results of the correlation analysis shows that the number of days accounts receivables as well as accounts receivable to revenue ratio positively relate to both the dependent variables - return on total assets and operating profit margin. This indicates that in crisis time, a higher level of accounts receivables could induce a higher profit in the Serbian case. Contradicting evidence is found with the correlation analysis of Bavald (2009), who finds a negative relation between the number of days accounts receivables and a firm’s profitability in the crisis time in the case of the Netherlands. The results of Bavald's correlation analysis show a negative relation between the number of days accounts payables and both return on assets and gross operating profit. This indicates that managers can create value by keeping the levels of accounts receivables to a minimum.Table3: The correlation matrix of profitability and independent variablesROTAOPMARRRRTRSIZELIQROTA1OPM(,680)**1ARRR(,329)**,1421RTR(,293)**,127*(,959)**1SIZE(,385)**(,436)**(,283)**(,253)*1LIQ(,298)**(,405)**-,116-,059,0861**Correlation is significant at the 0.01 level (2-tailed). *Correlation is significant at the 0.05 level (2-tailed). Sales and liquidity show also a positive relation on the dependent variables, which is consistent with the findings of Deloof (2003), and Baveld (2012). A shortcoming of Pearson correlations, that they are not able to identify the causes from consequences(Deloof, 2003), will be overcome by the regression analysis.REGRESSION MODELThe regression analysis used in this study is based on the following equations:OPMit = β0 + β1ARRRit + β2RTRit+ β3SIZEit + β4LIQit +εitROTAit = β0 + β1ARRRit + β2RTRit+ β3SIZEit + β4LIQit +εitwhere OPM and ROA measures the firm profitability, SIZE, the company size as measured by natural logarithm of sales, ARRR, the accounts receivable to revenue ratio, RTR, receivables turnover ratio, LIQ, the current liquidity ratio. The analysis utilizes fixed effect regression model for the whole sample (Table 4).The results of regression analysis indicate a positive relation between accounts receivables and return on total assets, which is not statistically significant. Table 4 also shows a stronger, but positive relation between accounts receivables and the second dependent variable – operating profit margin. This finding is not surprising taking into account that operating profit margin describes the profitability of sales resulting from the core business, which is highly influenced by the amount of receivables and the collection effectiveness.As it is pointed out by Baveld (2012), the absence of any significant relation for both the dependent variables may indicate that the relation between accounts receivables and firm’s profitability is changed in times of a crisis. These regression results could be explained by the fact that Serbia is an transition and emerging market where most of the firms are seen more profitable if they give their clients more trade credit. Indeed, these finding are contradicting with the results on the impact on receivables on firm's profitability in many developed counties (see Table 1), but consistent with Sharma and Kumar (2011), who also find a positive relation between ROA and accounts receivables in the case of India. The conclusion can be made that large and medium listed firms in Serbia use to keep their levels of accounts receivables to a high level during crisis years.Table 4 Regression model results for two dependant variables:Return on Total Asset and Operating Profit MarginDependent variable: ROTADependent variable: OPMIndependentStd.t-Std.t-variableCoeff.ErrorstatisticSig.Coeff.ErrorstatisticSig.(Constant)-,280*,085-3,281,001-,908,167-5,445,000ARRR,056,093,601,549,306,181-1,686,095RTR,041,0391,042,300,184,0772,397,018SIZE,038*,0123,219,002,108*,0234,659,000LIQ,008*,0023,545,001,020*,0044,525,000WeightedstatisticsR square,300,367AdjustedR,273,343squareSEof,057,112regressionF-statistic11,03314,937* Significant at 5% levelTable 4 shows that R-squared value is 0.300 (0.367) indicating that 30% (36.7%) variance in Return on Total Assets (Operating Profit Margin) as dependent variable can be explained through four independent variables used.CONCLUSIONThis study explores how large and medium sized companies listed at the regulated market segment of the Belgrade Stock Exchange manage their accounts receivables in the most profitable way during a crisis period, from 2008 to 2011.The analysis of the relation between accounts receivables and two dependent variables on profitability, return on total asset and operating profit margin, indicates a positive, but no significant relation. This implies that managers of the most successful Serbian companies are of the opinion that it’s profitable, and thus beneficial for their firms, to support their financially constraint customers by increasing the level of the receivables. In this way, companies secure their future sales and survival in crisis times. Companies take into account the trade-off between extending trade credits and increasing the default risk involved on the one hand, and the short-term and the long-term benefits of such a receivables management on the other hand. Profitability and creation value for shareholders over crisis time is achieved by increasing the accounts receivable levels.This study is featured at least by three main limitations. In the first place, it is based on the data of the Serbian non-financial firms listed at the regulated market. Therefore, a generalization of the results of this research for the whole economy (financial firms, non-listed firms) is not acceptable. Secondly, the analysis is limited to a four-year crisis period, not taking into account the impact on receivables on profitability in a previous, non-crisis period. It this way, a comparative approach could not be applied and the differences between non-crisis and crisis period could not be compared and highlighted. Finally, the correlation and regression analysis is conducted using the Return on Total Assets and Operating Profit Margin as dependent variables, and four independent variables. In this respect, future research should comprise a more comprehensive set of explanatory variables and should be based on a larger and comprehensive database.REFERENCES: FACTORING OF RECEIVABLES AUDIT TECHNIQUES GUIDENOTE: This guide is current through the publication date. Since changes mayhave occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.OverviewCompanies generate accounts receivable by selling goods or services to their customers on credit. Many companies who extend credit to their customers sell their accounts receivable to a factor. A factor is a specialized financial intermediary who purchases accounts receivable at a discount. Under a factoring agreement a company sells or assigns its accounts receivable to a factor in exchange for a cash advance. The factor typically charges interest on the advance plus a commission. The price paid for the receivables is discounted from their face amount to take into account the likelihood of un collectability of some of the receivables.Factoring is a technique used by companies to manage their accounts receivable and provide financing. Typically companies that have access to sources of financing that is less expensive than factoring would not use factoring as source of credit.A factor may provide any of the following services:Investigation of the credit risk of customers of the client; Assumption of the credit risk of customers; Collection of the client’s accounts receivable from customers; Bookkeeping and reporting services related to accounts receivable; Provision of expertise related to disputes, returns and adjustments; Advancing or financing. There are numerous types of factoring arrangements. Some of the basic types vary the treatment of credit risk assumption and customer or debtor notification.When the factoring agreement involves the purchase of accounts receivable where the factor bears the risk of a customer or debtor failing to pay the client for reason of financial inability it is a non-recourse or without-recourse agreement. In the situation where the client must bear the risk of non-payment due to financial inability, the agreement is a recourse agreement. In many instances, factoring agreements provide for accounts to be purchased on both a recourse and non-recourse basis depending on the credit worthiness of the customers or the pliance FocusA strategy has been identified in which multinational corporations use the factoring of accounts receivable among related parties. The goal of this strategy is to avoid U.S. taxation by shifting income offshore and to significantly reduce remaining U.S. income by deducting expenses related to the same income.Typical Fact Pattern:A U.S. subsidiary (“Taxpayer”) of a foreign parent earns sales income and books accounts receivable. The Taxpayer then factors (sells at a discount) the accounts receivable to a brother-sister foreign affiliate. The Taxpayer pays the foreign factor the following fees: a discount; administration fees; commissions; and interest.The Taxpayer deducts these fees or may net them against gross receipts. However, the foreign factor does not perform any of the typical services of a factor, including collection of the Taxpayer’s accounts receivable. Instead, theTaxpayer agrees to continue doing all or most of its own collection work on its accounts receivable. In some cases, factoring arrangements involve the use of a domestic (U.S. based) factor instead of a factor located offshore. In cases involving a domestic factor, some audit steps and issues discussed below may not apply. If the transaction is between two domestic entities it may be structured for state tax purposes and has no federal tax effect. In addition, insome cases, the Taxpayer and factor may be engaged in a financing arrangement involving securitizing the accounts receivable.General Audit StepsAlthough U.S. taxpayers are taxed on their worldwide income, the income of foreign subsidiaries of U.S. taxpayers is generally deferred from taxation in the U.S. Consequently, the existence of a factoring arrangement may not be readily identified on the face of a return. Therefore, at a minimum the following audit steps should be utilized:Submit a specific IDR to determine if any accounts receivable were sold if yes, were they sold to:A related entity; and/orAny entity located offshore.Review the tax return balance sheet to determine if the accounts receivable reflected thereon are reasonable for the size and type of business. Perform a comparative analysis of the balance sheets for the current and atleast 5 prior tax years, noting any significant reduction in accounts receivable. Review the tax preparation work papers for large debits to income. Review and analyze Form 5472 and the audited financial statements of both the domestic entity and the related foreign entity for any footnotes reflecting the sales and/or securitization of the accounts receivable. Request that theforeign entity provide this information in English. Note whether this analysis demonstrates income shifting from the domestic entity to the foreign entity. Also note whether there is evidence that the foreign entity was conducting a trade or business within the United States.The following facts should be determined during the audit through IDRs or functional analysis and by requesting documentary substantiation where appropriate.The FactorName and location of the factor;Relationship of the factor to the taxpayer; The name and location of a common parent of the factor and the taxpayer; Whether the taxpayer and the factor are part of a consolidated group; Whether the factor is a Controlled Foreign Corporation (CFC); The name of any promoter/advisor or accounting firm involved in structuring the taxpayer’s factoring arrangement.The Factoring ArrangementThe factoring arrangement is usually set forth in a Factoring Agreement between the factor and the taxpayer. Obtain a description of the terms of the factoring arrangement including if applicable the following:The names of the parties that entered into the Factoring Agreement; The date the Factoring Agreement was signed; The services the factor agreed to provide; The services the factor contracted back to the taxpayer; The fees the taxpayer charged the factor for performing the services contracted back to the taxpayer; The discount and fees charged by the factor for:discount on accounts receivable;administrative fees;commission fees;interest charges.The date the taxpayer was required to transfer accounts receivable to the factor; The date the factor had until to accept or deny the factored accounts receivable; Whether the sale of the receivables to the factor was recourse or non-recourse; The reasons the taxpayer provided for entering into the factoring arrangement; Whether the taxpayer ever entered a factoring arrangement before; Whether it is a common practice in the taxpayer’s industry to factor receivables; If a related entity is utilized to perform factoring, explain the source of the funding used by this entity to acquire the accounts receivable.SecuritizationIf the factoring arrangement involves the securitization of factored accounts receivable then obtain a description of the securitization process including:The purpose for securitizing the accounts receivable; The names and location of all entities involved in the securitization process; The relationship between the parties involved in the securitization arrangement; Whether any of the entities involved in securitizing the accounts receivable were a Special Purpose Vehicle (SPV); The fees charged by the parties involved in securitizing the accounts receivable; A description of how the accounts receivable were securitized, including the flow of funds; Whether the sale of the receivables to the factor was recourse or non-recourse; Whether the taxpayer ever securitized its accounts receivable before; Whether it is a common practice in the taxpayer’s industry to securitize accounts receivable;If a related entity is utilized to perform securitization, explain the source of the funding used by this entity to acquire the accounts receivable.Tax ReturnIndicate where on the tax return the expenses from the factoring arrangements are deducted. Identify if the factoring fees are netted against other items such as sales. Also, indicate if the factoring deductions are reflected as book/tax difference on Schedule M.Provide all tax preparation work papers related to the factoring/securitization arrangement. Financial StatementsIndicate if and how the factoring arrangements are presented on the taxpayer’s financial statements. Compare the treatment of how the factoring arrangements are presented on the financial statements with the presentation on the tax returns.Transfer Pricing StudiesTaxpayers engaged in transactions with related parties are required to establish an appropriate transfer price in accordance with prescribed methodologies. Analysis and evaluation of the appropriate price is what is known as a TransferPricing Study.To obtain a copy of any and all Transfer Pricing Studies, prepare a separate IDR consisting of the following two paragraphs:Please provide within 30 days of this request any principal documentation outlined in Treas. Reg. Section 1.6662-6(d) (2) (iii) (B) that has been prepared to support your transfer pricing methodologies for all years under examination. This information would generally be provided in the form of a study; however all principal documentation outlined under the Code and associated TreasuryRegulation which was prepared for the years under examination, regardless of form, is requested. This documentation should include all internal and/or external studies.It should be so noted that any documentation prepared by the taxpayer pursuant to Section 6662(e) must be in existence when the return was filed in order to meet the documentation requirement. In addition, if this documentation is not provided within 30 days of this request, and if there are significant