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MSMEGroup1-FinalReport

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MSMEGroup1-FinalReport

  1. 1. MGT 4998 June 2015 Group Assignment – Final Report Score Members Name ID Program Section Cecilia Efendy Efendi Ellen Fredericia Herman Salim Sevin Alnovans I12001390 I12001386 I12001899 I12001395 I12001388 BBUS (IB) 6IB1 Group name MSME Group number One (1) Due date 27 July 2015
  2. 2. GROUP 1 – FINAL REPORT MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Marking scheme for Prelim Report - MSME Group number: One (1) Guide/ Scheme Feedback FormattingandProjectfulfillment  Fulfilled Group Formation requirements  Fulfilled Kick Off Meeting requirements  Fulfilled Check Point Meeting requirements  Adhere to submission guidelines  Availability of project standard cover page  Availability of this Marking scheme is as the second page of report  Good design report structure with clear indication or underlining of chapters/items/sub-topics  Availability of Table of Content with accurate page numbering  Availability of descriptive title for print screens, pictures, tables, graphs, figures or illustration (if applies)  Adhere to page limitation for each chapter  Adhere to font and spacing requirements (Arial 12. double spacing for writeup, single spacing for writeup in table) Mark /10%
  3. 3. GROUP 1 – FINAL REPORT MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME)Chap1:BackgroundandLiteraturereview A write up to summarizes/ describe the following; 1. Background and project deliverables a) A background of your project Employer b) Long term objectives of this project c) List and describe expected deliverables 2. Literature review on Trade Credit a) What is Trade Credit and its standard practices? b) Discuss topic related to TC, which include, but not limited to  Internal management structure of TC (personnel, headcount)  Process/procedure to set or amend TC with new client  Calculation approach for TC related statistics (Outstanding receivables, average length of terms, average write-off) 3. Literature review on terminologies a) Review necessary standard definition deem relevant to conduct your project (eg; SMEs, LCs, B2B, Retail sector) Grading criterion 1. Display clear understanding of project objectives and deliverables 2. Display clear understanding of the conceptual and theoretical background deemed relevant to the project 3. Lit review is deem a) Relevant to support delivery of project deliverables b) Sufficient to prepare group for subsequent discussion/interview process 4. Addresses all necessary items 5. Write up is deemed to have proper narration and structured 6. Summary of literature is genuine, where link towards this project objective is highlighted 7. Availability of diagrams or illustrations to summarizes write up 8. Adequate sources of literature/ references 9. Proper references to literature Max 10 pages – excluding illustrations Mark /40%
  4. 4. GROUP 1 – FINAL REPORT MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME)Chap2:MethodologyandPreparation A write up to summarizes/ describe the following; 1. Preparation for solicitation a) Develop necessary solicitation material (eg; Solicitation email, call scripts) b) Justify the design solicitation material. Your justifications may include, but not limited to;  Background of research  Confidentiality and permission to record  Voluntary participation  Persuasion c) Solicitation planning  Detail action plan with timeline and responsibility of each group members  Address possible equipment, telecommunication and transportation needs 2. Design of interview questions a) Open-ended questions  Prepare a list of open-ended questions  For each question, justify its  its link to project deliverables  capability to draw “deep” response from interviewee b) Structured questions  Prepare a set of structured questions that gauges characteristic of the organization (eg; SME, retail sector)  Prepare a set of structured questions that gauges characteristic of your interviewee (eg; age, position, job role)  A write-up that justify design of these structured questions Grading criterion 1. Availability of finalized solicitation material 2. Availability of finalized interview questions 3. Availability of an detail solicitation action plan 4. Solicitation preparation and planning are deemed to be comprehensive, detailed and well-conceived 5. Proper justification for all interview question and its deemed related to topics discussed under literature review and is deemed necessary for project deliverables 6. Open-ended questions are deemed to be non-bias 7. Structured questions are deemed sufficient to gauge characteristics of organization and characteristic of interviewee Max 15 pages – excluding illustrations Mark /50%
  5. 5. GROUP 1 – FINAL REPORT MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME)Chap3:AnalysisofFindingsandRecommendations A write up to summarizes/ describe the following; 1. Characteristics of interviewee and organization a) A table listing crucial details for all interviews which has been conducted.(eg; contact info, name, interview time, location, duration) b) Create necessary set of illustration to highlight the characteristics of your interviewee and his organization c) Describe the characteristics of your interviewee and his organization 2. Summary of interview findings Prepare a table with the following headings a) Category – a brief overview that describe the category of your findings (eg; Something new we have learned / Management of TC, Retail sector) b) Finding – Describe yourfinding derived from interviews c) Evidence – Evidence in the form of transcript with reference to exact time and audio file name, that support or justify your findings d) Strength – A form of numerical expression that indicates the level of dominant of your finding. Support this numerical expression with a brief justification 3. Recommendation for mass survey phase Prepare a table to document the following a) Category – a brief overview that describe the category of your recommendation. Category must include the following, but not limited to i. Area for further investigation (development of questions) ii. Solicitation recommendation (eg where and how to get participants) iii. Approach to calculate/ determine TC related statistics b) Recommendation – Describe what exactly you are recommending and how to execute your recommendations c) Justification – Justify your recommendations based on your findings. (eg; transcript, organization transcripts)
  6. 6. GROUP 1 – FINAL REPORT MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Grading criterion 1. Submission of raw audio files, one for each interview, in mp4 format 2. Submission of filled Non-Disclosure forms signed by interviewee in pdf file with proper filename 3. Availability of a table listing information deemed crucial and required for public scrutiny 4. Characteristic of organizations interviewed is deemed to be diverse and not uniform 5. Role and position of interviewee is deemed to be relevant to TC investigation 6. Availability of additional intuitive illustrations that is deemed supportive in justification of findings as well as recommendations 7. Finding is deemed to be insightful, non-bias and reveal new knowledge with respect to TC practices 8. Recommendations is deemed to be detailed, insightful and greatly advances development of subsequent phase ofmass survey 9. All justifications are deemed to be factual, non-bias logical and based on interview findings 10. Minimum operational requirements a) Member of 3 = 4 unique organizations b) Member of 4 = 6 unique organizations c) Member of 5 = 9 unique organizations 11. Extra credit for effort beyond min req as well as exceptional findings and recommendations Max 15 pages – excluding illustrations
  7. 7. GROUP 1 – FINAL REPORT I MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Table of Contents Table of Content...............................................................................................................................................i 1.0. Chapter 1 – Background and Literature Review ....................................................................... 1 1.1. Background and Project Deliverables................................................................................... 1 1.1.1. Background of MSME ................................................................................................. 1 1.1.2. Long-Term Objectives of Project............................................................................... 2 1.1.3. List and Description of Deliverables.......................................................................... 4 1.2. Literature Review on Trade Credit ........................................................................................ 5 1.2.1. Trade Credit and Its Standard Practices for SMEs................................................. 5 1.2.2. Topic Related to Trade Credit..................................................................................10  Internal Management Structure of Trade Credit .............................................10  Process or Procedure in Setting Trade Credit.................................................11  Calculation Approach for Trade Credit .............................................................13 1.3. Literature Review on Terminologies ...................................................................................16 2.0. Chapter 2 – Methodology and Preparation ...............................................................................17 2.1. Preparation for Solicitation ...................................................................................................17 2.1.1. Solicitation Material....................................................................................................17 2.1.2. Justification of Solicitation Material – Email Only .................................................17 2.1.3. Solicitation Planning ..................................................................................................18 2.2. Design of Interview Questions .............................................................................................22 2.2.1. Open-ended Questions.............................................................................................22 2.2.2. Structured Questions.................................................................................................24
  8. 8. GROUP 1 – FINAL REPORT I MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.0. Chapter 3 – Analysis of Findings and Recommendations...................................................25 3.1. Characteristics of Interviewees and Organizations ..........................................................25 3.1.1. Detail of Interviewees ................................................................................................25 3.1.2. Interviewee and Organization Characteristics.......................................................27 3.1.2.1. Characteristic of Organizations..............................................................27 3.1.2.2. Characteristic of Interviewees ................................................................28 3.2. Summary of Interview Findings ...........................................................................................29 3.2.1. Category – What We Have Learnt ..........................................................................29 3.2.2. Findings .......................................................................................................................30 3.2.3. Evidence......................................................................................................................37 3.2.4. Strengths .....................................................................................................................39 3.3. Recommendation for Mass Survey Phase.........................................................................41 3.3.1. Category......................................................................................................................41 3.3.1.1. Area for Further Investigation.................................................................41 3.3.1.2. Solicitation Recommendation.................................................................42 3.3.1.3. Approach to Calculate TC Related Statistics.......................................43 3.3.2. Recommendations Execution ..................................................................................44 3.3.3. Justifications ...............................................................................................................45 Reference List...............................................................................................................................................47 Appendix........................................................................................................................................................51
