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Bestlink College of the Philippines

Chapter I – Project Charter

1.0 PROJECT BACKGROUND

This chapter introduces the Accounts Payables and Account Receivables with

Treasury Management System (APART MS) under Service Management System. As

we are in a new era of an advanced high-tech environment, the business world is also

entering into an era of fierce competition noticed by takeovers and mergers. This

illuminates the type of dynamic and complex business environment that companies

have to face.

The rapid change in the environment reminds us that, for a business to survive, it

has to focus on its core competencies and discover in order to keep ahead of the

competitors. The field of Service Management system has evolved mainly in

accordance to the fact that financial accounts need to be managed strategically for the

firm to enjoy sustainable competitive advantage over competition. Several scholars

have noted the complex structures of financial account management in the present-day

Industry. Firms that learn how to manage their financial accounts well takes advantage

over others in a long run. The point is, the goal of producing a consistent management

of financial accounts must be attained.

1.1 PROBLEM / OPPORTUNITY PROBLEM

The following will be the problem/s to be resolve:

Time Consuming Task

Present application software being used is not sufficient to execute core

processes.

Needs a definite accounting process that makes the system more reliable.

Needs integration/interconnection with related Information Management

Systems. It must have a unified and secured data management control.

1.2 BENEFITS

Service Management System – Accounts Payables and Accounts Receivables with Treasury Management System


When the APARTMS has been implemented, chances are, it provides the

following advantages to the client(s):

A user will have an efficient updating and processing of accounts (esp.

AR and AP), with a detailed reports and easy solving-related

processes.

- It displays Accounting processes which are compose of Journal

Entries, T-Accounts or Ledger and Trial Balance.

Daily update of Treasury and funds.

- Income Statement and Financial Report has been displayed.

In addition, the APARTMS are intertwined and interconnected with

other related SMS subsystem, with an effective data cycle. Also, it has

a unified Database management control.

- Import / Exports data with General Ledger and BCMS.

It cut cost and time.

- AP and AR Accounts are managed easily.

It will provide up-to-date account reports.

- any transaction that has been process is automatically added to

the Journal Entries.

Higher data security compared to the existing system.

- Uses MySQL for data management.

1.3 GOALS To achieve the potential progress of their existing IS, while rendering

the foundational aspects of business flows and laws.

To monitor the Assets, Liabilities, Equity, and Expenses of the Clients

and at the same time, provides its report that can be satisfactory valid

and legal.

Easily updates the Clients/users on what has been paid and defines if

the company maintains or loses financial resources.

Income Statement and Balance Sheet has been processed

automatically.



To solve some minor Financial Management errors/mishandling.

Unified Database with other related SMS subsystem.

1.4 STAKEHOLDERS AND CLIENTS Marban Security Agency (Client)

Dennis Gonzales (Project Study I Adviser)

JunpyoManayan (Project Manager)

Mac Douglas Goron (System Analyst)

Joefel Langcauon (Programmer)

Jayson Cabigas (Business Analyst)

Mark Christian San Diego (Document Specialist)

2.0 PROJECT SCOPE

APARTMS covers the Information management of financial accounts, especially

Accounts Payables, Receivables, and Treasury fund.

2.1 OBJECTIVES

The main purpose of APARTMS is to manage and provide statement of

account, especially AP/AR and helps the accounting personnel to update assets

and treasury. The goal of APARTMS is:

It provides Financial Statement where a client is being informed how the

Financial Resources are managed.

It defines the Economical status of the client, where it gains or loses

money.

It distinguishes balances, credits, debits, and payables and at the same

time, describes the monetary unit being involved.

APART MS can be accessible in selected personnel whether Admin or

Accountant use.

It also manage the Treasury Information, where a journal entry and check

preparation has been produced, along with Financial statement Reports.

2.2 DELIVERABLES



The APART MS will help the company to monitor and manage financial

process, and allows the user to have an update with its core transactions. It also

gives a proficient tasking to the company who will use the proposed MS.

1. Journal Entry Form

2. T-Accounts or Ledger

3. Trial Balance

4. Income Statement Report Form

5. Balance Sheet Report Form

6. Check/Voucher Form

Planning Phase

The APARTMS undergoes SDLC method, along with other

manipulativeways of gathering data.

System Development System Design System Analysis Testing and Integration Implementation Operation and Maintenance

2.3 OUT OF SCOPE Electricity Issues: The APARTMS cannot be used in the midst of power

shortage.

Banking and other bank-related process is yet to be executed due to

the system requirements.

APARTMS is yet to be connected online.

3.0 PROJECT PLAN3.1 Approach and Methodology

Conduct a planning/strategy measures on how to obtain resources or

information.

Mapping or tracing



Formal interviews/surveying/actualization

Related Literature (Foreign and Local) review.

Research papers and forms for other information needed.

Simulation of the process flow being generated.

