ACCOUNTS RECEIVABLE MANAGEMENT

Presented by:
Group II
 Aaron Paul Arongat  Reynaldo R. Gulagula
 Angelica Mae Navarro Rodrigo DC Reyes Jr.
 Esperanza Diesto  Queenie Mae Frivaldo
 Ernesto Cabanela Jr.
REPORT OUTLINE

• Principles and Concepts of Accounts Receivable

Management
• Case Study: MARIWASA Manufacturing
Corporation
ACCOUNTS RECEIVABLE MANAGEMENT (AR)

•Account Receivables Management refers to the set of policies, procedures,

and practices employed by a company concerning managing sales offered on
credit.
•It encompasses the evaluation of client creditworthiness and risk, establishing
sales terms and credit policies, and designing an appropriate receivables
collection process.
•Accounts receivables are found on the balance sheet of a company, and are
considered a short-term asset.
•They are one of the backbones of sales generation and thus must be managed
to ensure they are eventually translated into cash flows.
WHY DO COMPANIES OFFER SALES ON CREDIT?
The majority of enterprises offer their clients the opportunity to purchase
their goods and services on credit. When designed appropriately, such an
arrangement can be mutually beneficial for both the firm and its clients.
Companies can ramp up their sales in a given quarter, move inventories, and
ensure stable operating cycles. On the other hand, clients can access
company inventories while deferring payments, allowing them to manage
their cash flows as they deem best for their operational cycle.
ASSESSING CREDIT WORTHINESS AND RISK

Prior to engaging in a sales credit agreement with a client, a company typically

conducts an analysis of client creditworthiness and short-term liquidity.
Payment history, financial statements, and general economic conditions are all
scrutinized.
Particular attention is paid to the customer’s liabilities (short and long-term)
which impacts the ability to meet obligations.
Furthermore, third parties that furnish credit-risk analysis and reports are
typically consulted, and in some cases completely outsourced.
DESIGNING SALES AND CREDIT TERMS

Depending on the assessment of the client’s creditworthiness and credit risk

profile, the ensuing step entails extending the actual terms of sales on credit.
For example, the term 5/10 net 30 is a sale on credit policy allowing the client
to pay the net purchase amount 30 days after the billing invoice date.
The client is also offered a 5% discount on the net purchase amount should
the payment obligation be satisfied within 10 days of the invoice date.
DESIGNING SALES AND CREDIT TERMS

Companies must critically balance the benefits of extending favorable terms

to clients (e.g. offering lengthy terms) with their cash flow needs and
working capital requirements.
While enticing clients with a lengthy term increase revenues, this also means
that receivables will be tied up longer, and cash receipts delayed.
Moreover, the risk of receivables becoming uncollectable increases the
longer they are outstanding.
THE COLLECTIONS PROCESS

In most cases, the payment collections process is rather simple.

Using their respective banks, customers will send payments to meet their
obligations and the terms of the sale.
The A/R department is responsible for keeping abreast of all communication,
documentations, bookkeeping, and pertinent matters concerning collecting
payments.
Upon receiving payments, companies perform an accounting journal entry,
whereby the Account Receivables account is credited (reduced) and Cash is
debited (increased).
DELINQUENT ACCOUNTS

In the event of non-payment, the use of collections agencies (or the company’s
own department) can be effective in recuperating all or a portion of the bad
debts.
Most companies create a specific account to deal with delinquent accounts,
commonly referred to in the industry as Allowances for Doubtful Accounts or
Bad Debt Accounts (a contra-account to Accounts Receivables).
By examining historical delinquent accounts and their patterns, management
usually forecasts bad debt (typically as a percentage of sales), and take that into
consideration when managing their sales and receivables.
PERFORMANCE EVALUATION OF ACCOUNTS RECEIVABLES
MANAGEMENT
CASE ANALYSIS:

MARIWASA MANUFACTURING CORPORATION

INTRODUCTION

Accounts receivable are sales made on credit which will be

paid later based on agreed credit terms.
BACKGROUND
With the continued growth of the ceramic industry in the Philippines in
the 1990’s, Mariwasa Manufacturing Corporation was challenged by the entry
of business competitors.
First Lepanto Ceramics, Inc. offered liberal credit terms to its customers
creating pressure on the corporation to follow the same suit. It was on this
ground that Bituin Ocampo, the account officer of Oriental Bank, saw the
chance to offer lending to Mariwasa to support the possibility of extending
credit to its customers.
TIME CONTEXT

In 1992, new players in the ceramic industry are coming in

and heightened competition using customer credit policy.
VIEW POINT

Mark Habaluyas, Finance Manager of Mariwasa

Manufacturing Corporation
STATEMENT OF THE PROBLEM

To determine whether Mariwasa Manufacturing Corporation

should match with the new players like First Lepanto Ceramics in
extending its current credit terms to its customers.
OBJECTIVES SHORT TERM

TO INCREASE SALES AND IMPROVE

PROFITABILITY

TO RETAIN ITS CURRENT MARKET SHARE

OBJECTIVES LONG TERM

TO GROW MARKET SHARE

TO TAKE THE NUMBER 1 POSITION IN THE

INDUSTRY

TO SUSTAIN PROFITABLE GROWTH

 Strength Weaknesses
 Known brand
 Very high level of inventory
 Profitable with good margins
 Highly capitalized with long-
 Good receivable management
term debt
-turn-over
-average collection day (47 days)
 Financially Stable with a high current ratio (1.73)