adjustments to your transfer price as determined under IRC Section 482, a penalty may be applicable under IRC Section 6662(e) or (h).Functional AnalysisWhen determining the appropriate amount of factoring fee charged between related parties, it may be necessary to perform a functional analysis to determine the actual services performed; the entity which performed the services; and, any compensation charged for these services.A functional analysis prepared with respect to factoring arrangements should include, but not be limited to, the following:Identity of the factor and its geographic location. Identity of the legal form (partnership, corporation, LLC, etc.) of the factor Identity of the tax form (partnership, corporation, disregarded entity) of the factor. Identity of the functions performed by the factor; and, if appropriate, the functions which the factor contracts to be performed on its behalf. Identity of the number, names and location of any employees of the factor. Identity of duties specifically performed by each employee. Identity of who performs the factoring functions. Explanation, in detail, of any transfer pricing methodology used in determining how a related entity reimbursed the taxpayer for services provided (i.e. servicing rights). Explanation, in detail, of any risks assumed with regard to the factored receivables and the entity assuming such risks.Analysis, in detail, of the amounts attributable to these risks, to be supported by appropriate work papers.Bad Debt HistoryDetermine the bad debt history of the taxpayer’s accounts receivable for the years under exam and if possible the past 3 to 5 years. Calculate the percentage of receivables written off as bad debts for each of the years. Identify the first time that the taxpayer entered into a factoring arrangement and indicate the reasons the taxpayer provided for entering into such an arrangement.Dates the Receivables Were Collected and TransferredThe legal analysis of factoring arrangements may require identifying the dates and amounts of receivables transferred to the factor. Accordingly, for all the factored receivables determine:The dates and the amounts of the accounts receivable the taxpayer transferred to the factor. The dates the taxpayer received collection on the accounts receivable; and The dates the factor had until to accept or deny the transferred accounts receivable.Prior History on Sale of Accounts Receivable/Repeal of Mark-To-Market Treatment under Section 475/Tax AvoidanceObtain answers to the following questions:Prior to July 1998, did the taxpayer utilize Section 475 to mark-to-market its accounts receivable?Did the taxpayer start or complete setting up transactions involving the “sale” of its accounts receivable to related corporations after July, 1998? Were any of these corporations created or acquired around or after July, 1998 to carry out this sale of accounts receivable? Were any of these types of transactions set up and promoted/marketed by any of the accounting firms or other promoters/advisors? Were any of the valuation services (for the accounts receivable) provided by the same accounting firm which marketed the transaction? Who provided the valuation services?OtherObtain a copy of the Accounting Manual; Standard Operating Procedures and/or Flow Charts which describe the corporate factoring/securitization policies and/or procedures. Obtain all legal, accounting, financial, and economic opinions and memoranda secured by or on behalf of the taxpayer in connection with this transaction. Determine whether a Tax Contingency reserve was established for any transactions. Obtain copies of any communications, brochures, memoranda or other materials received from or sent to the Taxpayer or its representatives describing the factoring arrangement. Treas. Reg. section 6050PTreas. Reg. section 6050P contains final regulations to the information reporting requirement under section 6050P of the Internal Revenue Code for discharges of indebtedness. The preamble of the Treas. Reg. section 6050P regulations, describe typical unrelated party pricing of factoring transactions and provide an example demonstrating how a bona fide unrelated party factoring transaction is often priced. The preamble states that factoring between unrelated parties ordinarily involves a factor who performs the following functions:Initial credit investigation; Selective assumption of the risk of loss (sometimes referred to as guaranteeing credit); On-going credit monitoring of the client’s customers, collection and bookkeeping.The preamble states that for typical transactions with unrelated parties factoring fees range between 0.35 percent of the face value of the accounts receivable (if the client retains the collection function) and 0.70 percent of the face value (if the factor undertakes the collection function).Accordingly, it may be indicative that a factoring arrangement between related parties is abusive if the factoring fees are much higher than the typical factoring fees charged for unrelated parties. This type of analysis should be made in determining whether a section 482 adjustment is warranted.Typical Issues:Potential issues include, but are not limited to:Were there deemed dividends from the U.S. taxpayer to its foreign parent in the amount of collected accounts receivable transferred to the foreign factor; and, were withholding taxes due on the dividends paid to a foreign recipient? Have the arm’s-length principles under section 482 been applied with respect to the sale of accounts receivable to a related party? Did the foreign factor’s factoring activities generate income from a trade or business within the United States? Should losses between the related parties in the factoring transaction be adjusted under Section 267? Was the factor a controlled foreign corporation (“CFC”) conducting intercompany transactions with the Taxpayer pursuant to Treas. Reg. 1502?Should losses from the factoring transaction be disallowed under Section 269 because the factor was acquired or created to evade or avoid incometax?REFERENCES: HYPERLINK ""pub/lrs-utl/tactoring of receivables atg final.pdf4.0 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYBLE IN LRGE FIRNISH FIRMS’ BALANCE SHEETS: WHAT DETERMINES THEIR LEVELS?ABSTRACTThis study empirically examines the determinants of Finnish listed firms’ accounts receivable and accounts payable. The results show that accounts receivable are most likely to be affected by the firms’ incentive to use trade credit as a means of price discrimination. Increases in the interest rate level also increases the amount of accounts receivable through increased demand for trade credit. The most important determinants for the level of accounts payable appear to be the supply of trade credit, firm size, interest rate level, the ratio of current assets to total assets, and insufficient internal financing.INTRODUCTIONOfficial statistics show that Finnish manufacturing companies’ accounts receivable are on aver-age 9.7% and accounts payable 6.1% of total asset (firms with more than 20 employees). For retail firms the respective percentages are 8.1% and 16.0% and for wholesale firms the numbers are as high as 24.1% and 23%, respectively.1 The importance of trade credit varies by country, and is likely to be highest in industrialized countries, although there is substantial variation across them (Marotta, 1997). Rajan and Zingales (1995) investigate non-financial firms in the G7 countries, and find that the proportional share of accounts receivable varies between 13% (Canada) and 29% (Italy), whereas the range for accounts payable is between 11.5% (Germany) and 17% (France). It is thus apparent that accounts receivable may form a substantial fraction of a firm’s assets, and accounts payable may be an important source of outside funding. Several theories have been developed to explain trade credit use. However, firm level empirical evidence is scarce and it is all on U.S. data. This paper tests the available theories using data on Finnish listed firms.THEORIES AND SOME EMPIRICAL EVIDENCE ON TRADE CREDITSeveral theoretical studies attempt to explain why suppliers provide financial intermediary services to their clients, and why these are willing to use trade credit instead of, e.g., bank debt even if trade credit is well known to be a more expensive source of funds.Transaction costshave been stated to be one reason to maintain credit sales. Ferris (1981)argues that the existence of trade credit allows flexibility in payments and makes it possible to cumulate the payments of several successive shipments to be paid at once thus leading to savings of transaction costs. Furthermore, trade credit allows the buyers to hold smaller cash balances and save money accordingly. Other versions of the transaction costs theories relate to seasonalities in the consumption pattern of the selling firm’s products (for a detailed de-scription, see Petersen and Rajan, 1997).Financial modelsare based on capital market imperfections relating to information asymmetries. Schwartz (1974) suggests that firms with better access to the institutionalized capital market and with lower cost of financing will offer trade credit to firms with high costs when borrowing from financial intermediaries. As Schwartz points out, the institutional arrangement of trade credit enables established firms to help finance the growth of their customers. It may also be argued that trade credit can serve to mitigate credit rationing while trade credit provides a signal on the buyer’s good quality to the financial intermediary (Frank and Maksimovic, 1998; Biais and Gollier, 1997).2Other financial models suggest that the seller has an advantage over financial intermediaries in information acquisition and controlling the buyer. In the Anglo-Saxon countries, all these advantages relate to the closer and more ’physical’ relationship between the seller and the buyer than between the buyer and financial intermediaries. E.g., if the buyer does not pay in time, the supplier can threaten to cut off future supplies. A financial intermediary may not have such powerful tools in use, since the threat to withdraw future finance may not have an immediate effect on the buyer’s behavior (Petersen and Rajan, 1997).Trade credit may serve as a means of price discrimination when law (e.g., the Robinson-Patman Act in the U.S.) prohibits companies from directly using different prices for different customers. This is possible when credit terms contain an early payment discount. Firms with market power are more likely to offer such terms (Brennan et al., 1988; Mian and Smith, 1992). Such firms are operating with a high contribution margin, and have a strong incentive to gather additional sales but without cutting the price to existing customers. Therefore, they offer trade credit that creditworthy customers will avoid because of its high price. On the other hand, risky customers will take the credit because it may still be cheaper than to borrow from other sources (Brennan et al., 1988; Petersen and Rajan, 1997).Trade credit can be considered an implicit guarantee for the seller’s products. The idea is that the buyer is given time to become convinced on the quality of the product before he pays for it (Lee and Stowe, 1993). Frank and Maksimovic (1998) argue that trade credit as a guarantee is likely to be of particular importance for small and less well established sellers.Some studies discuss the effect of changing macroeconomic conditions on the use and terms of trade credit. Schwartz (1974) argues that trade credit reduces the efficacy of any given amount of monetary control, but also mitigates the discriminatory effects generated by restrictive monetary policy. When loan supply is constrained, larger firms with easier access to institutionalized capital markets can extend trade credit to smaller firms (Kashyap et al., 1993). Under those circumstances it can be expected that smaller firms are willing to extend the term of the offered trade credit because rising interest rates make trade credit a more competitive form of short-term financing.As Petersen and Rajan (1997) point out, there is little empirical evidence on the above theories in addition to their own study. They use firm level data from the National Survey of Small Business Finances that was conducted in 1988–89, and find that firms use trade credit more when credit from financial institutions is not available. Their evidence also shows that well established suppliers might act as financial intermediaries by lending to firms with no access to the financial markets. The study further finds some evidence to support the theorythat trade credit is used as a means of price discrimination.There are several differences between our data set and Petersen and Rajan’s (1997) data. One important difference is that between the Finnish and U.S. capital markets. The Finnish capital markets are bank-based and highly concentrated. A number of studies on relationshiplending suggest that close bank-borrower relationships enhance credit availability. These studies also suggest that firms operating in concentrated as opposed to competitive markets have easier access to funds (Petersen and Rajan, 1995; Boot and Thakor, 1999). One distinguishing feature of the bank-based systems is that banks monitor the performance of firms more closely than in the market-based systems such as that of the U.S., play an active part in the administration of many large corporations, and may even own substantial amounts of their share capital. Under the Finnish circumstances, this fact may provide banks a relative advantage over suppliers as opposed to the financial intermediaries in the U.S., and thus have an effect on the firms’ patterns of using trade credit in their short and intermediate term funding.Second, we use time series data that allow us to test the determinants of trade credit over time, whereas Petersen and Rajan (1997) used a cross-sectional one-year sample. We include explanatory variables such as the interest rate level and year-dummies that cannot be used when the data are available for only one year. A third difference is that our data consist of firms that are among the largest in Finland, whereas Petersen and Rajan’s sample mainly consisted of small firms.The study proceeds as follows. Section 3 describes the data sample used. Section 4 presents the results on the determinants of accounts receivable and accounts payable. Section 5 concludes the study.DATA DESCRIPTIONThe data sample consists of financial accounting data on firms that were listed on the Helsinki Stock Exchange either in the main list or in the OTC list during the research period 1989– 1997. For some firms data are available for shorter periods. The entire sample size is 1018 observations from 121 firms.Table 1 shows the time-series behavior of median accounts receivable (divided by as-sets) in firm size quartiles during the research period. Table 2 reports the respective results for accounts payable. The data have been classified into firm size quartiles based on annual sales.The relative amounts of trade credit offered and used remain quite stable during the research period, and neither accounts receivable nor accounts payable display a trend in time in any quartile of sales. However, there are certain differences in trade credit policies between the different quartiles. Especially, firms in the smallest sales quartile clearly havethe smallest accounts receivable and accounts payable relative to assets, while differences between the three larger quartiles are smaller and less consistent. The relative difference between the lowest sales quartile firms and other firms is much larger for accounts payable. The lowest sales quartile firms borrow from suppliers on average only 50% compared to theTABLE 1. Median accounts receivable to total assets: time-series behavior in different firm size quartiles. The smallest firms are in quartile < 0.25 and the largest firms in quartile > 0.75.YearsQuartile of sales198919901991199219931994199519961997All years< 0.250.1080.1010.1020.0680.0990.1060.1020.0910.1190.1020.25 – 0.500.1330.1510.1290.1510.1420.1770.1700.1640.1480.1490.50 – 0.750.1620.1460.1250.1170.1300.1330.1480.1470.1280.138> 0.750.1350.1340.1250.1280.1290.1300.1470.1410.1620.136All firms0.1380.1340.1190.1230.1310.1320.1440.1400.1430.133TABLE 2. Median accounts payable to total assets: time-series behavior in different sales quartiles.The smallest firms are in quartile < 0.25 and the largest firms in quartile > 0.75.YearsQuartile of sales198919901991199219931994199519961997All years< 0.250.0350.0450.0250.0200.0300.0270.0340.0330.0390.0310.25 – 0.500.0620.0570.0450.0520.0530.0710.0720.0730.0800.0820.50 – 0.750.0690.0590.0540.0660.0550.0690.0580.0550.0580.059> 0.750.0810.0750.0610.0670.0700.0850.0820.0790.0860.078All firms0.0680.0590.0500.0510.0530.0710.0620.0600.0710.060median firm of the total sample, whereas the respective ratio when lending to customers is about 75%.The result concerning the differences between large and small firms may not be quite generalizable because there in fact are only large firms in our sample in the context of the entire population of Finnish firms. However, also Petersen and Rajan (1997) found that larger firms tend to offer more trade credit to their customers and they also hold larger balances of accounts payable. Their results were similar for a sample of large COMPUSTAT firms as well as for their primary sample consisting of small and medium sized firms.Table 3 shows the median percentages of accounts receivable and accounts payable classified by industry. The data are divided into four industry categories (classification codes used by Statistics Finland since 1995 are in parentheses): manufacturing and mining (C, D), energysupply and construction (E, F), retail and wholesale firms (G, H) and other services (I, J, K, O).Firms in wholesale and retail industries have the largest accounts receivable and accounts payable (16.6% and 13.3%, respectively). Accounts receivable are an important part of assets (14.7%) also in manufacturing and mining firms, whereas the level of accounts payable inTABLE 3. Accounts receivable and accounts payable by industry.Industry (classification codesMedianMedianMedianMedianused by Statistics FinlandAccountscollectionaccountspaymentare in parentheses)Receivableperiodpayableperiodto total assets(days)to total assets(days)Manufacturing and mining (C, D).14756.06759Energy supply and construction (E, F).07955.04157Trade (G, H).16644.13353Other services (I, J, K, O).09542.04274Total.13351.06060these firms’ balance sheets is only 6.7% of total liabilities. In general, it is true for all industries that firms hold more accounts receivable than accounts payable. The medians for the whole sample are 13.3% and 6%, respectively.RESULTSWe regress accounts receivable and accounts payable on variables that can be argued to be their determinants based on the theories discussed earlier. We shortly discuss the theoretical relevance of each variable while presenting the empirical results from the estimations. Table 4 first summarizes the variables of primary interest and presents correlations between them.Accounts receivableTable 5 presents the results from regressing accounts receivable (scaled by assets) on the different explanatory variables.4 Model I in table 5 is estimated using the variables listed in table 4 above. Since it seems possible that the relationship of accounts receivable with sales growth and cash flow is not linear, we estimate model II. The sales growth and cash flow variable are now both separated into two variables by multiplying them with (0,1) dummies indicating whether a particular observation has been positive or negative.Demand for trade credit. It is convenient to think that the level of a firm’s accounts receivable depends on how much it decides to lend to its customers. However, as Petersen and Rajan (1997) point out, there is most probably also a demand factor that affects the amount of The number of observations varies slightly across the different regressions because of list wise deletion of observations with missing data on some variable(s).As it is the common practice in related literature, assets is used as the scaling variable for both the dependentvariable and independent variables when scaling is needed. Potential problems related to this practice are dis-cussed in Kasanen and Lukka (1993).TABLE 5.The determinants of accounts receivable.Dependent variable: accounts receivable/assetsModel I (N = 896)Model II (N = 894)VariableCoefficientSignificanceCoefficientSignificancelevellevelLN(book value of assets). 002. 094. 002. 289LN(1 + firm age)–. 002. 493–. 002. 279% sales growth–. 0002. 566% sales growth if positive, 0–. 008. 078% sales growth if negative, 0. 078. 001Operating cash flow–. 046. 227Cash flow when positive, 0–. 082. 067Cash flow when negative, 0–. 007. 992Contribution margin. 091. 000. 087. 000Market interest rate1 . 198. 0801 . 111. 099Year - dummy 1989–. 094. 141–. 088. 159Year - dummy 1990–. 120. 101–. 113. 119Year - dummy 1991–. 122. 069–. 111. 096Year - dummy 1992–. 126. 066–. 118. 081Year - dummy 1993–. 059. 059–. 054. 080Year - dummy 1994–. 025. 138–. 022. 189Year - dummy 1995–. 031. 106–. 029. 123Year - dummy 1996–. 009. 356–. 008. 371Manufacturing and mining. 049. 000. 049. 000Wholesale and retail trade. 041. 000. 042. 000Other services–. 015. 133–. 012. 203Constant. 009. 790. 035. 298Adjusted R - squared. 238. 000. 248. 000trade credit a firm is able to extend. This demand is practically impossible to measure directly. Most firms have many customers whose individual attitudes towards trade credit differ from each other. For instance, a retail firm may have thousands of credit customers who may be either individuals or other firms. On the contrary, the accounts payable of a given firm may be more homogenous since they usually are payables to other firms whose number at least in certain industries may be relatively small.Since we don’t know the demand curve for trade credit, this issue must be taken into account when interpreting the estimated coefficients. Petersen and Rajan (1997) illustrate the alternative interpretations of the result that large firms have higher accounts receivable. First, this result may mean that larger firms are less capital constrained because they have better access to capital markets. An alternative interpretation is that a part of large firms’ customers may be credit rationed for one reason or another, and the larger than average accounts receivable of large firms may be explained by the demand factor. However, we believe that the use of industry dummies in our regression partly mitigates this problem since they divide the customers of the sample firms into more homogenous groups.Creditworthiness and access to capital markets.A firm’s creditworthiness and access tocapital markets are most commonly measured by firm size and age. We use the natural log of the firm’s total assets (Ln (Assets)) and the natural log of firm age (Ln(1 + Firm Age)) to proxy for the supplier’s access to external capital.The results in table 5 show that asset size is significant in model I (p = 0.094), but insignificant in model II. Firm age remains insignificant in both models, even when the square of the log of firm age is added in the model (the coefficient of the squared age variable is not reported in table 5). We added the squared age variable, because Petersen and Rajan’s (1997) results show that after 19 years of operation a firm’s level of accounts receivable peaks and starts to decrease.The result that a firm’s creditworthiness and access to capital markets does not affect the level of trade credit it extends is theoretically unexpected, and it also differs from previous empirical findings by Petersen and Rajan (1997). Table 4 shows that firm size and age are correlated by factor 0.4. Although the correlation is not very large, it may be one reason be-hind the insignificance of firm size and age as predictors for trade credit extended.Growth.Firms may have trade credit policies that are in connection with their target growthrates. Traditionally, credit terms such as trade credit discounts and time of payment are believed to be used as competitive tools. A firm willing to grow may choose a strategy of extending trade credit with longer due periods than its competitors. This suggests that growth should be positively related to the level of accounts receivable. However, also firms whose sales have developed inadequately, may use trade credit to enhance their sales. Especially, a firm whose sales are declining may extend more trade credit than the average firm in its industry (Petersen and Rajan, 1997). In this study, we measure growth by the annual sales growth percentage.Empirically, it appears that neither of the above theories holds. When negative and positive observations are in the same variable, the regression coefficient is insignificant. However, when the variable is partitioned on the basis of the signs of the observations, it appears that the coefficient of the variable with negative sales growth numbers has a significant positive coefficient. When interpreted, this result means that the more negative a firm’s sales growth, the less trade credit it extends. On the other hand, the coefficient of the variable including positive growth observations is significantly negative (p = 0.078), indicating that firms with high growth rates extend less trade credit than lower-growth firms. The results are exactly the mirror image to Petersen and Rajan’s (1997) results, who found that firms with high growth rates extend more credit than firms with lower growth rates. Additionally, their results showed that the more a firm’s sales declined the more it used trade credit to finance its customers’ purchases, and thus support both the above mentioned theories.Internal financingWe use operating cash flow (earnings before depreciation and interestminus taxes) divided by assets to measure the firm’s ability to generate cash from internal sources to finance the trade credit that it offers to its customers. The results in Table 5 are mixed and difficult to interpret. When the initial cash flow variable is used, the coefficient is insignificant. However, when positive and negative observations are separated into two variables, the variable with positive observations has a negative coefficient (significant at the 6.7% level), while the variable with negative observations is insignificant. This result means that the larger positive cash flow the supplier has, the less trade credit it is willing to extend to its customers. Petersen and Rajan (1997) find that the firm’s ability to generate cash internally from operations is statistically significant but its sign is unexpectedly negative. However, when they elaborate their analysis, they find that only losses are significantly negatively correlated with accounts receivable, and conclude that firms in trouble extend more credit to maintain sales. Our results may be considered exactly the opposite to theirs.Price discriminationPrice discrimination is a practice whereby different buyers arecharged different prices for the same product for reasons other than any differences which exist in the costs of supplying them. Monopolists will often enjoy the power to discriminate in this way. Our measure for price discrimination is the monopoly power of the firm measured by the ratio of contribution margin (sales minus variable costs) to assets. (See, e.g., Ferguson et al., 1993, for formal derivation and discussion).In our sample of large Finnish firms, it appears that price discrimination is by far the most important variable explaining accounts receivable management policies. Its coefficient is positive and statistically very significant in both models I and II in table 5.Cost of alternative capital. We use the annual average three-month HELIBOR rate to measure the underlying cost of capital. We expect to find a positive association between accounts receivable and the interest rate level, because the demand for trade credit can be expected tobe highest when the cost of alternative sources of funds is high. Table 5 shows that the interest rate has a significant positive coefficient in both models I and II (p = 0.099).TimeOur model includes eight year-dummies to control for annual changes with 1997serving as the control year. All coefficients of the year-dummies are negative indicating that the level of trade credit was highest in 1997. Interestingly, the negative coefficients are statistically significant during the period 1991–1993, when the economic conditions in Finland were weak. Thus, it seems that the deep economic recession reduced the amount of trade credit extended.IndustryThe coefficients of the industry dummies for manufacturing and mining firmsand for retail and wholesale firms are both positive and very significant. This indicates that firms in these industries extend more trade credit than in the two other industries (electricity supply and construction; other services).Accounts PayableTable 6 presents the results from regressing accounts payable on their suggested determinants. The variables (including control variables) are for the most part the same as above in the model estimated for accounts receivable. Additionally, there are two new variables: purchases (scaled by assets) describing the supply of trade credit and the ratio of current assets (financial assets and inventories) to total assets measuring asset maturity.Model III in table 6 is estimated using the ’original’ explanatory variables, whereas in model IV the sales growth and cash flow variables are both separated into two variables one containing positive observations and the other negative observations.Supply of trade credit.Petersen and Rajan (1997) use the fraction of the firm’s annualpurchases made on account as a proxy for the quantity of trade credit offered to the firm. Their sample consists of small firms some of which may be credit rationed by suppliers. Since our sample firms are larger firms we make an assumption that all purchases are on credit and use their annual purchases as a proxy for the supply of trade credit. We believe that this assumption is not very restrictive, since large firms typically don’t pay their purchases in cash. In measuring the supply of trade credit we have an advantage over previous research since we know the exact amounts of the sample firms’ annual purchases. Petersen and Rajan had to estimate the amount of purchases to measure supply of trade credit since U.S. firms do not provide information on the division of cost of goods sold into different cost categories such as wages and purchases.Because we use a proxy for the supply of trade credit, we can be more confident in interpreting the coefficients of the other variables in the model. The regressions for accounts receivable and accounts payable differ in this respect, since the coefficients of the former regression are reduced form coefficients that include both demand and supply side. (Petersen andRajan, 1997).The result concerning the supply of trade credit is clear and expected: purchases are statistically significantly associated with accounts payable, and their coefficient is positive. That is, an increase in the supply of trade credit enhances the level of its use.TABLE 6.The determinants of accounts payable.Dependent variable: accounts payable/assetsModel III (N = 911)Model IV (N = 909)VariableCoefficientSignificanceCoefficientSignificancelevellevelPurchases. 018. 000. 019. 000LN(book value of assets). 005. 000. 004. 000LN(1 + firm age)–. 001. 402–. 002. 134% sales growth–. 0006. 006% sales growth if positive, 0–. 012. 000% sales growth if negative, 0. 082. 000Operating cash flow. 085. 000Cash flow when positive, 0. 083. 001Cash flow when negative, 0–. 128. 062Current assets % total assets. 041. 000. 043. 000Market interest rate. 825. 037. 795. 037Year - dummy 1989–. 076. 040–. 074. 039Year - dummy 1990–. 091. 020–. 085. 038Year - dummy 1991–. 091. 020–. 082. 029Year - dummy 1992–. 088. 027–. 085. 026Year - dummy 1993–. 044. 016–. 041. 019Year - dummy 1994–. 019. 049–. 016. 