  9. 9. GROUP 1 – FINAL REPORT 1 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 1.0. Chapter 1 – Background and Literature Review 1.1. Backgroundand ProjectDeliverables 1.1.1. Background of MSME Malaysia SME is part of MSME Inc., a media group whose products are available in the form of print, electronic, online, on air, mobile and events. Malaysia SME media group was established in 2005 with the key areas include business newspaper, community directory, business events, business sitcom and online news portal. It is the pioneer and the only among media groups that focuses specifically on covering news, updates, developments and events of SMEs within Malaysia and across all regions. The location of MSME headquarter is at E-33A-3A, Dataran 32, No.2, Jalan 19/1, 46300 Petaling Jaya, Selagor Darul Ehsan, Malaysia with its official website www.malaysiasme.com.my. Malaysia SME also has been awarded the “Sahabat Negara SME Award” by SMI AssociationMalaysia for three consecutive years. It is awarded for its tremendous and immense contribution in promoting and development of SMEs in Malaysia. MALAYSIA SME® business newspaper and MALAYSIA SME® Community Directory are the two most reputable publication acknowledged by the SME community in Malaysia. It enables readers to relish insights, analysis, profound interview and coverage of numerous SMEs development, activities and initiatives. Both have annual audited circulation of 50,000 copies and 130,000 copies consecutively. A total of 50,000 complimentary copies are circulated monthly to SMEs, Government Ministries
  10. 10. GROUP 1 – FINAL REPORT 2 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) and Agencies, Associates and Trade Chambers and Commerce, MNCs, GLCs and PLCs. The paper is also available for sale at myNEWS.com, MPH, Borders and Popular bookstores nationwide. Moreover, there is also online news portal which serves SMEs internationally which is named as MSME™ News Network. Other than publishing media, there is also event such as regular business networking that acts as a platform for entrepreneurs to exchange ideasand build lasting business relationship. Additionally, annual MALAYSIA SME® Congress is also one of the most successful and longest running signature event by its organizer that participated by a peak number of more than 7,500 SME businesses from six successful congresses. By inviting successful international SME entrepreneurs as well as renowned local SME entrepreneurs, this event provides continuous source of motivation, inspiration and guidance for entrepreneurs. Malaysia SME has also produced an entrepreneur sitcom called “Small Mission Enterprise” which combines elements of educational and entertainment. It is presented to the audience light comedy and dramatic manner and aimed to educate and create awareness toward the importance of SMEs to Malaysians. 1.1.2. Long-Term Objectives of Project From this project, there are three (3) long-term objectives can be derived which will benefit to not only the employers themselves, but also to those students who are doing this final project currently and to those next semester students. As for the employer which is the MSME, this project involves our group as part of it to help the
  11. 11. GROUP 1 – FINAL REPORT 3 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) MSME to investigate the current trend and practices of Trade Credit or Payment Terms, terms offered by Malaysian SMEs to the customers especially to large corporations. Besides that, the issue of late payment or non-payment has also been the serious challenge for Malaysia Small-Medium Enterprises (MSMEs). In this case, the goods or services sent will be the debt instead of profit. Surprisingly, those customers are mostly from large corporations. This will eventually impact to business growth, difficulty in paying staff, and so on. Hence, to identify and investigate this issues stated above and to minimize the risks, there is a need to gather all the related information from at least nine (9) SMEs. All information gathered will be only used for research purposes and will not be shared to those who do not involve. A full set of reports will be sent to authorize people as a proof to negotiate the average length of terms. As for us who are currently doing this project, it will help in enhancing basic skills to deal with people by the way of interviewing the questions set before in the report. In addition, the main objective for us in doing this report is to enable us to conduct research in the future. Lastly, through this report making process, we will be able to learn how to solicit employers who basically are very hard to be pursued. Information gathered and the project done in this semester will be a crucial foundation for the next project. Analyzing the trend and practices of Trade Credit in Malaysia will result in understanding of how Trade Credit is practiced. If there is an unusual trend or unfair practices being done, the data collected will be used for improvement of practices.
  12. 12. GROUP 1 – FINAL REPORT 4 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 1.1.3. List and Description of Deliverables List of Deliverables Description of Deliverables Preliminary Report & Final Report Final report is our expected deliverable in a form of tangible where background of the MSME has been described together with the long term objectives of this project. This report also has addressed on the literature review in regards to current trend and practices of trade credit in Malaysia SME to their customers especially large business such as multinational company which concentrating on business-to- business (B2B) transactions; findings in respect of practices gathered from interviewing with at least nine (9) entities. A set of structured and open-ended questions have also been designed to this report together with e-mail as the solicitation method prior interviewing. Those questions set have the purpose of finding out the financial challenges and whether trade credit is one of the issues. Those will be used as the equipment in the final report to summarize all the findings gathered after interviewing. At last, recommendations are given based on the findings. This final report will be submitted to the MSME employers as the material of proof to responsible authorities showing that there is an issue regarding to trade credit; late payment and non-payment. Check-Point Presentation & Final Presentation Despite the tangible form of deliverable, This project also requires us to give intangible form of deliverable which is through presentation. The purposes of this project findings have been split to two presentations which are check-point presentation and final presentation. In the check-off presentation with the MSME employers, the preliminary report will be presented by slides explaining the objectives of this project and current trend or practices of trade credit. For final presentation, findings from all information gathered by the way of interviewing at least nine (9) entities will be presented to fully understand the current practices and the main challenges that MSME faces in dealing with other businesses such as trade credit. Recommendations will be given as to solve issues.
  13. 13. GROUP 1 – FINAL REPORT 5 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 1.2. LiteratureReview on Trade Credit 1.2.1. Trade Credit and Its Standard Practices for SMEs Financial challenges can be faced by any organization which one of them is trade credit. The terms of trade credit has been well known even since thirty years ago (Peterson & Rajan, 1997). However, according to Ferraro and Mulier (2012), there was an increase of the use of payment terms from the mid-2009 during financial crisis for the purpose of compensating the decline in short-term bank loans. With that short history, the use of payment terms is expanding in every single business including profitable or non-profitable organizations now and is expected to grow in the future. For many organizations, trade credit or so called as payment terms is one of the most important approaches for the purpose of financing in short-term basis and financing growth. Fitzpatrick and Lien (2013) in their journal states that trade credit refers to as an agreement where suppliers allow the business they partnered with to delay the payment for a specific period of time after the goods and services delivered in advance. The authors added that by allowing the later payment after receiving the goods or services helps to manage the short-terms cash flows of a business. It is referred as the basic alternative funding source provided by financial institutions. Additionally, Nilsen and Gerzensee (1999) found trade credit as the two- sided phenomena where it is often used by small businesses that are suffering from downturns of banks’ loans. Hence, they have no choice, but to use trade credit with their suppliers. Cunat and Appendini (2012) added that it helps buyers to increase the
  14. 14. GROUP 1 – FINAL REPORT 6 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) inputs purchase. Offered in this way, trade credit supposedly to be unfavorable for suppliers, but they still have to use it to maintain and or gain long-term loyalty and relationships of customers, and indeed to obtain higher sales, so that accessing to capital markets is possible. However, both suppliers and buyers should consider the rate of stock turnover, economic conditions, goods characteristics, location of buyer, and many others as stated in the journal of Kalyanji (1999). According to Cunat and Appendini (2012), there are two types of trade credit agreements. The first type is net terms where supplier expected to accept payment in a certain period after delivering the good. The period is usually specified in the contract. For instance, “net 30” which means that the payment have to be done during 30 days. Charge will applied if the payment is done not during the time specified. Another type is two-part terms where the supplier will offer discount if the payment is done shorter than the period of time set. For instance, “2/10 net 30” which means that 2% discount will be given during ten days out of 30 days after delivery. The main reason why trade credit is getting more attractive as stated by Pike, Cheng, and Chadwick (1998) is mainly due to high transaction costs offered by financial institutions. Other than that, it also reduces the frequent payments and increases operating efficiencies. The importance of trade credit as stated by Fitzpatrick and Lien (2013) in their journal are to act as an instrument for price discrimination and to be used by businesses to verify the purchases quality before having to do payment. However, despite the importance given, trade credit is also giving disadvantages to businesses
  15. 15. GROUP 1 – FINAL REPORT 7 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) especially SMEs like late payment and or non-payment which will be further discussed in this report. The standard practices of trade credit is described in the figure below. Ferrando and Mulier (2012) states that the use of trade credit of a firm can be said a twofold process where suppliers give trade credit to an organization and, in turn, the organization can extend trade credit to its customers (accounts receivable). Figure 1. The Process of Trade Credit Source: Peterson & Rajan (1997) However, trade credit has become too troublesome issue for some organizations, especially SMEs, as it often gives disadvantages to SMEs that provide trade credit to other businesses such as late payment and or non-payment. Globally, according to Wehinger (2014) in OECD journal, Greek SMEs currently facing the issue associated with trade credit such as difficulties in accessing finance due to demand and supply constraints. It caused by non-performing loans (NPL) and large business turnover. There is a decline in credit, therefore it is affecting on supply of credit from banks. Credit towards Greek SMEs still remains expensive. Other issue such as late payment for small business has been addressed by UK legislation which was recently updated by the Late Payment of Commercial Debts
  16. 16. GROUP 1 – FINAL REPORT 8 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Regulations 2013. In fact, the large companies have the economic power to rule or determine credit period to their small company suppliers (Collis, Jarvis, and Page, 2013). A standard contractual payment term is usually applicable for 15, 30 or 45 days, but large companies will demand for the longer terms. Based on interviews conducted in US, one particular resource collected said that “There are some very large corporations that bully you into very long terms. You have a 30-day term which is a standard term you’re using, but they may bully you into 60 or 90 days” (Collis et.al., 2013). In South Africa, found that both the owner and manager of small companies are not considering their access to credit was affected by their lack of knowledge of finance. Small companies not study the supply financial information to suppliers providing trade credit. It would appear that the assessment of credit risk when suppliers grant trade credit to SMEs is also based on nonfinancial factors (Collis et.al., 2013). In Malaysia, the problems however, are not very different from those faced by SMEs in other countries as some of the major ones are due to their smallness. One of the issues is credit risk which refers to the possibility of default or delay in the payment by the debtor. Other issues consist of inadequate financial support; inadequate linkages with large industries; and limited market (Zainudin, 2009).