Opportunitie Treats
sPotential increase in sales & profit with  Aggressive competition from Lepanto
change in credit terms  Loss in market share
 Improved margin and profitability
BALANCE SHEET
BALANCE SHEET ASSETS
MARIWASA
31-Dec-91 31-Dec-90
FIRST LEPANTO
30-Jun-91
CURRENT ASSETS
Cash 26.00 13.80 0.90
AR 60.20 38.00 55.40
Inv 292.90 203.40 80.20
Deposits on Letters of Credit and
prepaid import charges 61.70 36.10 1.30
Others 4.70 4.30 0.00
TOTAL CURRENT ASSETS 445.50 295.60 137.80

PLANT, PROPERTY & EQUIPMENT - NET 409.40 345.50 227.20

OTHER ASSETS 24.10 14.70 28.60

TOTAL ASSETS 879.00 655.80 393.60

 MARIWASA FIRST LEPANTO
LIABILITIES & STOCKHOLDER'S EQUITY
31-Dec-91 31-Dec-90 30-Jun-91
CURRENT LIABILITIES
AP 105.40 126.90 20.90
STLP 7.30 27.50 23.10
ITP 4.80 3.40 0.00
Acceptance & Trust receipts - NET 82.20 72.70 0.00
Current portion of LTD 58.00 26.80 0.00
TOTAL CURRENT LIABILITIES 257.70 257.30 44.00

DUE TO PARENT COMPANY 0.00 0.00 184.50

LTD - NET of CURRENT PORTION 109.80 104.10 90.00

TOTAL LIABILITIES 367.50 361.40 318.50

STOCKHOLDER'S EQUITY
Capital Stock 229.60 148.60 40.00
Additional Paid-in Capital 118.30 17.80 0.00
Revaluation increment in Property 95.40 95.50 0.00
Retained Earnings 68.20 32.50 35.10

TOTAL STOCKHOLDER'S EQUITY 511.50 294.40 75.10

TOTAL LIABILITIES & STOCKHOLDERS EQUITY 879.00 655.80 393.60

 FINANCIAL RATIOS
MARIWASA FIRST LEPANTO
31-Dec-91 31-Dec-90 30-Jun-91

ROE 0.0811 0.0995 0.4660

ROA 0.0472 0.0447 0.0889

DAYS RECEIVABLE 48.1442 32.9845 195.9399

DAYS PAYABLE 84.2923 110.1510 73.9196
DAYS INVENTORY 376.0412 247.3051 799.8087
FIXED ASSET TURNOVER 1.1148 1.2171 0.4542
TOTAL ASSET TURNOVER 0.5192 0.6412 0.2622

GROSS PROFIT MARGIN 38% 29% 65%

NET PROFIT MARGIN 9.09% 6.97% 33.91%

DEBT TO EQUITY 0.2147 0.3536 1.1984

DEBT TO ASSET 0.4181 0.5511 0.8092

CURRENT RATIO 1.7288 1.1489 3.1318

QUICK ASSET RATIO 0.3345 0.2013 1.2795
 INCOME STATEMENT
MARIWASA FIRST LEPANTO

31-Dec-91 31-Dec-90 30-Jun-91

Net Sales 456.4 420.5 103.2

Cost of Goods Sold 284.3 300.2 36.6
Gross Profit 172.1 120.3 66.6
Operating Expenses 61.7 50.9 10.3
Income from Operation 110.4 69.4 56.3
Other Income/Charges
Interest & Financing Charges -59.2 -38.3 -21.6
Loss on Foreign Exchange -2.9 -0.4 0
Miscellaneous 4.2 5.1 0.3
Income Before Income Tax 52.5 35.8 35
Provision for Income Tax 11 6.5 0

NET INCOME 41.5 29.3 35.0

 FINANCIAL ANALYSIS
Formula Mariwasa Lepanto

Average Daily Sales Annual sales(456.4)/360 1.27 0.57M

AR Turn-over Sales/Receivables 7.58 3.72

Average Days Receivable 360/7.58 47 days 97 days

Credit Term 30 days 90 days

Gross Profit Ratio/ Sales 37.7% 64.5%

Current Ratio Current Assets/ Current 1.73 3.13

Liabilities

Return on Equity Income/ Stockholder’s Equity 8% 47%

 INCREMENTAL ANALYSIS
Current Proposed Proposed
30 days 60 days 90 days
Net Sales 456.4 38.1 76.2
Cost of Goods Sold 284.3 23.7 47.4
Gross Profit 172.1 14.4 28.8
Operating Expenses 61.7 0.8 3.8
Income from Operations 110.4 13.6 25.0
Other Income/ Charges:
Interest (59.2) -
Forex Loss (2.9) -
Miscellaneous 4.2 -
Income before Income 52.5 13.6 25.0
Tax
Provision for Income 11 2.8 5.2
Tax
Net Income 41.5 10.8 19.8
 ALTERNATIVE COURSE OF ACTION

Consider matching the credit term of the

competition
Evaluate the need to give cash discounts instead
of trade discounts for short-term credit
 RECOMMENDATION

Aside from matching credit terms, mariwasa should

review and look for opportunities to reduce the cost
of goods sold.
 PLAN OF ACTION

 Segment clients and offer various credit terms:

-30 days with a cash discount
-60 days
-90 days
 Monitor the collection of receivables closely
 Review and manage cost of production
THANK YOU!!