A Survey and Analysis of Receivables Practices in American Corporations

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A Survey and Analysis of Receivables Practices in American Corporations

  1. 1. COURSE TITLE: SEMINOR IN FINANCE COURSE CODE: MPH 622 Presentation on A Survey and Analysis of Receivables Practices in American Corporations by: Cecillia Wagner Ricci, Seton Hall University, USA Published in: Financial Practice and Education, Fall/Winter (1999) May 6, 2011
  2. 2. Presentation Outline Purpose and motivation Research Methodology Respondents Profile Major Findings Critical appraisal
  3. 3. Purpose & motivation To obtain information on whether firms are maximizing the value of their shareholders’ wealth in the area of receivables. In another terms, to test the objective function as maximization of shareholders wealth in terms of areas of receivables
  4. 4. Purpose & motivation….. Financial theory Motivation of the study Objective of the firms Existing research gap (review based)
  5. 5.  Population: Listed firms in the 1996 Business Week Global 1000.  Sample: 200 American firms  Response rate: 44.5% (89/200)  Respondents: Credit managers  Study period: 1996  Focus of the study: Receivable management in presale, postsale and ongoing issues. Methodology
  6. 6. Profile of respondent Remarks: Majority are managers, followed by controller and VP of finance Remarks: 7 industries, Largest from consumer goods industry, followed by technology industry, and the least transportation industry
  7. 7. Profile ………….. Only the assets value is significantly different ROE is higher in respondent group but it is not significant The indicators; market value, sales, profits: as well as assets are lower in respondent set and higher in non- respondent set.
  8. 8. Profile ………….. 55.1% of the respondents do not have any of their receivables automated, followed by 34.8% of respondents in range 81-100 percentage automated, and the least is no respondents in class 21-40. 45.9% have percentage overdue in range 1-20, followed by any of their percentage overdue for 30.3% of respondents, and the least respondents lie on 61-80 class.
  9. 9. Profile ………….. Only 10.1% of respondent outsource some of the receivables process, Only 2.2% factor the receivables 1.1% (1/89) or only 1 respondent pledge the receivables Further use of receivables (Outsourcing the receivables, Factoring & Pledging),
  10. 10. Major findings….. Presale issues  Using different methods for determining to whom to grant credit, firms are not maximizing shareholders’ wealth in terms of receivables. Obtaining information from more than one sources impact against the objective function.
  11. 11. Major findings….. The association between past dues and credit investigating costs shows the maximization of shareholders wealth. Majority of the respondents set credit limit for their customers, supported by statistically significant relationship between credit limit and past due, that maximize the function.
  12. 12. Major findings….. Postsale issues Based on due date and postmark date survey, US firms are receiving payments more quickly so that maximize the objective function. But, it is not free of response bias. The use of more than one method for payment collection, speed the collections that support the goal of maximizing the shareholders wealth or increase the cash inflows.
  13. 13. Major findings….. Ongoing issues The use percentage of sales method to forecast the receivables results, decrease in administrative costs and finally maximize the wealth. The association in two standard deviation between monitoring the credit and past dues accounts, confirmed the maximization of wealth.
  14. 14. Major findings…..  The significant relation between number of methods use for reporting to management and existence of past due accounts support the objective function.
  15. 15. No sig.; Not maximizing No sig.; Not maximizing Sig.; max. wealth Sig.; max. wealth Sig.; max. wealth In Sum….. Setting credit limits, monitoring receivables and reporting to management are in favor of maximizing shareholders wealth i.e. minimization of cost , or increase cost and progressively accelerate the wealth. Two variables are against the objective function i.e. only increase administrative cost!
  16. 16. Strength The simple methodology of analysis provides the elementary insight regarding the working capital management practices in corporate America. Specifically, this study is very much useful for early practitioners, academic people, and with the same extent it helps to researchers. Critical appraisal
  17. 17. Weaknesses The study bear the pitfalls of the survey methodology, thus the generalization of the results might not be possible, and depends on few samples. The responses tend to clusters usually in the same magnitude in majority of the response options. For instance, the responses usually sticks on 70-80% range, may be due to small sample size.
  18. 18. Thank you.

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