1. Seminar in Finance Course Code: 622
Synopsis on: A Survey and Analysis of Receivables Practices in American Corporations
By Cecillia Wagner Ricci, Seton Hall University, USA
Submitted by: Sudarshan Kadariya, Roll No. 04/2010, M. Phil in Management.
Purpose: To obtain information on whether firms are maximizing the value of their shareholders’ wealth in the area of
receivables. In other words, the objective function of the study is to maximize the net present value of cash flows which
is the difference is cash inflows (maximize cash inflows) and outflows (minimize cash outflows).
Motivation: The fundamental objectives of the most corporations are to secure profit volume and maximization of
shareholders wealth. The basic feature of the corporate financial theory is also that firms will engage in those behaviors
and activities that maximize the value of the shareholders wealth. In the long run, almost all corporate policies,
programs and strategies are heading towards the capitalization of the ultimate shareholders capital. In corporate world,
different financial tools are used to manage the balance sheet figures of the firms. The tools could be the inventory
management tools, receivables management tools, payables and accruals running tools, etc which have daily impact on
the corporate operation and stakeholders relations. In sum, the theme of the motivating factor of the study is the
concurrent research gap in relation to the receivables practices and its impact on the shareholders wealth.
The motivation of the study is supported by the review of literature in different areas like minimizing administrative
costs – Smith and Bell (1989), Besley and Osteryoung (1985), Beranek and Sherr (1991); speeding cash inflows – Hill,
Sartoris and Ferguson (1984); and regarding the goal of maximizing the value of information provided to
management – Byl (1994). With the review of these works, it is found that the evidence regarding the maximization of
the objective function in the working capital arena is mixed.
Methodlology: Mail survey method was used for the study and 11 questionnaires were distributed to the sample of
credit managers of American firms listed in the 1996 Business Week Global 1000. Thus, the population for the study is
1000 and sample constitutes 200 American firms, out of the 200 randomly selected credit managers, only the 44.5%
(89/200) returned the usable response. The sample represents 50.5% of the American firms listed in the 1996 Business
Week Global 1000. The survey questionnaires are focused on three areas of the receivable management – presale issues,
postsale issues and ongoing issues.
Respondents profile: Almost all respondents are managers (85%), followed by controller and vice-president of finance,
and the least is credit analyst and senior account representative represents only 1% each. The respondents represent
seven industries and the largest number of respondents from the consumer goods industry (32), followed by technology
industry, and the least representation from the transportation industry constitute only 3 respondents. On the other hand,
almost the same pattern of non-respondent with respect to industry is appeared. The financial statistics of the respondent
and non-respondent companies indicates that only the assets value is significantly different between two groups, return
on equity is higher in respondent group but it is not significant, and the rest of the indicators like market value, sales,
profits and assets are lower in respondent set and higher in non-respondent set.
The descriptive statistics provides the additional information in the three areas; receivables automated, overdue
receivables and other information. First, the statistics shows that 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. Second, 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. Third areas is the other information
(outsourcing the receivables – factoring & pledging), only 10.1% of respondent outsource some of the receivables
process, 2.2% factor receivables and 1.1% (1/89) or only 1 respondent pledge the receivables.
Survey results:
Presale issues:
54.9% of respondents use more than one method in determining whether to grant credit, followed by the ratio
analysis. Overall, 78.9% of total respondents use at least ratio analysis in determining credit grant. The

2. insignificant chi-square test result shows that firms are increasing their administrative costs by using more than
one method of determining to whom to grant credit but has no impact on whether they have due receivables.
Thus, by using different methods for determining to whom to grant credit, firms are not maximizing
shareholders’ wealth in terms of receivables.
The majority of the respondents get information from more than one sources to validate the correctness of the
credit decisions but the chi-square test reject the null hypothesis that respondents appear to be increasing their
administrative costs by obtaining information from more than one sources with-out decreasing their risk of late
payments. Thus, It is also against the objective function.
57.3% of the respondents make the scope of the investigation dependent on the size of the sale which indicates
that firms understand the cost of investigating potential customers, and attempt to manage these costs. The
behavior of the responding firms shows the effort to decrease the administrative costs associated with
receivables and thus, its impact on the maximization of the profitability and shareholders wealth. The chi-
square result also shows the association between past dues and credit investigating costs. (or, reject the null
hypothesis)
Majority of the respondents set credit limit for their customers. The statistical significant relationship between
credit limit and past due indicates that administrative costs are increased as a result of having to monitor the
credit limits but it has a positive impact (maximize shareholders wealth) on the existence of overdue
receivables.
Postsale issues:
Survey on payment on time based on due date and postmark date shows that 78.7% of the respondents
consider a payment on time based on due date, which indicates that firms are receiving their payments more
quickly so that maximizing the objective function. But, there is one doubt that 3.4% respondents respond that
they use both dates which is not possible!
Among the different options of methods of collection, banking, lockboxes, direct sends and, electronic
payments or another method that speed the collection. 75.1% respondent use more than one method to speed
the collections that support the goal of maximizing the shareholders wealth.
Ongoing issues:
Regarding the forecasting receivables, majority respond to use percentage of sales method, followed by
internally developed model and more than 70% use the only method. As a result, decrease in administrative
costs and maximize the wealth.
Majority of respondents use more than one method (69.2) to monitor the receivables, followed by the aging
schedule as only one method and about 97% use the aging method in combination for credit review. The chi-
square test indicates the significant association between monitoring the credit and past dues accounts. With this
result, one can derive the explanation that firms allocate more resources for receivables monitoring which
helps faster collection and maximize the shareholders wealth.
Among the various reporting receivable position to management options provided to the respondents, aging
schedule and DSO has the more popularity independently but majority use the more than one method (72.5%).
The chi-square result indicate the significant relation between number of methods use for reporting to
management and existence of past due accounts.
Conclusions: From the detailed analysis, it is derived that managers are eager to maximize the shareholders wealth, and
the results help to reach to the conclusions that credit investigating costs, setting credit limits, choosing due dates, speed
of collection, forecasting and monitoring receivables and reporting the receivables position to management are in favor
of maximizing shareholders wealth.
Critical appraisal: The simple methodology of analysis provides the elementary insight regarding the working capital
management practices in corporate America. Specifically, very much useful for early practitioners and academic people,
with the same extent it helps to researchers. One weakness found of this work is the whole results are based on the few
representative samples which may not support for generalization. The respondent clusters usually in same magnitude in
majority of the response options. For instance, the respond usually sticks on 70-80% range due to small sample.
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