  17. 17. GROUP 1 – FINAL REPORT 9 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Figure 2. Incidence of Late Payment Reports by Region Source: ACCA (2015) Above figure shows the late payment experinced by Asia Pacific’s large corporates and SMEs which includes Malaysia from Q1 2009 to Q3 2014. It states that from that period of time, approximately 29% of Asia Pacific’s SMEs alongside with North Americas’ has experienced late payment which caused by trade credit. This considers to be low as compared with other regions, but it can be hurt enough for Malaysian SMEs that currently generate 32% of Malaysia’s GDP. In addition, below figure indicates that the percentage of Asia Pacific’sSMEs experienced late payment has fluctuated steadily from Q4 2009 to Q3 2014. However, it considers to be the third lowest in Q3 2014 among other regions excluding Central and Eastern Europe and North America which consecutively to be the lowest and second lowest.
  18. 18. GROUP 1 – FINAL REPORT 10 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 1.2.2. Topic Related to Trade Credit  Internal Management Structure of Trade Credit It is very important to get paid on time for the wellbeing and health of financial in the organization. To maintain a healthy cash flow and beneficial business required a good control of trade credit. A good credit control can assist the company to stay away from severe problems such as late payment or non-payment from customers. Hence, to achieve the good control of trade credit, there should be people who can well manage the trade credit (National Australia Bank, 2015). Below is about the internal management structure of trade credit based on our understanding. Figure 3. Incidence of Late Payment Experienced by SMEs Source: ACCA (2015)
  19. 19. GROUP 1 – FINAL REPORT 11 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Figure 4. Internal Management Structure of Trade Credit Source: MSME Group 1 (2015) Besides the people who manage the trade credit, a business can actually prevent late payment or non-payment of such impact from trade credit by applying insurance and or checking the credentials (Accelerated Collection Services Pty Ltd, 2010).  Process or Procedure in Setting Trade Credit Trade credit occurs when a company buy goods from a supplier that may give permission to the company to delay their payment. When the supplier
  20. 20. GROUP 1 – FINAL REPORT 12 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) granted the buyers a deadline for payment, effectively the supplier is extending financing to the company. This will enable the buyer to have enough time to obtain funds some other way and facilitate its short-term financial plan (Peavler, 2015). After the discount period expire, this adjustment normally requires a higher purchase price that is not reduced by the discount. Besides, buyers who use to pay before deadline instead pay within a fixed day, shorter time normally obtain a price lessening in the amount of the agreed discount period. Therefore, trade credit allows the buyer greater financing smoothness than short-term bank credit, which is frequently available to enterprises as a current account credit that customized to their operational requirements. Given this process is unbroken by several phase of sales and production, without the granted supplier credits being repaid by sales proceeds, or by bank loans, the credit chain can keep on or may be overlap with others. The whole process is restricted only by the relatively high interest rates charged and by the discount period which is normally drive punctual repayment (Bundesbank.de, 2012). For instance, The owner of an ice cream stand sign a franchising agreement, under which the distributor approves to supply ice cream stock under the terms "Net 60" with a 10% discount on payment within 30 days, and a 20% discount on payment within 10 days. This means that the operator has 60 days to pay the invoice in full. The ice cream distributor can do the same thing. Receiving trade credit from milk and sugar suppliers on terms of Net 30, 2% discount if paid within ten days, means they are apparently taking
  21. 21. GROUP 1 – FINAL REPORT 13 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) a loss or disadvantageous position in this web of trade credit balances. (Entrepreneur Staff, 2015).  Calculation Approach for Trade Credit - Outstanding Receivable According to Berman (2015), receivables refer to debts owed to a company. If a business agrees to provide its products or services and accept payment later, such as 30-day, 60-day and 90-day payment terms, those items qualify as outstanding receivables until such time as they are paid off. - Average Collection Period The average collection period or days sales outstanding can be referred as the measurement of time that the buyers take to pay their bills which shows the effectiveness of the business credit and collection policies (Bragg, 2015). This ratio also specifies if the credit terms are realistic. It is calculated as: Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash.
  22. 22. GROUP 1 – FINAL REPORT 14 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Agro Boards is a retailer that offers credit to customers with the agreement that the payment will be made within 30 days. Some customers promptly pay for their goods, while others are delinquent. Agro Boards year-end financial statements list the following accounts: Accounts Receivable: RM15,000 and Net Credit Sales: RM175,000. Average Collection Period will be: - Accounting for Bad Debt Account receivable is created from selling goods or services on credit. O’neill (1999) states that despite the good-faith efforts of the parties involved, it turns out that the debtor is unable to pay the creditor the amount owed and it is called bad debt. From the standpoint of the company extending the credit, the account receivable created in the transaction is not collectible, and should not be included in the current assets. In fact, the debt may not represent an asset at all. At the moment that collection becomes doubtful or impossible, the account receivable must be removed somehow. The first general method to get receivable off the accounts is the direct write-off (O’neill, 1999). Assume that three months elapse after the sale of the goods, and the RM1000 account is determined to be uncollectible.
  23. 23. GROUP 1 – FINAL REPORT 15 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Using the Direct Write-off Method, the entry to write the account off would be: The next method is the allowance in which estimation of the bad debts are needed each accounting period. After an estimate is made, adjustment entry for each period should be made (Helstrom, 2015). Figure 5. The Direct Write-off Method Source: O’neill (1999) Figure 6. The Allowance Method Source: O’neill (1999)
  24. 24. GROUP 1 – FINAL REPORT 16 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 1.3. LiteratureReview on Terminologies SME is Small and Medium size Enterprise which has characteristics that distinguish it from other business. For manufacturing sector, the employees are not supposed to exceed 200 or sales turnover not exceeding RM50 million. The employees should not exceed 75 or sales turnover not exceeding RM20 million for SMEs under services and other services (SME Corp, 2014). B2B (Business-to-Business) is a transaction between two entities without involving customers. For instance, transaction between Malaysia SME with Shell (Arline, 2015). Trade credit can be defined as a facility that allows purchase and delivery of goods and services without prompt payment. In other words, trade credit is an extension of payment after purchasing goods and services on credit. Normally, the length of trade credit given is 30, 60 or 90 depends on agreement signed by both parties (Ferrando and Mulier, 2012). L/C (Letter of Credit) is a guaranteed document from the bank to pay the seller full amount of payment as long as the seller fulfil particular delivery conditions. The bank will cover the remaining amount of payment if the buyer can’t meet with the expectation (Gov.uk, 2012). Bad debt is the situation when the buyer can’t cover the payment or the seller can’t collect the debt. There is possibility of debtor going to bankrupt or exceeding additional cost of pursuing the debt. Generally, bad debt will be written as an expense for the company (Accounting Tools, 2011). Account payable referred as responsibility of the company to pay its short term debt to its creditors when the products and services purchased on credit. Account payable on the balance sheet is available under current liabilities. The company should pay account payable within agreed period of time (Parsons, 2015). Account receivable referred when the customers owe money to the company on credit purchase and have not been paid although the goods and services are delivered or have been used. Account receivable on the balance sheet is available under assets. The customers should settle account receivable in short period of time, generally a few days to a year (Barad, 2010). Credit Insurance is an insurance bought by the borrower that frequently pays for existing debts in the event of a death, disability, or even unemployment. The payment of credit insurance is similar like credit card in which the assure pay low percentage of charge for unpaid balance monthly (Morel, 2010). Economic Condition is a condition affected by microeconomics (supply, demand, customer behavior of the company) and macroeconomics (Gross Domestic Product, national income, price levels) (Pettinger, 2013).