083Year - dummy 1995–. 027. 014–. 026. 014Year - dummy 1996–. 007. 163–. 007. 194Manufacturing and mining. 023. 000. 023. 000Wholesale and retail trade. 047. 000. 049. 000Other services. 004. 528. 006. 299Constant–. 062. 001–. 053. 005Adjusted R - squared. 241. 000. 281. 000Creditworthiness and access to capital marketsThe results in table 6 show that asset sizeis a very significant explanatory variable for accounts payable in both models III and IV. How-ever, firm age remains insignificant in both models, even when the square of age is added in the model (coefficient not reported). We add the squared age variable, because previous re-search provides evidence that older firms have less investment opportunities than younger firms,and therefore they need less external funding.The results concerning size and age contradict the notion that larger and older firms would use less trade credit than smaller and younger firms. The positive sign of the size variable indicates that large firms which even otherwise have easier access to the capital market use more trade credit in their financing. Also Petersen and Rajan (1997) find that there is a weak positive correlation between the level of accounts payable and firm size.GrowthTheoretically, it may be argued that rapidly growing firms have better investment opportunities than other firms and would thus be willing to use more trade credit as a partial source of financing for new investments. However, the empirical results show just the opposite. As a whole, sales growth is negatively associated with accounts payable (model III). When this variable is separated into two variables one containing the positive values (negative values are set to be zeros) and another containing the negative observations (positive values set to be zeros), both variables are very significant. On one hand, the coefficient of positive growth is negative indicating that the faster a firm is growing the less it uses trade credit in its financing. On the other hand, the larger the sales decrease, the less trade credit a firm will use. Therefore, the maximum amount of trade credit is used by firms who grow slowly or not at all. Consistently with the theory explained above, Petersen and Rajan (1997) observe the mirror image of our results while they find that the more a firm’s sales is growing or decreasing the more it uses trade credit. One explanation to the different results is that Finland is traditionally a bank-dominated environment, and firms may rather turn to financial intermediaries (banks) than to extend the use of trade credit when their level of growth deviates from normal growth in one direction or another.Internal financingThe results show that operating cash flow is a significant explanatoryvariable for accounts payable with an initially positive coefficient (model III). However, when it is separated into two variables (model IV), it appears that the coefficient of positive cash flows is positive and the coefficient of negative cash flows is negative. This result means that the most liquid firms use more trade credit than the average firm and the same holds for firms with negative internal financing. The latter part of this result is consistent with the notion that firms in trouble use more trade credit, and it is also in line with Petersen and Rajan’s (1997) results.Asset maturityThe proportional share of current assets (current assets/total assets) is a(very) significant explanatory variable for the level of accounts payable. This is in line with the theories stating that firms attempt to finance assets of certain maturity with funds having the same maturity. This is done to schedule repayments of the financial capital to correspond with the decline in value in the firm’s assets (Myers, 1977; Diamond, 1991; Hart and Moore, 1991). Therefore, short-term (current) assets are financed using short-term debt such as accounts pay-able, while long-term assets are financed using long-term debt or equity.Cost of alternative capitalMarket interest rate is a significant explanatory variable foraccounts payable. It may be noted that it is statistically more significant than in the model(s) estimated for accounts receivable. This result may support the notion that movements of the market rate affect in particular the demand side of trade credit.TimeThe results concerning the year-dummies indicate that the level of accounts payable was highest during the control year 1997. All dummies except that of the year 1996 have statistically significant negative coefficients.IndustryIndustry effects are similar to the regressions for accounts receivable. The coefficients of the manufacturing and mining industries and the retail and wholesale industries are both positive and very significant indicating that firms in these industries use more trade credit in their financing than in the two other industry groups.CONCLUSIONThis study empirically examined the determinants of Finnish listed firms’ accounts receivable and accounts payable management policies. The results show that accounts receivable are strongly affected by the firms’ incentive to use trade credit as a means of price discrimination. Market cost of capital also has an effect on their level. The latter result may be largely explained by increasing demand of trade credit when market interest rates rise.All the variables that were used to explain the level of accounts payable were statistically significant although their signs were not always expected. The results show that the most important variables behind accounts payable policies are supply of trade credit, firm size, level of interest rates, asset maturity, and internal (insufficient) financing.The results of this study differ in many aspects from previous results obtained using U.S. data. These differences may largely be due to differences between the Finnish and U.S. capital markets, since Finland has a bank-based system much like those of Germany and Japan. Corporate bond markets are basically non-existent, and banks form the major source of capital even for most large firms. One obvious line of further research would be to examine the role of bank-borrower relationships, as financial intermediaries are an alternative source of capital for trade credit. However, data on relationships between firms and banks is private, and data samples containing such information are not publicly availableREFERENCES: Management of Accounts ReceivablePREFACEThis guide accompanies the Auditor-General’s Audit Report No. 29, Management of Accounts Receivable in the Commonwealth. It is intended toprovide an overview of the current trends and "better practice" approaches that are being adopted by organizations in managing accounts receivable.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 whom accounts receivable is a core business process. The better practices discussed in this guide are therefore recommended for consideration by Commonwealth government agencies.Not all of the practices outlined in this guide will suit each agency’s circumstances, however, it is considered that most agencies, which derive revenue on sale of goods and services on credit terms, will benefit from benchmarking their current practices against those detailed in the guide.INTRODUCTIONEffective management of accounts receivable presents important opportunities for agencies to achieve strategic advantage through improvements in customer service, cash management and reductions in costs.The primary objective of accounts receivable in the Commonwealth 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 which operate 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.All government agencies, including those operating in a monopoly, are required to demonstrate contestability - that is delivery of a high quality standard of service at a cost that is comparable to providers of similar services operating in similar environments. Improvements in accounts receivable management which reduce the cost of collecting monies can improve an agency’s ability to demonstrate contestability and accountability.INPORTANCE OF ORGANIZATIONAL CULTUREAn international receivables management benchmarking study commissioned by the Australian Taxation Office has highlighted the importance that organizational culture has in the successful management of accounts receivable. The study, which involved the survey of five international taxation agencies and eight domestic organizations for which accounts receivable is a strategic issue, indicated that management attitudes need to support practices for minimization of debt.All agencies should adopt a culture whereby staff are encouraged to obtain payment, where required, and not just focus on program or service delivery.THE ACCOUNTS RECEIVABLE PROCESSA typical accounts receivable process is mapped below.The process commences with a receipt of a customer order and ends with the collection or write off of a debt.Financial management functions such as accounts receivable have been traditionally viewed as transaction processing activities. An international benchmarking study referred to in the Paying Accounts Better Practice Guide issued by the ANAO in November 1996 indicated that up to 65 per cent of time was spent on non-value added activities across all government and industry sectors. The study suggested that the elimination or reduction of non-value tasks can be effected through better work practices and automation ofprocesses. This can be achieved by analyzing current processes and redesigning them to remove as much manual intervention as possible, reducing rekeying and appraisal activities and minimizing operator error. An important part of this analysis is a formal, structured risk assessment which identifies and measures exposures associated with the accounts receivable process.The following diagram highlights the opportunities available for improvement through better practices.Significant advances in accounts receivable performance and process efficiency are available to agencies through the following five complementary key management initiatives:Re-engineering accounts receivable Risk assessment Use of advanced technology Debt collection processes Performance Measurement These matters are addressed in the following chapter.RE-ENGINEERING ACCOUNTS RECEIVABLESome large private sector organizations have achieved real cost reductions and performance improvements by re-engineering the accounts receivable process. Re-engineering is a fundamental rethink and re-design of business processes which incorporates modern business approaches.The nature of accounts receivable is such that decisions made elsewhere in the organization are likely to effect the level of resources that are expended on the management of accounts receivable. An illustration of this point is the extra effort that must be put into debt collection where credit policy is poorly administered or too freely given. The strong linkages between different processes means that true improvements cannot be achieved without focusing on all aspects of the management of accounts receivable.The following better practices present opportunities to improve the accounts receivable function.Centralized ProcessingA better practice for the delivery of finance services is the adoption of centralized processing for finance functions such as accounts payable and accounts receivable. Centralized processing groups are typically high volume transaction processing centers servicing multiple operating groups. Their establishment achieves a number of benefits for the organization. These include the achievement of a high degree of specialist expertise in the function supported, the establishment of centers of excellence that develop and enforce common practices and standards and the achievement of cost efficienciesthrough the co-locating of systems and staff. The establishment of these centers also frees up other staff for more value adding work.One private sector firm reduced its total finance staff numbers by 12 per cent through centralized processing.Standing PaymentsResearch into better practice indicates that repayment rates are significantly enhanced by providing customers and debtors with alternative payment approaches. In addition to there being alternative payment methods there are also alternatives to issuing invoices in the traditional accounts receivable processing approach. These alternative payment strategies result in efficiencies in the management of accounts receivable.An approach that is available to agencies which deliver services on a regular basis resulting in recurring invoicing and receipting cycles is to arrange for the provision by customers of standing payments. An annual or bi-annual settlement can be undertaken to reconcile payments to services provided. The process can be facilitated by providing customers with regular updates of fees charged.The benefits of this approach to the service providers is the reduction of costs through the removal of the need for an invoicing and debt collection function and the more timely receipt of revenues. There is also benefit to the customer through the streamlining of payment processes. The approach is most effective if adopted in conjunction with payment by direct debit of customer bank accounts.Alternative payment optionsPrivate sector organizations and public authorities are finding that payment of accounts outstanding is likely to be quicker where a number of payment alternatives are made available to customers. They also find that the availability of convenient payment methods is a marketing tool that is of benefit in attracting and retaining customers.The following modern payment methods are available and provide the benefits of added customer service, reducing remittance processing costs and improving cash flow through faster debtor turnover.Direct debit - involves authorization for the transfer of funds from thepurchaser’s bank account; this approach has the advantage of reduced processing costs, however it can present security exposures.Integrated Voice Response - a system which combines use of human operatorsand a computer based system to allow customers to make payments over the phone, generally by credit card; this system has been proved highly successful in organizations which process a large number of payments regularly.Outsourced Agency Collection - payments are collected by an external agencyunder a contractual arrangement (e.g. Australia Post). The payment methodunder this approach can be either cash, check, credit card or EFTPOS. This method increases flexibility and convenience to the customer which may lead to improvements in the rate of payment. A variant on this approach is BPAY, a system whereby banks act as outsourcing partners by collecting payments from suppliers’ customers and directly crediting supplier accounts.Lock Box processing - an outsourced partner captures check and invoice dataand transmits the file to the client agency for processing in that agency’s systems. This approach transfers the cost of data collection to service provider.Other payment methods such as use of data kiosks by customers in public use areas and payment for goods and services via the Internet are likely to become readily available in the near future.Each of the above payment types have advantages and disadvantages which are likely to be peculiar to the environment that particular agencies operate in. Agencies need to balance the benefits in both the payment and receipting processes against the costs that some payment options may present to the agencies themselves.Marketing and educational activities can be used to promote timely payment.Agencies should provide information on the nature of products or services available, the required payment cycle, payment options available and the consequences of non payment.Customers should be aware of their liability at all times. A practical way of achieving this objective is the issue of monthly customer statements.Use of Payment IncentivesPrivate sector practice has been to, over time, reduce the level of reliance on discounting as an incentive for prompt