3.2 Project Timeline

ID Task Name Start Finish Duration

1 Conducting of preliminary meeting 12:00 NN 4:30PM 4HRS

2 Information Gathering 5:00PM 9:00PM 4HRS

3

Finalizing the system’s technical

features 9:00 AM 5:00PM 8HRS

4 Identifying System Design Specification 1:00 PM 2:00 PM 1HRS

5 System Coding

9:00AM, Sept.

21, 2014

10:00 PM, Sept.

28,2014 7 Days

6 System Design Prototyping N/A

7 System Modelling N/A

3.3 Success Criteria

The APARTMS must attain the following criteria:

It monitors/manages the financial statement efficiently, provided with a

exact and tallied reports (20%)

It has a fast processing speed (5%)

Functionality (10%)

User-Friendly features (15%)

Import/Export execution (40%)

Zero-Data Redundancy system (10%)

3.4 Issues and Policy Implications



For legality issues, al reports being produced by APART MS must be valid

and detailed.

APART MS is not allowed to be duplicated for own purposes. It was

created for business and school use only.

Selected personnel will be allowed to manage and maintain the

application software, with the approval of the stakeholders

Any technicalities being encountered in using APART MS software must

be addressed immediately, with the approval of the stakeholders.

In case of system upgrade, a contract between the stakeholders and the

proponents must be provided and must follow the legal issues of software

by-laws.

3.5 Risk Management

Risk FactorProbability(H-M-L)

Impact(H-M-L) Risk Management Action

Economical Changes H H Proper Budgeting

Competition H H Cheaper Software

User Demands M M User-related

Technical related risks M M Back-ups

3.6 Service Transition

These are the following activities that the company will surely comply

regarding with the system’s software, hardware, system specifications, computer

personnel, system requirements and implementation procedure.

The company must invest new desktop/ Laptop computers.

At least one (1) Printer for each department

One computer administrator per department

Higher Specification of hardware for each computer unit



Conducting a proper training for the employees when the system has

been implemented

Regular Maintenance of the system software

Upgrade of the system software (depends on the client)

Implementing the accessibility to the system according to the position

of the company (user, admin, manager etc.)

3.7 Option Analysis4.0 TECHNICAL FEATURES

Login Information, accessed only by the Administrator and User.

Form which includes payables table, with amount, date, and description label.

Treasury and fund viewing, in which the amount is defined in Peso.

Report form, ready to print.

5.0 PROJECT ORGANIZATION AND STAFFING

ROLE NAME AND CONTACT INFORMATION

RESPONSIBILITIES

Project Manager Manayan, Jun • Developing the project plan

• Managing the project stakeholders

• Managing Communication

• Managing the project team

• Managing the project risk

• Managing the project schedule

• Managing the project budget

• Managing the project conflicts

• Managing the project delivery

System Analyst Langcauon, Joefel • Identify, understand and plan for

organizational and human impacts

of planned systems, and ensure



that new technical requirements are

properly integrated with existing

processes and skill sets.

• Plan a system flow from the ground

up.

• Interact with internal users and

customers to learn and document

requirements that are then used to

produce business requirements

documents.

• Write technical requirements from a

critical phase.

• Interact with designers to

understand software limitations.

• Help programmers during system

development

• Perform system testing

• Deploy the completed system.

• Document requirements or

contribute to user manuals.

• Whenever a development process

is conducted, the system analyst is

responsible for designing

components and providing that

information to the developer.

Business Analyst Cabigas, Jayson • Business focused

• Domain specific knowledge

• Solve operational problems



• Solves business process problems

• Refines the business model

Programmer Goron, Mac Douglas • System Coding

• Handling System Software

• Program Development

• Perform System Analysis

• Train subordinates in

programming

• Develops programming methods

• Correct errors on the system

coding

Document Specialist San Diego, Mark Christian

• Documenting the process

• Craft the right message

• Distil the message into effective

documents

• Release the documentation

• Evaluate the results

6.0 PROJECT BUDGET

Budget Items Description Budget Cost

One – Time Cost

PS1 Payment Php 1,000 *5



Payment for the defense of the PS1

documentation of the proponents.

PS1 expenses are compulsory

payment of the proponents.

PS1 Manual / Book This manual is used as a preference

of the proponents in developing the

PS1 documentation. Php 300 *5

Total One – time Cost Php 6,500

Budget Items Description Budget Cost

Ongoing Cost

Food

Food expenses are absolutely

important for the proponents to avail.

This will also included into the

ongoing cost for the project

development. Php 1,500 / month

Electricity

Electricity expenses also included in

the ongoing cost. This includes the

usage of the electricity service for the

development of APARTMS. Php 1,000 / month



Printing of Documents

The development of the APARTMS

must be documented. Therefore, this

includes the printing expenses of the

documents that will be presented

upon defense. Php 1,000 / sem

Transportation

Transportation expenses when the

proponents are going to meet the

client or going from other place in

relation of the project development. Php 2,000 / month

Total Ongoing Cost Php 5,500

Chapter II – Related Studies and Systems

1.0INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS DETERMINANTS OF ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: A CASE OF PAKISTAN TEXTILE SECTOR

ABSTRACTThe objective of this study is to analyze the determinants of Pakistani listed

companies’ accounts receivable and accounts payable focusing the textile sector. It is



evident from the findings that accounts receivable are strongly affected by the firm’s

incentive to use trade credit as a means of price discrimination and level of internal

financing. Additionally, the size of the firm also affects the level of accounts receivable a

firm maintains. Whereas, most significant determinants of accounts payable are size of

the firm, level of purchases and market interest rate.