  25. 25. GROUP 1 – FINAL REPORT 17 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 2.0. Chapter 2 – Methodology and Preparation 2.1. Preparation for Solicitation 2.1.1. Solicitation Material (Refer to Appendix pg. 51 for solicitation email) (Refer to Appendix pg. 52 for call script) 2.1.2. Justification of Solicitation Material – Email Only As for this email, we have completed this project with compounded solicitation material (emails and call scripts). This email is focusing on persuading and attracting employers from SMEs Company to conduct interview. Basically, the background of this project research is to get better understanding of the trends and current practices of trade credit in the SMEs. Trade credit practice will be more frequently occur within the SMEs that conduct B2B business model (Business to Business). By doing this kind of solicitation material, we are able to capture the whole images of the trade credit. BACKGROUND RESEARCH As we are asking for the information that sensitive from their perspective (such as financial information), we already stated that we are not going to reveal the confidential information of the company and the name of providers because it is conducted based on project or for research purpose. CONFIDENTIALITY In the email, we have requested the permission to conduct interview for the parties. If they agreed with the interview and willing to participate, we would call or
  26. 26. GROUP 1 – FINAL REPORT 18 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) directly go to the companies to conduct the interview by ourselves. The information provided will become the main findings for this project paper. VOLUNTARY PARTICIPATION We also placed some persuasion point to convince them to do the interview. We indicate the persuasion by the development or improvement of better trade credit practice will be profitable for the SMEs to avoid these kinds of issues in the upcoming future. By addressing the point such as participation to this project will ease and reduce late payment for SMEs towards Large Company, it would be useful information for the company and benefits them as well. We also stated that the result of the project will be brought to the authority if necessary. PERSUASION 2.1.3. Solicitation Planning On Tuesday 16 June 2015, we had a discussion for continuing our progress. All of the members found the information about each company listed in the contact list given. We also found other contacts outside the list as well. We identified and differentiated the company based on its model (B2B or B2C) and size (small/medium/large). After all the contacts sorted, then only e-mail could be distributed. On Thursday 18 June 2015, we conducted our next meeting. Previously, we discussed the materials through social media (Facebook and Line). At this meeting, we discussed about chapter two which is the methodology and preparation. We started doing the solicitation email by referring to the grading scheme. Cecilia Efendy and Herman Salim designed the solicitation email (completed with background of research,
  27. 27. GROUP 1 – FINAL REPORT 19 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) confidentiality and permission to record, voluntary participation and persuasion) which later would be attached to the email for further information about the project. While they were making the solicitation email to be attached, Ellen Fredericia and Sevin Alnovans designed the initial email which would be sent to the business contacts. After all completed, all of the members started to distribute the emails. All the members have responsibility to reply the emails once it has been received and to inform other members regarding the answer given by the SMEs. On Friday 19 June 2015, one email from richard@han-jdql.com had been received. He had agreed to conduct an interview with us, but he had not given further clarification about time and place. From 32 emails, only one company had replied so far. The first SME we had found is located at Penang, so we only can have an interview with SME via telephone or e-mail due to the time and place constraints. Therefore, Ellen Fredericia had already done the call script for interview preparation. If nothing is obstructed by the means that at least five (5) companies approved to do the interview, the interview will be done through e-mail and via telephone. The possible equipments would be voice recorder, speaker, and stationary. The telecommunication will be smartphone. Lastly, rent a car will possibly be done if the company request us to do face-to-face interview.
  28. 28. GROUP 1 – FINAL REPORT 20 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Figure 7. Cecilia Efendy's Timeline Figure 8. Efendi's Timeline Figure 9. Ellen Fredericia's Timeline 16 June 2015 - Find contacts of the company 18 June 2015 - Design solicitation email 18 June 2015 - Distribute emails to entities 18 June 2015 - Contribute designing initial email 21 June 2015 - Check emails and find other potential contacts 16 June 2015 - Find contacts of the company 18 June 2015 - Design initial email 18 June 2015 - Disribute eight (8) emails 19 June 2015 - Reply to an email 19 June 2015 - Done the call script 16 June 2015 - Find contacts of the company 17 June 2015 - Arrange all contacts list found 18 June 2015 - Distribute emails to entities 19 June 2015 - Draft for call script 21 June 2015 - Check emails and find other potential contacts
  29. 29. GROUP 1 – FINAL REPORT 21 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Figure 10. Herman Salim's Timeline Figure 11. Sevin Alnovans's Timeline 16 June 2015 - Find contacts of SMEs 18 June 2015 - Design solicitation email 18 June 2015 - Distribute emails to entities 19 June 2015 - Email Dr Karling for more contacts 21 June 2015 - Recheck email and call script 16 June 2015 - Find contacts of SMEs 18 June 2015 - Design initial email 18 June 2015 - Distribute emails to entities 19 June 2015 - Done solicitation e-mail justification 21 June 2015 - Distribute and recheck emails
  30. 30. GROUP 1 – FINAL REPORT 22 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 2.2. Design of Interview Questions 2.2.1. Open-ended Questions No Questions Objectives 1 Are there any financial issues your company facing? To observe financial problem faced by the company. 2 How do the financial issues occur? To know the process of occurrence. 3 What are the effects from the financial issues? To know the impact of the issues. 4 Who manage the financial issues? To know who is responsible of solving the issues. 5 How many partners do the company has? Who are they? To observe company’s relationship with other entities. 6 What are the advantages of doing the partnership? To understand the advantages of partnership. 7 How do you usually deal with your business partners in regards to payment? To explore various types of payment methods. 8 Do you and your business partner have agreement on payment terms in conducting business? To identify the payment terms practice in doing business. 9 If yes, do you give discount to those who pay earlier than the agreed time? And how many percent discount? To identify the current policy adopted by the company. 10 If no, how do you avoid the request and what other options will you give to your business partner? To discover the standard practice of discounts given. 11 Who are involved in negotiating in payment terms? To know the internal and external parties involved. 12 What is the average length of time period set for an agreement of trade credit? Are there any difficulties associated with it? To understand the standard practice of trade credit In the company. 13 Do you give payment terms to new customers? Any requirement to obtain it? To know whether the company give favorable benefit to their new partners.
  31. 31. GROUP 1 – FINAL REPORT 23 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 14 If your company does not have any competitors, do you still give payment terms to your business partners? To learn the company position in the market. 15 Are there any late payments or no payment occurred when providing payment terms? Is that normal? To study about the issues that might occur from the trade credit practices. 16 What is the average delay in late payments? (if any) To identify the standard period of delay. 17 Do you charge for those who pay upon than the payment term? If yes, how many percent charge given? To identify the current policy adopted by the company. 18 What are the most difficult challenges when dealing with the late payment or no payment? To know the barriers in dealing with those issues. 19 How does the company usually deal with such issues? To know the methods used to overcome the issues. 20 How the company manages the cash flow if those issues occurred? To know how the company manage the cash flow in difficult situation. 21 How long usually it takes to solve the issues? To know the length of time used in solving the issue. 22 What are the systems used to check or investigate the issues? (if any) To discover if there is any technology that could help investigate or solve the issues.