payment. However, the practice is still used in government instrumentalities in Australia and should be considered by agencies which have problems with debtor turnover. Discounting can be used as an incentive for customers to pay upon receipt of services, thereby avoiding the use of credit terms.While discounting has the advantage of potentially shortening the average collection period it also reduces net revenue. Before deciding to offer discounts agencies should conduct an analysis of the effect that the utilization of discounting will have on net revenue. This estimate should be balanced against the costs of continuing to hold receivables at their existing levels, which is effectively the market interest rate applied to the annual carrying cost of receivables. Another issue for consideration is the alternative uses to which the funds tied up in receivables could be put.In addition to developing a range of incentives for early payment agencies should consider the imposition of penalties on late payment. In designing penalties agencies should be aware of legislative and policy considerations which may reduce the potential for major penalties such as removal of service.Case management approachWhere individual customers have strategic importance to the agency a case management approach may be adopted to the management of the agency-customer relationship. Under this approach all aspects of the relationship are drawn together including debt management. The increased knowledge of the customer that derives from the adoption of a case management approach can assist in the design of strategies for the prompt repayment of debt.Risk assessmentRisk assessment is a major component in the establishment of an effective control structure. Once risks have been properly identified, controls can be introduced to either reduce risks to an acceptable level or to eliminate them entirely. A proper risk assessment also creates opportunities for freeing processes from inefficient practices.In managing accounts receivable the key areas that management should focus on for the purpose of conducting a risk assessment are:debt management processes, and outstanding debts and debtors.Debt management processes The risk analysis involves a re-think of processes and questioning the way that tasks are performed. A risk assessment opens the way for efficiency and effectiveness benefits in the management of accounts receivable. In particular, processes can be re-designed to achieve the following benefits:the establishment of clear and concise policies for issuing credit and for recovery of debt;the removal of non-value adding tasks and clarification of roles and responsibilities, by, for example, streamlining delegations;the establishment of controls where exposures are noted;allowing staff to apply more initiative and ingenuity to everyday tasks and;the identification of new and more effective ways of delivering services.A credit policy document is a key component of the accounts receivable control environment and needs to cover all aspects of revenue and debt collection practices. It needs to be:written in plain English so that it is understandable by staff and customers;accessible to all staff who are required to administer it; and made available to customers in summary form. In addition, it shouldestablish a financial threshold under which it is uneconomical to pursue recovery action;set down criteria against which a debt might be considered for waiver;be kept up to date. This means it should be reviewed at regular intervals so that consideration can be given to incorporating new practices or initiatives, and be endorsed by executive managementAgencies should be aware that the credit term set in a credit policy will have a direct impact on their terms of trade.A checklist of features which should exist within a good policy document is included as an appendix to this Guide.Outstanding debts and debtorsThe application of a credit policy will not be fully effective unless there has been a comprehensive risk analysis of the customer population performed. This can be achieved by having detailed information on the characteristics of customers (and potential customers) and through the establishment of criteria against which to assess the credit worthiness of individual customers.The criteria needs to be laid out in the credit policy. Sufficient information on customers will need to be held on a comprehensive customer database. Key components of the database are:billing name and address;credit information;place of purchase;date of purchase;special service requirements (will vary with the nature of the service);method of payment;payment history; and customer type. This database will need to be regularly maintained and updated.Use of Advanced TechnologyAdvances in technology present an opportunity for improvement in accounts receivable processes. The principal innovations available are the integration of systems used in the management of accounts receivable, the automation of debt collection processes and the use of electronic commerce.Systems IntegrationImprovements are available from the integration of the revenue and accounts receivable systems. This integration results in remittances being automatically credited against a customer account with a simultaneous update of the general ledger. This process avoids the downloading of data and re-keying.A fully integrated system could exhibit some or all of the following features:electronic invoice; which extracts details from database of approved customers, credit terms and which is authorized electronically;quantity, price and account code for sales entered once only, on invoice; electronic notification of delivery of goods/services; customer and account code details extracted automatically from customer order for payment; automation of reminder letters, andautomatic triggering of write-off or waiver action.Electronic CommerceElectronic commerce is a term applied to the use of computer and telecommunications technologies, particularly on an inter organizational basis, to support trading in goods and services. It uses technologies such as electronic data interchange (EDI), electronic mail, electronic funds transfer(EFT) and electronic catalogue systems to allow the buyer and supplier to transact business by exchanging information between computer applications systems. This achieves cost savings by removing the need for direct negotiation between the parties.The Commonwealth government has required departments, through itsCommonwealth Electronic Commerce Service, to ensure that all suppliers andpotential suppliers of goods and services are given the opportunity to transact their business electronically. In its Statement of Direction on electronic commerce issued in July 1996 the government noted:"There is, in addition, an unrealized potential for the wider application of other electronic commerce technologies."The Statement indicated that individual departments should:"take account of the opportunities offered by electronic commerce in their business planning processes, and include in their information technology and telecommunications strategic plans relevant provisions covering the use or intended use of electronic data interchange both for core functions and in support applications."The objective of the Commonwealth Electronic Commerce Service to date has been to promote the use of electronic commerce by government agencies in purchasing. It is proposed to extend the system to payment of accounts in the near future. In situations where the government service recipients are other government agencies or non-government organizations which operate IT systems which have electronic commerce capabilities the potential exists for use of electronic commerce in accounts receivable. This potential is likely to increase in the future.Debt Collection processesDebt collection processes should be undertaken with the objective of reducing outstanding accounts while keeping sight of the need to maintain customer goodwill, in an environment of cost restraint.Better practice in debt collection includes the following:assessment of debts against a financial threshold before proceeding with recovery action; review of the accuracy of invoices following failure by debtors to respond to a letter of demand;categorize debtors in accordance with their ability and willingness to pay. Tailor debt collection processes in accordance with results of this analysis; prioritize debt on the basis of risk indicators. The indicators could include the payment history of the customer, debt level, demographics, etc; communicate directly with debtors most probably by phone and obtain personal commitment as to repayment schedule; staff have the authority to negotiate payment options within guidelines, without further approval from management; treat debt collection as a specialist function. Recruit specialists as required and provide appropriate training; and consider outsourcing all or part of the debt collection process to a private collection agency. Where debt collection is outsourced agencies should ensure that the Information Privacy Principles as laid down in the Privacy Act 1988 are complied with. Of vital importance in the design of debt collection procedures is the need to be proactive about the recovery process. Credit industry advice is that the more a debt ages, the greater is the risk of non-recovery. Estimates are that allowing a debt to age more than 90 days increases the risk of non-recovery by at least 20 per cent.Performance MeasurementAn integral part of the re-engineering of any finance function is to develop a suite of indicators which will measure progress over time.The following tables may be used by agencies both to establish performance indicators and to measure improvements which result from re-engineering the accounts receivable process. Each list should be modeled and adapted as necessary to suit the requirements of individual agencies.Table 1 is an example of a type of value analysis. Under this approach the data on time spent on each part of the process would most likely be based on estimates. The benefit of this approach is that it makes clear to managers the proportion of time that is spent on non-value adding activities in the accounts receivable cycle. This type of analysis is not an absolute indicator of cost effectiveness of processing as it takes no account of costs, however, it does demonstrate the interrelationship between the various steps in the process and therefore opportunities to reduce non value added activities.Table 2 provides examples of the types of performance indicators that agencies can use to measure themselves against both standard and best practice, at a point in time and over time.Following is an outline of the possible uses of some of the measures of effectiveness in accounts receivable management:Debtors turnover - This ratio measures the average period for which salesrevenue will be held in accounts receivable. This measures the efficiency and effectiveness of receivables collection.Accounts Receivable to Revenue ratio - This ratio can be used to highlighttrends in the level of investment in accounts receivable. Where accounts receivable as a proportion of monthly revenue exceeds an established bench mark, thereby indicating the possibility of interest foregone, the matter can be highlighted for management attention.Receivables Aging Schedule - This schedule is a listing of debtors by agingcategory. Analyzing this schedule allows Accounts Receivable management to spot problems in accounts receivable early enough to protect the agency from major revenue problems. It may also assist in highlighting individual delinquent accounts.In addition to measuring the effectiveness of the accounts receivable process as a whole specific debt collection techniques and their effectiveness should be monitored. This information can be used when assessing alternative debt collection strategies. It is of assistance when conducting assessments of this type to be cognisant of the costs of the relative collection strategies.An important consideration in this process is the cost of measuring and analyzing performance data. Where possible agencies should seek to have performance information on activities such as accounts receivable part of their Financial Management Information Systems.The current move ofCommonwealth agencies from cash based accounting systems to accrual systems presents an opportunity for agencies to include the production of performance information as a feature of any new systems.It is also critical that reports be timely, present information in a readily digestible fashion and that they are directed to the appropriate levels of management. Reports presented to higher levels of management are more effective when they are presented in summary form, often with table or chart form presentations. Reports containing too much data are unlikely to be effective. Better practice would be to obtain management input into the design of reports to ensure that the reports are used as intended. A good starting point in designing management reports is to carry out a survey of users to establish what they like and dislike about the current suite of reports.Table 1 - Example of Value Analysis of Accounts Receivable ActivitiesActivityValueCurrentCurrent TargetHours% TimeHoursTimeSet priceVAGrant creditBRMake saleVAIssue InvoiceBRUpdate receivables ledgerBRDeal with customer inquiryNVAReceipt paymentVAIssue monthly statementNVAIssue letter of demandNVADetermine repayment schedule with NVAdebtorMatch payment to invoiceBRCode: VA - value adding; NVA - non value adding; BR - business requirementTable 2 - Suggested performance indicatorsIndicatorCurrentTargetCommonBestBenchmarkPracticeBenchmarkEfficiency MeasuresInvoicesprocessed perFull10005000Time Equivalent(FTE)staffmember per monthRemittances processedper20008000FTE per monthDebtors contacted per FTEper monthDirectlabourcostper*invoice/remittance/debtcollection actionCost ofaccountsreceivable0.3%0.15%as a percentage of revenuefrom credit salesCost ofaccountsreceivableas a proportion of total administrative costscosts will vary with the nature of invoice production and issue, the nature of remittance and the type of debt collection actiondependent on nature of businessa relatively low figure will indicate better practice, however, the level of doubtful debts will be influenced by factors outside accounts receivable management such as accounting policy.APPENDIXThe following is a checklist of features which should exist within a good policy or procedure document.The policy is endorsed by an Executive OfficerThe policy is based on a risk assessment of the agency and it’s customers. This is recognized in the document by stating the risk factors.The policy:Explains the nature of debts and debtorsOutlines the agency’s rights and duties with debtors; and legal consequences. Details the terms of trade and circumstances when a delegate may change the terms of trade Identifies other related procedure manuals, legislation which can guide processing of debts. Outlines mode of payment accepted and under what conditions (eg any transaction less than $1,000 must be by credit card) Identifies mechanisms for reviewing requests from debtors Outlines general procedures for handling unusual requests or events Outlines who is responsible for debt collection States how and when to communicate with a debtor regarding an overdue amount States procedures to recover debts from employees Lists options for recovering an overdue debt (e.g. allow installments) Describes the use of commercial debt collection agenciesIdentifies whom has the authority for determining the mode of collecting an overdue debt (e.g. installments) and identifies circumstances to guide the decision. Identifies when to record a debt as overdue (including whether a period of grace applies). Details procedures for imposing charges Details the preparation of and requirement for certain report production Identifies means of monitoring debts Outlines the process of managing dishonored checksLists circumstance when debts no longer need to be pursued and whom has the authority to decide not to pursue a debt States clear and comprehensive standards of performance (including the desired relationship with the customer) and targets for the timing of debt collection (e.g. 80% within 30 days from date of invoice). Details the requirement to review the policy and procedures - when, whom byREFERENCE: .au/uploads/.../Management of Accounts Receivable.pdfANALYSIS/SYNTHESIS:The proponents notice the complex process of the AR and AP in different firms, from household AP/AR to a commercial and business organizations. They have different Payables components. Same is true in what they receive. But one thing in common that matters most is the generation of a specifically detailed report that an accountant can rely on. Though it differs from time-to-time updates (weekly, monthly, quarterly, annually, etc.), they still spread out the clear details of where the company's budget is allocated. They also have a good communication along with the governing bodies of law that constitutes their economical process. Of course, each company mentioned above has a unique set of computations of their accounting process. We observed how relevant the AR/AP process in accounting. It serves as a "balancer" in accounting core group. But due to economic differences, some AP/AR structural figures are differently defined along with other accounting subsystems.SYNTHESIS/ANALYSIS MATRIXRel. Literature FindingsProposed system specsSynthesis/AnalysisIncludes Treasury Mgmt.Originally doesn’t include treasury mgmt.Treasury is now a part of the core processes of AP/AROnline-based transactionsNot connected onlineDue to scope definition, It does not need to be connected online.Bank-Related processNo banking processesFor easy monitoring, it has no bank accounts included.Report GenerationGenerates ReportIt generates a more detailed report, ready to be viewed and to be printed.Credit/Debit presentationDescription/Viewing of AP and ARDisplays a form of AP designation and has a table representing the descriptive aspect s of AP and AR.End of the month Report presentationDaily update, directly generated in the GLDirectly updates the transactions being processedLegality issues being addressed to avoid business anomalyBusiness rules is also considered, but with minimal definitions.Follows the legal way of transaction process.-170682-23392BESTLINK COLLEGE OF THE PHILIPPINESCollege of Information Technology#1044 Brgy Sta. Monica, Quirino Hi-way Novaliches, Quezon CityQuestionnaires :Can we have the origins of the previous system being used?What is the difference between AR and AP? (Accounts Payable/Receivables) in your system?What particular accounts do you handled difficult?Can we know how you compute the AP/AR in your existing system?What specific reports do you issue?Who is/are the personnel using the system?In your case, as a Security Agency, what particular payables and receivables do you have?Do you use Purchase Order? How?Do you use Receiving Reports? How it goes along with the system?How about the Vendors invoice. Can we have a sample of your forms/reports?How do you update your account payables and receivables? Is it weekly, monthly, quarterly, etc?Do you encountered problems while using the system?Can we know the System’s scope?When using the system, do you have in mind that you must have an assistant? Why or why not?How the Manager/Head monitors the transaction process?What database management you use? How can you describe its connection with your treasury system? Can we view them?Just in case, what particular perspective do you want to your existing system to change?Is this system can be operated only by accountants, or it is an easy-to-use to other assigned personnel?Chapter III-EIS PROJECT MANAGEMENT AND DEVELOPMENTRISK MITIGATION, MONITORING, AND MANAGEMENT PLANINTRODUCTIONThis section gives a general overview of the risk mitigation, monitoring, and management for the APART MS.SCOPE AND INTENT OF RMMM ACTIVITIESThe proponents targets a goal to create an IS software with less defects, but in reality, there’s no such thing as a perfect software. In this regard, risk management plan must be considered as a must in creating a system software. Early identification of errors is the best possible ways to prevent it. The goal of RMMM in creating system software is to check out future risks that the creators and the proponents may encounter.RISK MANAGEMENT ORGANIZATION ROLEProponents are assigned to handle each task of managing the risk. It is a must so that every errors they encounter, they have possible remedies to apply.Software development can avoid having errors by double-checking their schedule, product size, estimated time and cost, etc.Providing all necessary software during the early phase of the development.Software development team can avoid risk by getting all the details of the equipment that are provided or accessible to them.Client can avoid risk by making all necessary business changes before initialization of request.RISK DESCRIPTIONThis section describes the risks that are likely to be encountered during this project. RISK TABLEThe following table describes the risks associated with the project. The appropriate categories of the risks are also given, as well as probability of each risk and its impact on the development process.DESCRIPTION OF RISK MPROBABILITY AND IMPACT FOR RISK MThe following is the sorted version of the above table by probability and impact.CategoryRisksProbabilityImpactEmployee RisksLack of training and experience40%1Process RisksLow product quality35%1Product SizeWhere size estimates could be wrong30%2Development RisksInsufficient resources30%2Customer RisksCustomer may fail to participate20%3Technology RisksObsolete technology10%2Business ImpactProduct may harm the business10%3Table-Risk Table (sorted)Impact ValuesDescription1Catastrophic2Critical3Marginal4Negligible RISK MITIGATION, MONITORING, AND MANAGEMENTThis section in detail describes Risk Mitigation, Monitoring, and Management for each of the possible risks. It will talk about ways to avoid, monitor, and derive the information of the risk.RISK MITIGATION FOR RISK MPRODUCT SIZETo limit risks, the existing process of Accounts Payable and Receivables subsystem under the Service Management System (SMS) must be mitigated/reduced, without affecting the core process. Simply put, it only expresses a report of what is paid and received.BUSINESS IMPACTThe subsystem proposed processes only the Accounts Payable and Receivable alone, with Treasury for reference.CUSTOMER (USER) RISKSTo avoid and lessen the mishandling or incorrect operation of the proposed system, simplification and “HELP” Button on the Information System must be present.PROCESS RISKSRisk factors including data redundancy, in terms of input and Import and Export process may not function well along with other related IS.TECHNOLOGY RISKSCapacity of the required unit (computer/s) cannot meet the specifications needed for the user and database of the system.The possibility of a low-end unit being used for a high-end petition with other IS being proposed is a risk.Upgrading of the proposed system in future use.DEVELOPMENT RISKSWhen creating the said Information System, the developer can encounter several risks:Unwanted changesBypassing or overlapping process that the systems scope may take in.Technical error in means of Power Supply, Unit incapability etc.Can also encounter Piracy cases.EMPLOYEE RISKS (TEAM MATES)Informal brainstorming, waste of time, knowledge does not meet system requirements.Irresponsible membersRISK MONITORING RISK MPRODUCT SIZETo limit risks, the existing process of Accounts Payable and Receivables subsystem under the Service Management System (SMS) must be mitigated/reduced, without affecting the core process. Simply put, it only expresses a report of what is paid and receivedBUSINESS IMPACTThe subsystem proposed processes only the Accounts Payable and Receivable alone, with Treasury for reference.CUSTOMER (USER) RISKSRisk factors including data redundancy, in terms of input and Import and Export process may not function well along with other related IS.PROCESS RISKSRisk factors including data redundancy, in terms of input and Import and Export process may not function well along with other related IS.TECHNOLOGY RISKS*Capacity of the required unit (computer/s) cannot meet the specifications needed for the user and database of the system.*The possibility of a low-end unit being used for a high-end IS.*Competition with other IS being proposed is a risk.*Upgrading of the proposed system in future use.DEVELOPMENT RISKSTime and Cost Resources is limited.EMPLOYEE RISKS (TEAM MATES)Miscommunications among members can occur and personnel related cases are expected.RISK MANAGEMENT FOR RISK MPRODUCT SIZEWhen monitoring our proposed systems process, the proponents will focus in monitoring the system, in terms of giving time to our proposed systems process.BUSINESS IMPACTWhile the monitoring is on process, the proponents shall communicate with the management’s clients the proponents assigned for us to know if there is/are some adjustments to be done with the proposed system.CUSTOMER (USER) RISKSThe proponents will put a HELP BUTTON in the proposed system for them (the user/s) how the proposed system works.PROCESS RISKSAs a back-up in case of unexpected problems in performing the work, each proponent must be knowledgeable in the work of each other given by the group’s Project Manager.TECHNOLOGY RISKSThe proponents will search/find other techniques for us to make our clients agree on the proposed system.DEVELOPING RISKSEMPLOYEE RISKS (TEAM MATES)SPECIAL CONDITIONSpecial conditions that are associated with the software are as follows:Use of laptops/computers:The proponents need to make sure that all inspectors at the facility are comfortable with the use of the units.Login:The proponents need to make sure that the person logged in will only have access to the certain parts of the application, this depends on the rights granted to the users. The proponents must explain to each user why they are not able to use some of the certain parts of the applications.SOFTWARE CONFIGURATION MANAGEMENT PLANINTRODUCTIONDuring the time of the software development the proponents will be making changes to our original plans. Software Configuration Management Plan is developed so that the proponents can identify the change, control the change, make sure that the plans are implemented correctly and to make sure that the changes will be reported to others. SCOPE AND INTENT OF SCM ACTIVITIESThe main purpose of SCM is to make, report and track any changes made to the original software development plan. It is applied throughout the software development process and will help the proponents to keep track of changes and also go through and make changes. SCM procedures will give the proponents a good map of the software so that if the proponents need to make more changes it will be relatively east to do. SCM will maximize productivity by minimizing mistakes.SCM activities are developed to:Identify the ChangesControl the ChangesImplementation of Change/s are ensuredThe changes have to be documented.SCM ORGANIZATIONAL ROLESince the proponents have rather a small development team, each member of the team should accept the responsibility for the software configuration management. This is necessary since there are only five members in the team. Each of the five members has to report the sudden changes and the remaining three members have to take up a job of authorizing change and to ensure that change is properly implemented. This will ensure that the conflict within the proponents will be reduced or it should be eliminated.The proponents will also keep a member on the client’s side just to inform that all of the changes for the client to be accepted. The changes that do not really affect user’s knowledge of the software will be presented to a selected member on the client’s side. These changes will be noted in a specific section so that the proponents can refer back to them to know what the original plan was and why the changes were made. If the changes are made or suggested so that the proponents will affect the way customer uses the software, then those changes will be discussed with the entire client team. Once a client has decided to go with the change then and only then will changes be implemented. The proponents extensively report or document all the changes so that client will have access to it after the software is packed and delivered. SCM TASKSIn this section we will try to detail all-important SCM tasks and will assign responsibilities for each. All of the SMC tasks will be performed by five members of the software development team members. We will try to keep one-person from the client’s team informed of all the changes that do not affect users. All the changes that affect the use of the software will discussed with entire team on the client’s team during the meetings.IDENTIFICATIONIn this section the proponents will describe the way software configuration items will be identified for the software configuration management plan.DESCRIPTIONIdentify changeDuring the software development phase, a member of a team suggests a change in the software then the proponents need to have a team work on the suggestion and figure out if the change/s is necessary and is justified.APPROVE CHANGEThe proponents want to be able to have the control over any change/s within the software. The proponents can’t afford to have one member of software development team thinks of a change or implement it without telling the other proponents of the team. This can be a huge technical problem for the software. The team leader of the team or proponents Project Manager will create rules so that the members of the team will ask for permission before to think of and implement changes in the software.DOCUMENT THE CHANGEThe proponents will document every little change/s during the software development in order for the documentation would be synchronized to the software development. Since change has to be documented from the time that a team member suggests change to the time change is finalized, the proponents will end up with extensive documents.ENSURED THE IMPLEMENTATION OF CHANGEThe proponents have to look over the change. Since the project team is working separately, it is possible to have made mistake in implementing the change. To make sure to settle this, the project team will set up times when team members will look over the change that other members have implemented and make it finalize.WORKS, PRODUCTS, AND DOCUMENTATIONIdentify changeOnce the change/s are identified, a change request form will be produced and will be send to all the proponents of the project team.Control changeAfter the evaluator got the change request form, change report form will be generated.Ensured the implementation of change.Document the change.Once the change/s are approved, the project team will document the change in the library.CONFIGURATION CONTROLDESCRIPTIONChanges will be controlled by using human procedures and automated tools. Here are the steps which will be taken in order to control change/s.Request for change/sChange report will be evaluatedFinalized decision on change/s will be made.If the change/s are approved:Define constraintsCheck the tools for changesImplement the change/sApply the SQA ActivitiesApply testing ActivitiesRebuilt the softwareDistribute the softwareVERSION CONTROLDESCRIPTIONAs a result of the changes, the version number of various modules will be increased accordingly. The proponents will also have a final version of the entire product.Major documentation will also have version numbers, such as User Manual or Design Specification.INCREASING VERSION NUMBERWhen a change request is filed, a change report will be created. After the change is finalized, it will be documented in the library. The proponents will be using a decimal point version number system:<Major update>.