  32. 32. GROUP 1 – FINAL REPORT 24 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 2.2.2. Structured Questions COMPANY: 1. How long has this company been operating? < 5 years (1) > 5 years and < 10 years (2) > 10 years (3) 2. In which industry your company is operating? 3. How many numbers of employees employed? 4. Does the company have partnership with any other businesses? • Yes (1) • No (2) 5. Does the company have any branches? INTERVIEWEE 1. How old are you? • 19-25 (1) • 26-32 (2) • 33-39 (3) • 40-46 (4) • >46 (5) 2. How long have you been working in this company? < 5 years (1) > 5 years and < 10 years (2) > 10 years (3) 3. What is your position in this company? 4. What is job role in this company? 5. Are you satisfied with your job? • Yes (1) • No (2)
  33. 33. GROUP 1 – FINAL REPORT 25 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.0. Chapter 3 – Analysis of Findings and Recommendations 3.1. Characteristicsof Intervieweesand Organizations 3.1.1. Detail of Interviewees HOTO STAINLESS STEEL INDUSTRIES SDN. BHD. Name of interviewee Mark Lim Interview time 8.10 a.m. – 8.25 a.m. Location Setia Alam Convention Centre Interview Duration 06 minutes 13 seconds Contact info 603-31761768 PAN MALAYSIA CAPITAL BERHAD Name of interviewee Michael Oh Hong Choon Interview time 8.25 a.m. – 8.40 a.m. Location Setia Alam Convention Centre Interview Duration 08 minutes 23 seconds Contact info +6012-278 5560 ASCENDENT CERTIFICATION SDN. BHD. Name of interviewee Lua Kheng Leong Interview time 8.40 a.m. – 9.00 a.m. Location Setia Alam Convention Centre Interview Duration 05 minutes 09 seconds Contact info +6012-375 2812 SUPERSHO (M) SDN. BHD. Name of interviewee Samuel Goh Interview time 9.05 a.m. – 9.20 a.m. Location Setia Alam Convention Centre Interview Duration 17 minutes 21 seconds Contact info +6012-300 4843
  34. 34. GROUP 1 – FINAL REPORT 26 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) MEDIA SPECIALISTS SDN. BHD. Name of interviewee Lim Ai Lian Interview time 11.30 a.m. – 11.45 a.m. Location Setia Alam Convention Centre Interview Duration 22 minutes 03 seconds Contact info +6017-889 0935 OPUS IT SERVICES SDN. BHD. Name of interviewee William Toh Interview time 1.20 a.m. – 1.35 a.m. Location Setia Alam Convention Centre Interview Duration 07 minutes 05 seconds Contact info +6011-3709 3878 ABYRES SDN. BHD. Name of interviewee Basheer Ali Interview time 1.50 a.m. – 2.10 a.m. Location Setia Alam Convention Centre Interview Duration 07 minutes 12 seconds Contact info +6019-321 4499 FLAVOR INN CORPORATION SDN. BHD. Name of interviewee William Arul Interview time 3.20 a.m. – 3.45 a.m. Location Setia Alam Convention Centre Interview Duration 20 minutes 18 seconds Contact info +6012-226 9422
  35. 35. GROUP 1 – FINAL REPORT 27 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.1.2. Interviewee and Organization Characteristics 3.1.2.1. Characteristics of Organizations No Name of Companies Years of Business Operation Industry Numbers of Employees Partnership Branches 1. HOTO Stainless Steel Industries Sdn. Bhd. (3) Manufacturing and Process >100 Yes No 2. Pan Malaysia Capital Berhad (3) Investment Holding (99) Yes (99) 3. Ascendent Certification Sdn. Bhd. (99) Consultancy Service (99) Yes (99) 4. Supersho (M) Sdn. Bhd. (3) Trading and Distribution 26-50 Yes Yes 5. Media Specialists Sdn. Bhd. (99) Marketing Communication (99) Yes (99) 6. Opus IT Services Sdn. Bhd. (2) Outsourcing 1-25 Yes Yes 7. Abyres Sdn. Bhd. (3) Information Technology ±50 Yes Yes 8. Flavor Inn Corporation Sdn. Bhd. (3) Manufacturer for food flavors ±30 Yes No *(99) = not specified, (1) (2) (3) = structured questions coding *All the description and illustration of organizational characteristics have been provided in the transcripts (see appendix pg. 55).
  36. 36. GROUP 1 – FINAL REPORT 28 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.1.2.2. Characteristics of Interviewees No Name of Interviewee Age Working Years Position Job Role Satisfaction of Job 1. Mark Lim (4) (3) Senior Manager Finance and Administration Yes 2. Michael Oh Hong Choon (5) (3) Director Audit Committee and Development Division Yes 3. Lua Kheng Leong (5) (3) Founder Metrology and Quality Management Yes 4. Samuel Goh (5) (2) Executive Director Managing the operations Yes 5. Lim Ai Lian (5) (3) Media Director/Partner Planning Consultancy and Sales Training Yes 6. William Toh (4) (2) Senior Manager Regional Business Development Yes 7. Basheer Ali (5) (2) Chief Operating Officer (99) Yes 8. William Arul (5) (3) CEO (99) Yes *(99) = not specified, (1) (2) (3) = structured questions coding *All the description and illustration of interviewees’ characteristics have been provided in the transcripts (see appendix pg. 55).
  37. 37. GROUP 1 – FINAL REPORT 29 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.2. Summaryof Interview Findings 3.2.1. Category – What We Have Learnt Category / Company HSSI PMC AC S MS OITS A FIC Practice Yes Yes Yes Yes Yes Yes Yes Yes Decision maker Sales Manager & Senior GM Director Sales Manager Sales- people Account person or Sales- person - Sales Manager or Account manager Marketing Average Terms 70 - 90 days D 1 – 5 months 30 – 90 days 30 days 30 days 30 – 45 days 60 – 120 days Average Delay - - - - - 1 – 2 month - - Discount D No Yes Yes No D D No Penalty No No No Yes No Yes - No Late/no payment No No Yes Yes Yes Yes Yes No Management Yes Yes Yes Yes Yes Yes - Yes New Customer No Yes Yes D - Yes D Yes Requirement Yes - - Yes - Yes Yes Yes
  38. 38. GROUP 1 – FINAL REPORT 30 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) System Yes Yes Yes Yes No Yes Yes Yes Others GST - - - - - - - *Company Name *Abbreviation HSSI: Hoto Stainless Steel Industries Sdn. Bhd. - : Not Specified PMC: Pan Malaysia Capital Berhad D : Depends AC: Ascendent Certification Sdn. Bhd. S: Supersho (M) Sdn. Bhd. MS: Media Specialists Sdn. Bhd. OITS: Opus IT Services Sdn. Bhd. A: Abyres Sdn. Bhd. FIC: Flavor Inn Corporation Sdn. Bhd. 3.2.2. Findings The objective of this project paper is emphasized on the trend and practices of Trade Credit done by SMEs in Malaysia with Large Corporations. Therefore, based on the categories above, the findings for each company have been derived. The data is collected from interviewing 8 different SMEs in Malaysia even though some data is not specified. The finding derived from Hoto Stainless Steel Industries Sdn. Bhd. shows that there is a payment terms practice in this organization. Sales manager and Senior General Manager will basically involve in negotiating payment terms with their business partner. The average length of terms given is 70 days, but it is negotiable up to 90
  39. 39. GROUP 1 – FINAL REPORT 31 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) days. For prompt payment, discount will be given with the condition that they have to calculate back the interest. The issues of late payment or no payment is identified. But, this company claimed that the control is good, so they have average term of 70 days. However, with the existence of GST, this company has made it to 60 days. To avoid the issue, this company will most likely to manage the debtors. Moreover, for new customers, this company will not give credit term. Hoto stated that the provision will be made even though not so soon. Requirements for getting credit are needed by new customers. Credit committee will be in charge for collecting documentations and identify the turnover and partner’s financial situation such as the bank account for the past three months. Basically financial situation is crucial to identify whether its partner is creditworthy or not. Besides, personal guarantee is also needed to enable this company to sue personally when they unable to pay. The whole process of payment terms is controlled by credit control committee and flow chart to analyze. The next finding from Pan Malaysia Capital Berhad indicates that payment terms is practiced by this company. Director will be the one involved in dealing with the terms. The average term given varies depend on the project. If the project value is RM50,000, then terms will be between two to three weeks. Moreover, if the project value is more than RM 2 million, the terms given will be more than three months. There will be no discount given to those who pay earlier since everything should follow the schedule. The payment usually made by work in progress. This company will ask for 30 percent upfront when the project is confirmed, 50 percent more when material delivered to site, another 10 percent when equipment is up and the last 10 percent is collected after testing communication. With this kind of policy, the late payment or no
  40. 40. GROUP 1 – FINAL REPORT 32 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) payment issue is rarely faced, therefore no cash flow issue in this company. Moreover, this policy is applied to every customer including new customer as well. The technological system used in this company is for remoting, recording and monitoring whole process of payment terms practice. Ascendent Certification Sdn. Bhd.’s findings indicate that there is a practice of payment terms with other businesses. When negotiating the payment terms, the internal decision maker involved is the sales manager. Moreover, the time period set for an agreement of trade credit is usually one to three months. However, if the businesses want to have extension, it will be up to five months. They do have given discount to those who paid earlier, but it is a seldom activity. The director who we interviewed states that there are late payment, but they never encountered no payment when dealing with other businesses. Surprisingly, they do not charge to those who pay late as they think relationship is very important. As it will affect the company’s cash flow, the director will use his own savings to recover it. This company does giving discounts to new customers with the policy only one month given for them to pay back. To control the whole process of payment terms, the company is using Management Information System (MIS) to regularize financial reports for every level of management. The findings from Supersho (M) Sdn. Bhd. describe the same with all SMEs we interviewed. They do have payment terms practices in dealing with other businesses where internal party involved in negotiating the terms is sales people. The average length terms is usually 30 to 90 days where if the other businesses pay earlier, they will get 1.5% discount. There are issues on late payment occurred in the company
  41. 41. GROUP 1 – FINAL REPORT 33 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) where other businesses tend to pay late and order new product by requesting quotation. Therefore, they will add on margin to cover up the interest payment to the bank. Normally, it will be 25%, but 30% will be imposed to those who often late. As this late payment or no payment occurred, the company will manage the cash flow by using facility from bank such as banker acceptance and letter of credit. They do check on trade record when giving payment terms to new customers. The businesses will have to follow some procedure as a requirement for obtaining payment terms from this company. The findings derived from Media Specialists Sdn. Bhd. shows that the practice between Media Specialists and other entities have agreement on payment terms verbally (contract) and non-verbally. The decision maker that deals and responsible in monitoring the process of payment term or trade credit is account or sales person. The average length of terms for trade credit payment is 30 days and it applied to the new customers as well. Furthermore, three different kinds of product line in the company will be given three different credit terms. The first product is advertisement booking where the customer should pay in front or booking will not be given. The second product is service oriented where credit terms given to the customers after services delivered. The third product is subscription online software which the service will be terminated after 30 days late or no payment. There is no discount provided for prompt payment. Media Specialists Sdn. Bhd faces issues regarding to late payment when it comes to deal with large corporations. Advertiser and communication industry (LC) pay within the normal days which is 60 days unless they are given prompt payment discount. Delay can be very damaging because when
  42. 42. GROUP 1 – FINAL REPORT 34 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) the amount of late payment is big, the company can’t cover for the supply, employees and expenses. There are no charges imposed for late payment. However, no payment never occur in this company because the management selective in choosing the clients. The action taken by the company to prevent late payment is by sending letter of demand to the customers or ask for split payment. There is no technological system used to check or investigate the issues. The company use call method to remind or monitor late payment. To summarize, Media Specialists feel threaten because of the practice of Malaysia business culture. The findings from OPUS IT Services Sdn. Bhd. shows that there is practice of payment terms while conducting business with others. The negotiation of time period of trade credit usually takes 30 days. But, it is subjected to customer agreement. They look for negotiation where it can up to 60 days. However, the business can still delay after the negotiation agreed where they will delay from 1 to 2 months. This company do give discount in payment terms when they order in bulk. They also have late payment which is very common for local company, however it is not a really big issue for their companies since they have a very good cash flow management. Then, they do charge to those who pay late. This company do have agreement on penalty where most of the time they just put in the white paper, yet they do not really emphasis on penalty because they want to maintain a good relationship with the business partners. When late payment or no payment occur, they send sale account manager to follow up with finance. They do not really take legal actions because they want some forms of return every month. Moreover, they do give every customer payment terms including new customer. However, they emphasis procedure toward which bank account you
  43. 43. GROUP 1 – FINAL REPORT 35 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) can actually pay through cash, check or bank-in. They also see finance credit form and do some background checks. Finally, they do have a finance system, this system is itself tell us that no money is coming in. The findings from Abyres Sdn. Bhd has shown that there is a practice of trade credit with their customers/ suppliers, basically all of negotiating process overseen by the manager or account manager. The average terms of Abyres Sdn. Bhd has given range from 30 to 45 days. The party who make earlier payment able to obtain discount are normally under special circumstances based on volume. Normally the issues such as late payment or no payment occurred only few times and those who cause it, will be imposed on penalty. When there is a new customer, they tend to be very strict in negotiating which emphasizes on account registration/supplier/render registration and credit worthiness procedure. The payment terms normally monitors by using technological system. The findings from William Arul as one of the CEO (Chief Executive Officer) of Flavor Inn Corporation Sdn. Bhd has stated that they have practicing trade credit from the last 12 years ago. Marketing people are the one who will be negotiating with the distributor regarding about the trade credit. William Arul also highlighted that the average terms to carry out the payment approximately 60 to 120 days and will be given discount under certain circumstances such as the company is tight on the cash which they will give 5% discount. Under certain stage, surplus fund occurs will be giving longer credit term. The case of late payment and no payment are never happened, however if there is such case, they will wait till they pay and that is consider regular
  44. 44. GROUP 1 – FINAL REPORT 36 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) occasion. Other option is by currency option to maintain their cash flow. Payment terms apply to all customer whether their new or existing customers. The normal requirement to have business dealing with each other is by doing letter of credit (LC). Finally, they do have system to monitoring all the payment terms dealing with their customers.
  45. 45. GROUP 1 – FINAL REPORT 37 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.2.3. Evidence Category / Company HSSI PMC AC S MS OITS A FIC Practice 01:24 01:21 - 00:59 01:00 00:59 01:23 03:50 Decision maker 01:55 02:28 02:21 09:16 15:59 - 02:54 03:13 07:54 Average Terms 02:10 03:01 01:31 02:31 01:30 01:17 00:59 03:43 04:28 05:29 Average Delay - - - - - 05:32 - - Discount 01:32 01:33 02:04 02:31 04:04 01:22 02:24 05:44 Penalty - - 03:48 03:22 03:44 04:10 01:38 06:00 11:35 Late/no payment 04:13 04:09 03:25 06:11 06:22 05:06 07:55 11:43 00:41 01:38 05:58 05:06 10:34 11:19 Management 05:06 05:33 04:06 07:08 09:45 14:05 03:45 04:00 - 11:10 12:48 New Customer 02:28 03:41 02:45 04:24 01:17 02:43 03:55 08:48
  46. 46. GROUP 1 – FINAL REPORT 38 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Requirement 02:47 - - 08:10 - 02:55 04:19 08:55 System 05:54 07:34 04:24 - 15:45 04:40 06:43 14:10 Others 04:13 - - - - - - - - : Not Specified
  47. 47. GROUP 1 – FINAL REPORT 39 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.2.4. Strengths Category Strengths Practice 8 out of 8 SMEs (100%). From all 8 SMEs that we interviewed, all of them do have payment terms practices in their daily operations with large corporations although the process on how they practice are different. Decision maker 7 out of 8 SMEs (87.5%). All SMEs besides OPUS IT Services Sdn. Bhd. do specify the internal parties who are involved in negotiating the payment terms with the other businesses. Most of them (5 SMEs) will put sales people as the person in charged negotiating the trade credit with business partners. Average Terms 7 out of 8 SMEs (87.5%). Pan Malaysia Capital Berhad is the only SME that does not state the exact time of average length terms given as they depend on the various projects from their business partners. Other SMEs do state the average length terms which overall range from 30 days up to 150 days. However, some of the SMEs open for negotiating the extension request. Average Delay 1 out of 8 SMEs (12.5%). Only OPUS IT Services Sdn. Bhd. that does want to specify their average delay of late payment by their business partners which is 1-2 months. The rest of the SMEs did not want to open their confidentiality by telling the average delay made by large corporations they are dealing with. Discount 2 out of 8 SMEs (25%). Pan Malaysia Capital Berhad and Media Specialists Sdn. Bhd. and Flavor Inn Corporation Sdn. Bhd. are the SMEs interviewed that do not give discount to those who paid earlier than agreed time. The other three entities do have some percentage of discounts, but they all depend on certain conditions. Supersho (M) Sdn. Bhd. and Ascendent Certification Sdn. Bhd. are the only two companies that said “yes’ to give discount. Penalty 2 out of 8 SMEs (25%). Penalty will be imposed by Supersho (M) Sdn. Bhd. and OPUS IT Services Sdn. Bhd. for those who often pay late. Supersho (M) will add on margin 25%-30% to the items ordered while OPUS only states the charge imposed on the contract, but they do not really practice it. Abyres Sdn. Bhd did not specify whether they impose penalty or not while the rest of the SMEs do not want to impose penalties with relationship as the main concern.
  48. 48. GROUP 1 – FINAL REPORT 40 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Late/no payment 5 out of 8 SMEs (62.5%). From all SMEs we interviewed, 62.5% of them do experience late payment and no payment. But, late payment is the most common case which has become a norm in doing business for SMEs. However, it is not the case for Flavor Inn Corporation Sdn. Bhd., Hoto Stainless Steel and Pan Malaysia. The companies do have issues, but they never felt threaten on that as they partners will definitely pay sooner or later. Management 7 out of 8 SMEs (87.5%). All of the SMEs except Abyres Sdn. Bhd. do specify how they manage the cash flow if late payment or no payment occurred. Some of the SMEs will make use of the own savings, and so on. At last, if the issues are not solved, some of the SMEs will take legal actions as the last stage. New Customer 4 out 8 SMEs (50%). Hoto Stainless Steel Industries Sdn. Bhd. does not provide payment terms to new businesses as they think it is not the right time to do so. But, the rest of the SMEs are providing payment terms, but Supersho and Abyres have put standard average terms for new customers and conditions to fulfill. Requirement 5 out of 8 SMEs (62.5%). Pan Malaysia Capital, Media Specialist and Ascendent Certification did not specify any requirement for new customers to obtain payment terms. However, the other 5 SMEs have some procedures and they do have background check on the new businesses that want to obtain it. System 7 out of 8 SMEs (87.5%). Media Specialists Sdn. Bhd. does not have the system used to control the whole process of payment terms. They just call to chase for payment. The other seven entities have some kind of technological systems used to investigate the process of TC such as MIS, and so on. Others 1 out of 8 SMEs (12.5%). Hoto Stainless Steel Industries Sdn. Bhd. stated that Goods and Services Tax (GST) has impact the average length terms they provided to decrease from 70 days to 60 days.