<minor update><bug fix>Bug FixIf enough bug fixes have been done on the product, the bug fix portion of the version number will be increased. The number of user visible bug fixes will also affect when the bug fix number is increased. The more visible bug fixe have been made, the closer the bug fix number will need to be increased.Minor UpdateIf the software come up a new process or functionality that has been added that will make the software increase the user-friendliness and performance but does not change the way a function work, the minor update number may be increased.Major UpdateThe proponents do not foresee any change in major version number. The product will be labeled as version 1.WORKS, PRODUCTS, AND DOCUMENTATIONA single document titled Version Revision History will be used to document all the version revisions. An online bug report and tracking system will also be used to monitor and document all the bug fixes and enhancement requests.CONFIGURATION STATUS ACCOUNTING (CSA)The Project Team will be using three different ways to communicate with the proponents and to inform others that changes may concern.DESCRIPTIONThere are ways or tools that the proponents will be using to communicate with the other project team members or the people associated with software development.Verbal communication:Since the software development team is small and all the team members are in constant touch with each other it would be better to communicate verbally.WORKS, PRODUCTS, AND DOCUMENTATIONChange request report generatorEmailsTest errors will be documented electronicallyAll suggestion made during pre interview will be noted.SOFTWARE QUALITY ASSURANCE OVERVIEWSCOPE AND INTENT OF SQA ACTIVITIESREVIEWS AND AUDITSGENERIC REVIEW GUIDELINESFORMAL TECHNICAL REVIEWSSQA AUDITSPROBLEM REPORTING AND CORRECTIVE ACTION/FOLLOW-UPREPORTING MECHANISMSRESPONSIBILITIESDATA COLLECTION AND VALUATIONSOFTWARE QUALITY ASSURANCE PLANINTRODUCTIONThis section gives a general overview of the Software Quality Assurance Plan (SQA) for the Accounts Payables and Accounts Receivables with Treasury Management System (APART MS). SQA will focus on the management issues and the process specific activities that enable a software organization to ensure that it does the right things at the right time in the right way.SCOPE AND INTENT OF SQA ACTIVITIESThe Objectives of SQA are: SQA ORGANIZATION ROLEEGO-StructureSQA TASKSTASK OVERVIEWSTANDARD, PRACTICES, AND CONVENTIONS (SPC)SQA RESOURCESREVIEW AND AUDTISA formal technical review (FTR) is a software quality assurance activity that is performed by software engineers. The Objectives of the FTR are:To uncover errors in function, logic, or implementations for any representation of the software;To verify that the software under review meet its requirements;To ensure that the software has been represented according to predefined standards;To achieve software that is developed in a uniform manner;To make projects more manageable. GENERIC REVIEW GIODELINESFORMAL TECHNICAL REVIEWSSQA AUDITSPROBLEM, REPORTING, AND CORRECTIVE ACTION/FOLLOW-UPREPORTING MECHANISMSRESPONSIBILITIESSince we use the egoless team model, we won’t select a team leader, But since Manayan, Jun has a lot of real world experience on software development and has great knowledge on the project, so he’s the de facto leader for the team. But as far as decision making, no changes will be make unless all five members agree on it.Project Manager/resolving the issue: Manayan, JunLead Programmer/Handling System Software: Langcauon, JoefelBusiness Analyst/Analyze Business Process: Cabigas, JaysonSystem Analyst/System Design: Goron, Mac DouglasDocumentary Specialist/release the documentation: San Diego, Mark ChristianDATA COLLECTION AND VALUATIONSTATISTICAL SQASOFTWARE PROCESS IMPROVEMENT ACTIVITIESGOALS AND OBJECTIVES OF SPISPI TASKS AND RESPONSIBILITIESSOFTWARE CONFIGURATION MANAGEMENT AND OVERVIEW SQA TOOLS, TECHNIQUES, METHODSSYSTEM SPECIFICATIONSINTRODUCTIONThis section gives a general overview of Account Payables, Accounts Receivables and Treasury Management System (APART MS).GOALS AND OBJECTIVESThe main purpose of APARTMS is to manage and provide statement of account, especially AP/AR and helps the accounting personnel to update assets and treasury. The goal of APARTMS is:To provide a detailed scenario of our subsystem is been provided.To provide a view of financial reports being paid and received can be seen.Definite journal is been exported directly to GL, while importing financial updates with BCMS and PMS.This MS can be accessible in different personnel, whether Admin or Accountant use.It includes Treasury Account for viewing, so that any amount that has been declared as Receivables or Payables, it can be updated into the Treasury IS.SYSTEM STATEMENT OF SCOPEThe general statement of the Accounts Payable and Accounts Receivables with Treasury Management System (APART MS) should be specified and provided in this section. That is the information has to be produced, what the major functions are implemented and what data are provided as the input to Accounts Payable and Accounts Receivables with Treasury Management System.GENERAL REQUIREMENTSThe following general requirements were laid out for our project named APARTMS:A way that users could add new facilities to the database.A way in which users could generate financial reports.A button in which AP and AR reports can be clicked and viewed.A way in which it can import and export valuable data in other related IS.A way it can be easily understood by the user.A way in which they could view data that has been entered into the database prior to our software.Interface EnhancementsThe APART MS will provide an interface enhancement to achieve the user-friendliness and usability functionality that is requested by the client / users. Database Administrative InterfaceThe APART MS will provide a secured database on which the user could retrieve and save data and information at ease with the use of MS SQL database.SYSTEM CONTEXTEventually, multiple users will be using the product altogether. Therefore, concurrent connection will be an issue for implementation. Also, because of eventual use, it can encounter technical issues.MAJOR CONSTRAINTSTIMEThe proponent has been given 10 months to finish all project charter, software copy, and other add-ons. The proponents is been pressured due to a short time period, and some changes of the system process has been considered.MONEYLack of financial support is one of our major constraints. We can’t have a permanent sponsor to create the project. We also encountered several technicalities due to a limited number of PC’s to integrate the said IS.PERSONNELSince this is a group work, others can’t perform the creation of system software. Those who are assigned in creating the project documents have also need other members to research for the related literature of the proposed IS.FUNCTIONAL DATA DESCRIPTIONIn this section, the overall system functions and the information domain of the Accounts Payable and Accounts Receivable with Treasury Management System (APART MS) are being identified and described on which it is implemented and operated.SYSTEM ARCHITECTUREARCHITECTURAL MODELCURRENT SUB-SYSTEM OVERVIEWHelp FunctionsEach IS has an interface for the user to learn on how to operate the system well. It is necessary to have a help menu in order to guide the user when they are having a hard time to operate the developed system. The instruction under the help menu must be readable and understandable so that the user can adopt easily.DATA DESCRIPTIONMAJOR DATA OBJECTSRELATIONSHIPSHUMAN INTERFACE DESCRIPTIONSUB-SYSTEM DESCRIPTIONSUB-SYSTEM FLOW DIAGRAMSHere are some of the diagrams regarding subsystem dataflows.CREATE CLIENT INFORMATIONCREATE/ADD VENDORSCREATE/PRINT CHECK VOUCHERCREATE/PRINT INVOICESCREATE PAYMENTSCREATE JOURNAL ENTRY/PRINT (DFD)LEDGER/T-ACCOUNTSTRIAL BALANCEVIEW/PRINT REPORT OF INCOME STATEMENTVIEW/PRINT REPORT OF BALANCE SHEETENHANCED INTERFACE PROTOTYPINGSOFTWARE REQUIREMENTS SPECIFICATIONSGOALS AND OBJECTIVESThe main purpose of APARTMS is to manage and provide statement of account, especially AP/AR and helps the accounting personnel to update assets and treasury. The goal of APARTMS is:To provide a detailed scenario of our subsystem is been provided.To provide a view of financial reports being paid and received can be seen.Definite journal is been exported directly to GL, while importing financial updates with BCMS and PMS.This MS can be accessible in different personnel, whether Admin or Accountant use.It includes Treasury Account for viewing, so that any amount that has been declared as Receivables or Payables, it can be updated into the Treasury IS.SYSTEM STATEMENT OF SCOPEThe general statement of the Accounts Payable and Accounts Receivables with Treasury Management System (APART MS) should be specified and provided in this section. That is the information has to be produced, what the major functions are implemented and what data are provided as the input to Accounts Payable and Accounts Receivables with Treasury Management System.GENERAL REQUIREMENTSThe following general requirements were laid out for our project named APARTMS:A way that users could add new facilities to the database.A way in which users could generate financial reports.A button in which AP and AR reports can be clicked and viewed.A way in which it can import and export valuable data in other related IS.A way it can be easily understood by the user.A way in which they could view data that has been entered into the database prior to our software.Interface EnhancementsThe APART MS will provide an interface enhancement to achieve the user-friendliness and usability functionality that is requested by the client / users. Database Administrative InterfaceThe APART MS will provide a secured database on which the user could retrieve and save data and information at ease with the use of MS SQL database.EXTENDED ENHANCEMENTSYSTEM CONTEXTEventually, multiple users will be using the product simultaneously. Therefore, concurrent connection will be an issue for implementation. In addition, this is a pilot product that hopefully, if successfully, can be used in other locations as well. This leads to issues about future support for a larger user base.MAJOR CONSTRAINTSTIMEThe proponent has been given 10 months to finish all project charter, software copy, and other add-ons. The proponents is been pressured due to a short time period, and some changes of the system process has been considered.MONEYLack of financial support is one of our major constraints. We can’t have a permanent sponsor to create the project. We also encountered several technicalities due to a limited number of PC’s to integrate the said IS.PERSONNELSince this is a group work, others can’t perform the creation of system software. Those who are assigned in creating the project documents have also need other members to research for the related literature of the proposed IS.USAGE SCENARIOThis section will define the user level of the Accounts Payable and Accounts Receivable with Treasury Management System (APART MS). This will define the user type and the accessibility level upon logging in into the system.USER PROFILESThe Accounts Payables and Accounts Receivables with Treasury Management System (APART MS) will have the following levels of users:Read / View (User)Full Control (Admin)Read/ Write/ Modify All (APART Manager)Read/ Write/ Modify own (Encoder)USE CASESDATA MODEL DESCRIPTIONDATA DESCRIPTIONDATA OBJECTS AND DICTIONARYRELATIONSHIPSFUNCTIONAL MODEL AND DESCRIPTIONSUB-SYSTEM FLOW DIAGRAMHere are some of the diagrams regarding subsystem data flows.CREATE CLIENT INFORMATIONCREATE/ADD VENDORSCREATE/PRINT CHECK VOUCHERCREATE/PRINT INVOICESCREATE PAYMENTSCREATE JOURNAL ENTRY/PRINT (DFD)LEDGER/T-ACCOUNTSTRIAL BALANCEVIEW/PRINT REPORT OF INCOME STATEMENTVIEW/PRINT REPORT OF BALANCE SHEETHUMAN INTERFACERESTRICTIONS, LIMITATIONS, AND CONSTRAINTSTimeThe proponents only have two months to finish all documentation, software creation and enhancements. We have a lot of ideas but cannot implement them due to time constraint. One of the major ones is to move the application to be completely browser-based.FundingVALIDATION CRITERIASOFTWARE DESIGN SPECIFICATIONSINTRODUCTIONThis section gives a general overview of Account Payables, Accounts Receivables and Treasury Management System (APART MS).GOALS AND OBJECTIVESThe main purpose of APARTMS is to manage and provide statement of account, especially AP/AR and helps the accounting personnel to update assets and treasury. The goal of APARTMS is to provide a detailed scenario of our subsystem is been provided.To provide a view of financial reports being paid and received can be seen.Definite journal is been exported directly to GL, while importing financial updates with BCMS and PMS.This MS can be accessible in different personnel, whether Admin or Accountant use.It includes Treasury Account for viewing, so that any amount that has been declared as Receivables or Payables, it can be updated into the Treasury IS.SYSTEM STATEMENT OF SCOPEThe general statement of the Accounts Payable and Accounts Receivables with Treasury Management System (APART MS) should be specified and provided in this section. That is the information has to be produced, what the major functions are implemented and what data are provided as the input to Accounts Payable and Accounts Receivables with Treasury Management System.GENERAL REQUIREMENTSThe following general requirements were laid out for our project named APARTMS:A way that users could add new facilities to the database.A way in which users could generate financial reports.A button in which AP and AR reports can be clicked and viewed.A way in which it can import and export valuable data in other related IS.A way it can be easily understood by the user.A way in which they could view data that has been entered into the database prior to our software.Interface EnhancementsThe APART MS will provide an interface enhancement to achieve the user-friendliness and usability functionality that is requested by the client / users.Database Administrative InterfaceThe APART MS will provide a secured database on which the user could retrieve and save data and information at ease with the use of MS SQL database.SYSTEM CONTEXTEventually, multiple users will be using the product altogether. Therefore, concurrent connection will be an issue for implementation. Also, because of eventual use, it can encounter technical issues.MAJOR CONSTRAINTSTIMEThe proponent has been given 10 months to finish all project charter, software copy, and other add-ons. The proponents is been pressured due to a short time period, and some changes of the system process has been considered.MONEYLack of financial support is one of our major constraints. We can’t have a permanent sponsor to create the project. We also encountered several technicalities due to a limited number of PC’s to integrate the said IS.PERSONNELSince this is a group work, others can’t perform the creation of system software. Those who are assigned in creating the project documents have also need other members to research for the related literature of the proposed IS.DATA DESIGNDATABASE DESCRIPTIONARCHITECTURAL AND COMPONENT-LEVEL DESIGNPROGRAM STRUCTUREOVERALLMenu ItemsThe following shows the Architecture of the main menu:Accounts Receivable (AR)Accounts Receivable EntryManage InvoicesReceivable AgingManage ReportsPrint InvoicesControl BillingAdjusting EntriesQuit Accounts ReceivableBack to main menu/main screenAccounts Payable (AP)AP EntryVendors InquiryManage InvoicesG/L DistributionReportsQuit APBack to main menu/main screenTreasuryAP/AR ReportsAssetsTax Declaration (ask on hand)Quit treasuryBack to main menu/main screenPassword MaintenanceChange passwordAdd userExitBack to main menu/main screenCREATE AR ENTRYVIEW AP ENTRY REPORTSPOST TREASURY REPORTSDESCRIPTION OF COMPONENTSACCOUNTS RECEIVABLEMajor Form(s):AP_Frame,AR_Entry,Inv,Aging,MReports,PrintInv,cntrcBill,AdjEntryMajor Action(s): View, search, create, edit, save, delete, quit, backCreateObject-name:cmdCreateThe create button should disabled unless no historical data