  49. 49. GROUP 1 – FINAL REPORT 41 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.3. Recommendation for Mass SurveyPhase 3.3.1. Category 3.3.1.1. Area for Further Investigation After conducting interview with 8 SMEs in Malaysia and done with the analysis of data gathered from the interview, we do realize that although we have good points which we should improve for future research, yet there are still many weaknesses to be reflected to. We do realize that there are still many weaknesses that we must reflect to. Our questions are not quite effective and sufficient. From the questions set, we know that they did not cover all the specific areas of payment terms in a mean that not too detail. Since the next stage research will require mass survey instead of interview, one of our recommendations for further investigation is to ask detailed questions on payment terms. The area covered includes average delay, impact of late payment and management of issue (e.g: cash flow). Another recommendation is to investigate the correlation between organizational size and payment terms practice. Organizational size refers to how many employees that one particular company employed. We suggest that questions regarding to organizational size should be put in the survey question. Based on our findings, we found a trend between organizational size and payment terms practice to new customer.
  50. 50. GROUP 1 – FINAL REPORT 42 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Lastly, it is known that Malaysian Government has just imposed GST (Goods and Services Tax) recently. Therefore, mass survey stage should take influence of GST to payment terms into consideration. In addition, it is better to give the survey to variety of industries besides manufacturing and services. Overall, the more information that we have, the better outcomes of the project will be. This paper is not only focus on one aspect, it also allows the students or researchers to learn more based on the data received. It becomes very important for the researchers to go out there and learn something and not to box themselves on only focusing the listed questions. Therefore, we can excavate more data and useful information to be applied into the project. 3.3.1.2. Solicitation Recommendation Based on the findings, we have found that there are several recommendations needed to improve for a better practice of this project. As for the solicitation email, firstly, our group recommends to search and find the entities that fulfill the requirement as SMEs. It is necessary to prepare set of email script. Email script is including the statement of brief personal identification (Name and University), the objective and brief overview of the project, and confidentiality assurance. Email script together with the survey questions will be sent to SME entities.
  51. 51. GROUP 1 – FINAL REPORT 43 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) The greater number of targeted SMEs, the more possibility of email replied. Email replied should be responded quickly and. If the email is being ignored several times, the action such as calling the entities should be taken. In order to get participants for the survey phase, it is possible to check the website that list down all SMEs from different kind of industries and from different places in Malaysia. Once it is found, students should do a research about the company’s contact number and basic thing about the company such as what kind of things they do or what kind of products they produce. Moreover, students should also ensure that the targeted SMEs are dealing with large corporations since this project is mainly focused on SMEs which are dealing with large corporations. 3.3.1.3. Approach to Calculate TC Related Statistics The average collection period or days sales outstanding can be referred as the measurement of time that the buyers take to pay their bills which shows the effectiveness of the business credit and collection policies (Bragg, 2015). This ratio also specifies if the credit terms are realistic. It is calculated as: Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash.
  52. 52. GROUP 1 – FINAL REPORT 44 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Agro Boards is a retailer that offers credit to customers with the agreement that the payment will be made within 30 days. Some customers promptly pay for their goods, while others are delinquent. Agro Boards year- end financial statements list the following accounts: Accounts Receivable: RM15,000 and Net Credit Sales: RM175,000. Average Collection Period will be: 3.3.2. Recommendations Execution From all the recommendations stated above, the execution of recommendations have already stated specifically for each. At this point, brief and general overview on how the recommendations should be executed is to do research regarding on payment terms practice in advance. From the research, the students in next phase can obtain more information and knowledge which can help them in setting survey questions. The students must ensure the questions set are in sequence and detail. For example, the trend of GST in Malaysia. The students may use this trend to set the survey questions. Beside the questions personally set by students, they may refer to the area of payment terms that we have recommended above including average delay, management of issues, impact of late payment, and correlation between organizational size and payment terms policy, but not limited to.
  53. 53. GROUP 1 – FINAL REPORT 45 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) 3.3.3. Justifications We recommend average delay, impact of late payment and management of issue as the area to be covered on payment terms is due to the reasons below. Average delay is recommended because we did not provide sufficient information about average delay the SMEs face. From eight SMEs we interviewed, only one specified the average delay time by its clients. This shows that our finding is not strong enough to make a speculation. Therefore, students should ensure that this question is answered. Secondly, we recommend impact of late payment because we did not provide that area in our findings. If we ask about the impact of late payment to the company, we may discover variety of impacts. Based on our findings, we only ask about the management of cash flow since we speculate that is the only impact that late payment gives. Moreover, management of issue regarding cash flow provided in our finding is not sufficient as well. Hence, students must dig more information regarding this issue. Regarding the payment terms practice, there is a need to further investigate the correlation between organizational size and payment terms practice to new customer. It is because from findings we found the trend that organizations with number of employees of above 50 will have strict consideration of creditworthiness, background check and trade record of the potential customers who want to apply for payment terms. However, the findings we got are insufficient as there are some companies not specify number of employees in their organization. If all of information is specified clearly, the
  54. 54. GROUP 1 – FINAL REPORT 46 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) trend might be proved. Therefore, based on this speculation, further investigation in this area should be done. Lastly, one of the eight SMEs we interviewed mention about impact of GST on how the average of terms is given to the clients. It shows that GST has decreased the length of terms given. Based on this, we suggest GST should be investigated further. Moreover, we suggest the next phase to better study variety of industries because we only study manufacturing and services industry and we found that the average length terms for both industries are different which is 30 days and 60 days. In our opinion, the trend is not well-supported if only a few types of industries studied.
  55. 55. GROUP 1 – FINAL REPORT 47 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Reference List ACCA, 2015. Ending late payment. [pdf] Available at: https://attachment.fbsbx.com/file_download.php?id=413300792195532&eid=ASuNvO1KH3 VeFszspY9B1rEtmttb0WDDiKnWKYMLVsMSBHfOy5pLzcE8tTPx6bwq2vM&inline=1&ext=1 435854292&hash=ASv_Hu3g0rNtTaqn [Accessed 03 July 2015]. Accelerated Collection Services Pty Ltd, 2010. Show Me The Money: 4 Tips to Preventing Bad Debts. [online] Available at: http://www.debtcollection.com.au/preventing-bad-debts.php [Accessed 03 July 2015]. Accounting Tools, 2011. What is the difference between bad debt and doubtful debt? [online] Available at: <http://www.accountingtools.com/questions-and-answers/what-is-the- difference-between-bad-debt-and-doubtful-debt.html> [Accessed 12 June 2015]. Arline, K., 2015. What is B2B? [online] Available at: <http://www.businessnewsdaily.com/5000- what-is-b2b.html> [Accessed 12 June 2015]. Barad, M.M., 2010. Analysis of Receivable Management Particular. [pdf] Available at: <http://shodhganga.inflibnet.ac.in/bitstream/10603/723/11/11_chapter%206.pdf > [Accessed 12 June 2015]. Berman, C., 2015. What Does It Mean for a Company to Have Outstanding Receivables?. [online] Available at: http://smallbusiness.chron.com/mean-company-outstanding-receivables- 81155.html [Accessed 18 June 2015]. Bhatt, S., 2014. How to prevent your debtors from turning into bad debts. [online] Available at: http://articles.economictimes.indiatimes.com/2014-02-19/news/47489850_1_client-23-lakh- bad-debts [Accessed 03 July 2015]. Bragg, S., 2015. Accounts Receivable Collection Period I Days Sales Outstanding. [online] Available at: http://www.accountingtools.com/receivables-collection-period [Accessed 03 July 2015]. Bundesbank.de, 2012. The importance of trade credit for corporate financing in Germany – evidence from financial statements statistics. [pdf] Available at: https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report_Articles /2012/2012_10_trade.pdf?__blob=publicationFile [Accessed 19 June 2015]. Career Planner.com., 2011. Job Duties and Tasks for: "Accountant". [online] Available at: http://job- descriptions.careerplanner.com/accountants.cfm [Accessed 21 June 2015]. Collis, J. Jarvis, R. and Page, M., 2013. SMEs, Financial Reporting and Trade Credit: An International Study. [online] Available at: <http://www.accaglobal.com/ab77> [Accessed 22 June 2015].