have been found or selected for the AR Entry, The users needs to enter a new invoice # and other important detailsEdit/ModifyTo edit/modify a AR entry, user needs to enter an existing invoice # in txtInvNum Field.SaveObject-name: cmdSaveThe save button should be disabled unless the txtInvNum Field in filled in, and any changes have been made to any field on the AR Entry form. When the save button is clicked, new record will be generated but if the Invoice number does not exist in the system, otherwise current record will be updated.DeleteObject-name: cmdDelThe delete button should be disabled unless no historical data have been found for AR Entry.ViewObject-name: cmdViewThe view button should be disabled unless historical data have been selected for the AR entry, contract billing, adjusting entry, manage reports.SearchObject-name: cmdSearchTo search for a AR entry/Invoices, user can search on invoice number field, when the existing invoice number is filled in, user can highlight a AR entry in the result grid, then click OK and all information on AR Entry will be filled in.ExitObject-name: cmdExitWhen cmdExit is clicked, a warning message will appear to confirm user’s action. If the user confirms, the form will be closed, and if the user does not confirm on the user select no option, user will simply be returned to the form.BackObject-name: cmdBackWhen cmdBack is clicked, the interface will return to the main screen.ACCOUNTS PAYABLEMajor form(s): AP_Frame, AP_Entry, Vendors_Inquiry, Manage_Inv, ReportsMajor Action(s): view,editViewcmdViewEntry, cmdViewVendors, cmdViewInv, cmdViewReportsThe view button should be disabled unless no historical data have been selected or found for the AP Entry, vendors inquiry, manage invoice, report.EditObject-name: cmdExitAPIf the user choose a vendor from the list or highlighted a vendor(s), the user can edit the contents of the vendors information and click save to update the database or the vendor’s information.TREASURYMajor form(s): AP_reports, AR_reports, assets, tax_decMajor Action(s): viewViewWhen the user selects AP and AR reports or either both,the user can view the reports by clicking the VIEW button. And also the user can view the assets and tax declaration by doing the same procedure.PASSWORD MAINTENANCEMajor Form(s): Pass_Main, change_pass, add_userMajor Action(s): edit, saveEditObject-name: cmdEditPassThe user can edit or change his/her password by clicking the PASSWORD MAINTENANCE in the main menu.USER INTERFACE DESIGNThere will be about 11 interfaces in the program. This is not the exact number of interfaces that our system has, because the clients still have to think over on several interfaces. DESCRIPTION OF THE USER INTERFACEBelow are some of the forms in the system. After launching the program, the login screen will appear. If the user inputs the correct username and password, it will immediately take the user to the main interface of APART MS.SCREEN IMAGESLOGIN SCREENMAIN INTERFACESAMPLE REPORTS OF APVENDORS INQUIRY285752924175OBJECTIVES AND ACTIONSINTERFACE DESIGN RULESInterface design rules are focused on these areas of concerns:The system must be user-friendlyThe system must be easy to navigateThe system should be readableThe system should be easy to learnThe system should be maintainabilityThe system should use a minimum of two color and maximum of three colorsThe system must be PONENTS AVAILABLEThe proponents are allowed to use Java Programming language as a general rule given by the project evaluation committee. The Java Net beans chose by the proponents to develop the APART MS and as a reference for creating the system’s front-end. Basically, the proponents are already having a lot of ready-made components available to develop the proposed system. The following is a list that the proponents will use for the software development.INSTRINSIC CONTROLSLabelTextField/TextBoxListBoxCheckBoxComboBoxOptionBoxMenu BarImageCommandButtonEtc.ACTIVE X CONTROLSRESTRICTION, LIMITATIONS, AND CONSTRAINTSTIMETime is so far the biggest restriction or constraint for our project as we only have around three months to finish entire project. It is very important for us to watch the time we spend over every phase of the software development project. We could have included many more components to the software like online help menu but time restricts us from doing so.Employee SkillsEmployees programming and design skills is also one of the restriction. It does not have as big of an impact on the project as time but it sure does limit us from doing more addition to the projects.Insufficient ResourcesNot having all the necessary instruments also is a problem for our software. We planned to use latest equipment for the project like hand held PC with keyboard etc. but the employees so we had to abandon the plans.TESTING ISSUESThe APART MS have to validate is functions by means of testing. The proponents test the APART MS in order to check the possible error that may occur. During the testing, the proponents are concerned about the input and their expected output when it process into the system. Emphasizing the input data as they processed and compare the results as the output. Basically, the proponents are not concerned on the system’s processes but focused on the correct output of the APART MS.CLASSES OF TESTSThe APART MS has many different function and forms that describes its functionalities. The proponents will go through each of the interfaces and other function to describe different types of test performed on them.Interface / FormsThe proponents are creating new interfaces using the Java Net Beans. This interfaces allows the user/clients to manage the AP/AR with Treasury processes particularly the monitoring of the company’s AP/AR/Treasury, able to print necessary documents of employees.Login WindowThe proponents will use several different username and password. The proponents will have to use either correct and incorrect username or password to access the APART MS and thus access its database. The user will not be logged in if they insert the wrong username or password. When the correct username and password will be inserted, the user will be able to log into the next window. This will be possible upon checking the OK button by performing a proper testing of the function.SMS-APART MS (Main Form)This is the main window of the APART MS that the user will use to access the database using the Java Net Beans.PERFORMANCE BOUNDSThe proponents have to setup a certain performance bounds or criteria for the APART MS so that by following this criteria. The proponents will be able to maintain quality and user friendliness and usability of the software.IDENTIFICATION OF CRITICAL COMPONENTSTEST SPECIFICATIONSINTRODUCTIONThis section gives a general overview of the Test Specification for the Accounts Payables and Accounts Receivables with Treasury Management System (APART MS).GOALS AND OBJECTIVESA better information system will work effectively in favor of the user’s needs. The proposed system will go through tests, all the test outputs will be listed for the proponents to be aware on unnecessary objects, data flows, limits and boundaries.The proponents wants to have a test to monitor future errors in the proposed system.STATEMENT OF SCOPEAn overall plan for integration of the software tests are documented in this section. Below are the different kinds of tests that the proponents will take to ensure the quality of the software.Unit TestingMS SQL DatabasePC ApplicationJava Net BeansIntegration TestingMS SQL DatabasePC ApplicationJava Net BeansPortability TestingMS SQL DatabaseAPART MSPC ApplicationSecurity TestingMS SQL DatabaseAPART MSPC ApplicationPerformance TestingMS SQL DatabaseAPART MSPC ApplicationMAJOR CONSTRAINTSIn this section, the proponents will talk about the business, technical and resource related constraints that may keep us from performing all the tests necessarily.The proponents has a limitation on the time to test the proposed system at the client’s when it comes to testing because of we cannot test the proposed system during the company’s working hours.The proponents have limited funds for testing, the proponents only have one laptop to make software testing for APART MS. It means that the proponents cannot test the software using laptop / PC from other brand and other hardware specification that is lower / lesser price than of the laptop / PC that the proponents are currently using.The proponents don’t have enough manpower to perform the software testing and identify the results. This might be the reason for not be able to test the APART MS into the larger user base.TESTING PLANThe proponents want the product to be bug free. Also want to make sure that there are no defects in the product. So the proponents will be spending large amount of the total software development time on the testing. Below is the description of the testing procedure and strategy. And also be presenting the timing and scheduled of the tests to be carried out.SOFTWARE (SCI’s) TO BE TESTEDINTERFACESTESTING STRATEGYIn this section we will describe the testing strategy. The proponents will use four different methods to test the proposed system APART MS.UNIT TESTINGIn unit testing, the proponents will be testing the separate modules of the software. The proponents will carry out white box testing where each module or component of the software are tested individually. The proponents will test the components by passing data through it and the proponents will be monitoring data to find the errors.The proponents will be looking for entry and exit conditions of the data and will make sure that all the components work without any troubles.The test primarily be carried out by the lead programmer who designed and implemented the module and the System Analyst will then carry out on the modules to finalize the testing.INTEGRATION TESTINGIn this method of testing, the proponents will implement the software at the client’s office location and try to run the system. This means that the software will be testing upon the client’s network. The proponents are looking for the compatibility of the software through the network of the client. This testing will make sure that there is no confusion among the applications on the network when they are running with the software will have to install properly together with the other application needed for the implementation and demonstration of the APART MS at the same time. This will make sure that the APART MS are working properly and able to transact its functions correctly. The proponents will start with the login window to the other component of the APART MS respectively and try to figure out when there are collision among the application with the APART MS.VALIDATION TESTINGIn this method of the test the proponents will be working with the user/customer to find out if the software developed in valid for the clients. The proponents want to make sure that the clients are getting what he/she asked for. The proponents will look at the software requirement document in the case of conflict or misunderstanding with the client regarding software components.The proponents will perform the block testing where the software is completed and test all the software components together. The proponents will have several input data or test data that the proponents will derive results for. The proponents will insert this data and will get results from the software. The proponents will compare the results from the software with the results that the proponents derived. In case there are problems with the software, the proponents will create a deficiency list and will record all the problems that the software has. The proponents will test all the components and subcomponents of the software to perform the validation test.The proponents will try their best for the developers to avoid listing of deficiency list. This is necessary because if errors are found at this stage of the software development, the proponents cannot fix the problems encountered by the time the proponents reach the software deliverance date. In this case, the proponents have to negotiate with the clients to give the developers extension on the project.HIGH-ORDER TESTINGIn this test method, the proponents will combine several different other types of testing, the proponents will test for different conditions by following several methods.Recovery TestingIn this type of testing method, the proponents are concerned with the ability of the software to retrieve lost data. The proponents want to make sure that the software is fault tolerance and does not loose data in case of system shutdown or if the system ceases.Security Testingin this type of testing method, the proponents wants to make sure that the security checks are working properly and no one is able to temper with the data except the head manager and employees.Stress TestingIn this type of testing method, the proponents will monitor stress caused to system and the software due to simultaneous use. The proponents wants to make sure that the system does not break down under the extreme use conditions.Performance TestingIn this type of testing method, performance bounds are set during the design part of the software being developed. This bounds will help the proponents in determining the effectiveness of the software. It will also help the proponents to minimize stress level that is caused to user because of our software.TESTING RESOURCES AND STAFFINGThe proponents will use several different resources to carry out the test on the APART MS. Since the time is a part of project constraint, the proponents will try to use help from everyone that is essential to take the responsibility and evaluate the software during the testing phase.The Company StaffThe ProponentsCompany’s PCSoftware ApplicationsTEST RECORDING KEEPINGTest record keeping and test work products are described in section 3.4 of test specifications document. For more information regarding these topics, please refer to section 3.4 of the test specification document.TESTING TOOLS AND ENVIRONMENTThe proponents will have to provide the testing tools such as the desktop/laptops to be used, computer resources, application needed, hardware specifications, other devices and the company office that serves as the main venue for the testing of the APART MS. The proponents will also use resources available to software development team outside of the client’s facilities.TESTING SCHEDULEThe following is the schedule for the testing of the HRMS.Project Test PlanTo be scheduledSystem TestingTo be scheduledGenerating the test reportsTo be scheduledSystem ImplementationTo be scheduledTEST PROCEDUREIn this section the proponents will describe the test procedures in detail.SOFTWARE (SCIS) TO BE TESTEDThe following software that has to be tested is listed on the section 2.1 from the test specification document. For detailed list of the software component items you can refer to the previous section of the document.TESTING PROCEDUREIn this section, the proponents will try to describe the overall software specification of the APART MS. It includes the description of the methods for all the different tests to be performed and will also declare the expected outputs.UNIT TESTINGIn this section, the proponents will try to describe over all software specification. The proponents will be testing all the important paths to find any errors within the boundary of the module. The proponents will apply sort of white box search. The proponents will be testing parts of software rather than the entire software. The modules are as follows:INTEGRATION TESTINGVALIDATION TESTINGHIGH-ORDER TESTING-233129-8747BESTLINK COLLEGE OF THE PHILIPPINESCollege of Information Technology#1044 Brgy Sta. Monica, Quirino Hi-way Novaliches, Quezon CityACCOUNTS PAYABLES, ACCOUNTS RECEIVABLES, AND TREASURY MANAGEMENT SYSTEM (APARTMS)(Service Management System)Adviser:Mr. Dennis GonzalesMembers:Manayan, Jun I.Goron, Mac Douglas P.Cabigas, Jayson C.Langcaoun, JoefelSan Diego, Mark Christian R. ................
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