  56. 56. GROUP 1 – FINAL REPORT 48 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Cunat, V. and Appendini, E.G., 2012. Trade credit and its role in entrepreneurial finance. [pdf] Available at: http://webcache.googleusercontent.com/search?q=cache:VOD8LWZZhI4J:www.vicentecun at.com/TC%2520Chapter_OUP.pdf+&cd=2&hl=en&ct=clnk [Accessed 15 June 2015]. Dun & Bradstreet Australia Pty Ltd, 2009. Five steps to prevent bad debts. [online] Available at: http://dnbsmallbusiness.com.au/Cash_Flow/Five_steps_to_prevent_bad_debts/indexdl_837 9.aspx [Accessed 03 July 2015]. Entrepreneur Staff, 2015. Trade Credit. [online] Available at: <http://www.entrepreneur.com/encyclopedia/trade-credit> [Accessed 03 July 2015]. Ferrando, A. and Mulier, K., 2012. DO FIRMS USE THE TRADE CREDIT CHANNEL TO MANAGE GROWTH. [pdf] Available at: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1502.pdf [Accessed 14 June 2015]. Ferrando, A. and Mulier, K., 2012. Do firms use the trade credit channel to manage growth? [pdf] Available at: <https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1502.pdf> [Accessed 12 June 2015]. Gov.uk, 2012. Letters of credit for importers and exporters. [online] Available at: https://www.gov.uk/letters-of-credit-for-importers-and-exporters [Accessed 12 June 2015]. Helstrom, K., 2015. The Allowance Method Based on Credit Sales Vs. the Allowance Method Based on Accounts Receivable. [online] Available at: http://smallbusiness.chron.com/allowance-method-based-credit-sales-vs-allowance-method- based-accounts-receivable-56497.html [Accessed 03 July 2015]. Kalyanji, J., 1999. THE IMPACT OF TRADE CREDIT ON BUSINESS OPERATIONS. [pdf] Available at: http://webcache.googleusercontent.com/search?q=cache%3A6QmJmC8Aep4J%3Awww.ua br.auckland.ac.nz%2Ffiles%2Farticles%2FVolume1%2Fv1i1-impact-of-trade- credit.pdf+&cd=6&hl=en&ct=clnk [Accessed 14 June 2015]. Monster.com, 2015. Recruiting and Hiring Advice. [online] Available at: http://hiring.monster.com/hr/hr-best-practices/recruiting-hiring-advice/job- descriptions/accountant-job-description-sample.aspx [Accessed 21 June 2015] Morel, F., 2010. Credit insurance in support of international trade Observations throughout the crisis. [pdf] Available at: <http://www.berneunion.org/wp-content/uploads/2013/10/Credit- insurance-in-support-of-international-trade.pdf> [Accessed 12 June 2015]. Nab.com, 2015. How to avoid bad debts. [online] Available at: http://businesstips.nab.com.au/cash- flow-management/avoid-bad-debts/ [Accessed 03 July 2015].
  57. 57. GROUP 1 – FINAL REPORT 49 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) O’neill, M., 1999. Accounting for Receivables. [online] Available at: <http://seattlecentral.edu/faculty/moneil/A210/L9/Lesson9-6ed.html#emailMe> [Accessed 18 June 2015]. Parsons, N., 2015. What Is Accounts Payable? Metrics in a Minute. [online] Available at: <http://www.liveplan.com/blog/2015/02/accounts-payable-metrics-minute/> [Accessed 12 June 2015]. Paul, S., 2006. Understanding the Importance of Trade Credit: Two-Sided Phenomenon. [pdf] Available at: http://webcache.googleusercontent.com/search?q=cache%3A9zYpXxlz- CIJ%3Awww.researchgate.net%2Fprofile%2FSalima_Paul%2Fpublication%2F250003670_I CM_Art2%2Flinks%2F0deec51e93c416f852000000+&cd=3&hl=en&ct=clnk [Accessed 14 June 2015]. Peavler. R., 2015. The Cost of Trade Credit (Account Payable). [online] Available at: <http://bizfinance.about.com/od/Accounts-Payable-and-Accruals/qt/cost-of-trade-credit- accounts-payable.htm> [Accessed 10 June 2015]. Pettinger, T., 2013. Difference Between Microeconomics and Macroeconomics. [online] Available at: <http://www.economicshelp.org/blog/6796/economics/difference-between- microeconomics-and-macroeconomics/> [Accessed 12 June 2015]. Prospects., 2014. Financial Manager Job Description. [online] Available at: http://www.prospects.ac.uk/financial_manager_job_description.htm [Accessed 21 June 2015]. SME Corp, 2014. SME Definition. [online] Available at: http://www.smecorp.gov.my/vn2/ [Accessed 14 June 2015]. Sola, C.M. Teruel, P.J.G. and Solano. P. M., 2015. TRADE CREDIT AND SME PROFITABILITY. [pdf] Available at: http://webcache.googleusercontent.com/search?q=cache%3ApZ4YcXuLJuMJ%3Awww.aec a1.org%2Fpub%2Fon_line%2Fcomunicaciones_xvicongresoaeca%2Fcd%2F150b.pdf+&cd =5&hl=en&ct=clnk [Accessed 15 June 2015]. Thefsegroup.com, 2014. Definition of an SME. [online] Available at: <http://www.thefsegroup.com/definition-of-an-sme> [Accessed 12 June 2015]. Wihenger, G., 2014. SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature. [pdf] Available at: http://webcache.googleusercontent.com/search?q=cache%3Ax2I_FzJcR8sJ%3Awww.oecd. org%2Ffinance%2FSMEs-Credit-Crunch-Financing-Difficulties.pdf+&cd=8&hl=en&ct=clnk [Accessed 14 June 2015]. Wihinger, G., 2014. SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature. [online] Available at: <http://www.oecd.org/finance/SMEs-Credit- Crunch-Financing-Difficulties.pdf [Accessed 22 June 2015].
  58. 58. GROUP 1 – FINAL REPORT 50 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) wiseGEEK.com, 2015. What Are the Different Types of Trade Credit Terms. [online] Available at: http://www.wisegeek.com/what-are-the-different-types-of-trade-credit-terms.htm [Accessed 13 June 2015]. WTO.org., 1997. An Integrated Framework for Trade-Related Technical Assistance, including for Human and Institutional Capacity-Building, to Support Least-Developed Countries in Their Trade and Trade-Related Activities. [online] Available at: https://www.wto.org/english/tratop_e/devel_e/framework.htm [Accessed 21 June 2015]. Zainudin, N., 2009. Nature and Problems of SMEs in Malaysia. [pdf] Available at: http://e- publications.une.edu.au/1959.11/1512 [Accessed 22 June 2015].
  59. 59. GROUP 1 – FINAL REPORT 51 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) Appendix - E-mail Dear Sir/Madam Re: PERMISSION TO CONDUCT AN INTERVIEW REGARDING TO INTI’s PROJECT Hello, we are students from INTI International University who are currently doing final year project with Malaysian SME (MSME), a business newspaper in Malaysia. With reference to the subject above, this e-mail is sent concerning about your kindness to conduct an interview with us either face- to-face interview or via telephone. We are pleased to conduct any of them. Please allow us to briefly introduce our research to you. This project is mainly focused on investigation of trend and practices of trade credit by SMEs in Malaysia with their business partners, especially large corporations. As the research topic concerns, it may require SMEs to reveal confidential and sensitive information such as financial information and information of business partners of the company. However, the company name will not be revealed to unless to parties involved in this final project and it is only used for research purposes. All the information collected will be analyzed and trend will be investigated in detail. By cooperating with us, SMEs have already involved in the development of the better practice of trade credit for SMEs in Malaysia. The result of our investigation will be developed more and then be brought to the authority. The objective is to ease the business operation by SMEs with their business partner, for instance shorten the average length of terms. This will benefit SMEs in term of better cash flow. After all, we are hoping to gain your support and generosity to make the project done smoothly. If your company would like to participate in the success of this final year project, do reply to this email or contact/WhatsApp us at +6011 1275 1091. Best Regards, Herman Salim
  60. 60. GROUP 1 – FINAL REPORT 52 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME) - Call Script Hello, Good morning Ms/Mr _____ I am from INTI International University, and previously we have agreed to conduct an interview today. As the information that I already attached in the email, we are interested to know about the trend and current practice of trade credits within SME in Malaysia. I realize your time is precious, therefore we will only ask for about 15 minutes. Since we have opportunity for interviewing you, is it okay for us to record the whole conversation for the academic purpose? We will keep the confidentiality of this interview. Okay thank you Mr/Ms ____ for your kindness. We will begin the interview now. (Session 1) Open-ended/ Unstructured questions (Session 2) Structured questions This information given will be investigated further. By conducting this interview, you will help to enhance the development of the better trade credit practices for SME in Malaysia. Thank you for your time and willingness to cooperate with us. Have a good day!
  61. 61. GROUP 1 – FINAL REPORT 53 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME)
  62. 62. GROUP 1 – FINAL REPORT 54 MGT4998 – INTERNATIONAL BUSINESS PROJECT (MSME)

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