INTRODUCTIONIn corporate finance trade credit has been supposed to be a nonissue for a long

time, at least in the context of perfect markets (Sartoris and Hill, 1988). Nevertheless, it

is observed that a significant quantity of cash is invested in accounts receivable and an

enormous amount of accounts payable, as a source of financing in nearly all non-

financial firms (Deloof and Jegers, 1999). Significance of trade credit differs among the

countries and it is expected to be higher in the countries which produce more

manufacturing products, although there is substantial difference across them (Marotta,

1998). Rajan and Zingales (1995) compared non-financial companies in the G7

countries and found that relative part of accounts receivable differs between 29% Italy

and 13% Canada, on the other hand, the respective limits for accounts payable were

17% France and 11.5% Germany. Mian and Smith (1992) reported that in 1986 US

manufacturing firms had 21 percent of accounts receivable of their total assets and

about 40% of account payable of their total liabilities. Deloof and Jegers, (1999)

reported that in 1995 Belgian non-financial firms’ accounts receivable were 16% of total

assets, and accounts payable 12% of total liabilities. Several studies have been

conducted to simply analyze the existence of trade credit (see a.o. Schwartz, 1974;

Feriss, 1981; Frank and Maksimovic, 1998; Long, Malitz and Ravid, 1993; Brennan,

Maksimovic and Zechner, 1988; Brick and Fung, 1984; and Emery, 1984 and 1987), but

very few studies have discussed the reason behind the trade credit is offered or which

corporations use it or delivers it most (Petersen and Rajan, 1997). Storey (1994)

analyzed earlier work on the financing patterns of UK small companies and found that

for small firms trade credit is more valuable than for large firms. Whereas Walker (1991)

investigated the US small firms and found that US small firms are also relying on trade

and bank credit and these two financing sources are being used as substitutes.



Furthermore, it is always argued that borrowing at rational rates is an issue for

corporate decision makers. Berger and Udell (1998) suggested that when borrowing

outside the firm, small firms face particular restrictions. Borrowing a small amount of

capital from external capital markets becomes their obstacle, which is usually called as

Macmillan gap, and for this reason they are being offered higher interest rates (Storey,

1994). While market imperfections, just as, agency costs and asymmetric information,

are the reasons of these issues as proposed by several economic theorists. Even risky

debt has a preference when information asymmetries are not favorable. Mayers (1984)

pointed out this situation as ‘pecking order’ theory of financing in which a firm first raises

capital internally by reinvesting its net income and selling off its short-term marketable

securities. When that supply of funds is exhausted, the firm will issue debt and perhaps

preferred stock. Only as a last resort will the firm issue common stock. Whereas, it has

also been reported by several studies that close bank-borrower association improves

credit accessibility (Niskanen and Niskanen, 2006). Other studies propose that the

availability of credit is affected positively by bank-borrower relationship (Petersen and

Rajan, 1994).

LITERATURE REVIEWDanielson and Scott (2004) investigated the effect of bank loan availability on

the trade credit and credit card demand of small firms and found that firms increase

their demand for trade credit and credit card debt when facing credit constraints

are imposed by banks. Deloof and Jegers (1999) investigated the role of trade

credit as source of financing for Belgian firms focusing accounts payable and found

that trade credit plays a significant role in the corporate financing policy. They

found that the amount of trade credit a customer takes is determined by the need

for funds and by the internally available funds. Finally they found that trade credit

can act as a vital substitute for short term as well as long term financial debt.

Atanasova (2007) tested for the existence of creditconstraints and their effect on

the corporate financing policies and found that credit constrained firms substitute

trade credit to institutional finance especially during tight money periods.

Huyghebaert (2006) tested hypothesis that why firms use trade credit on business



start-ups and find that more trade credit is used when firms face financial

constraints and suppliers have a financing advantage over banks in financing high

risk firms. Niskanen and Niskanen (2006) analyzed credit policies of Finnish small

firms functioning in bank dominated environment. Creditworthiness and access to

capital markets were found as important determinants of trade credit extended by

the sellers. Firm’s age, size and level of internal financing were found to be

negatively correlated to the trade credit usage, whereas level of current assets to

total assets and loan availability were found negatively correlated with the trade

credit usage. In addition to it, the level of purchases was found positively correlated

with level of accounts payable. Niskanen and Niskanen (2000b) analyzed the

accounts receivable and accounts payable of Finnish listed firms and found that

accounts receivable are most likely to be influenced by the firms’ incentive to use

trade credit as a means of price discrimination. Through increased demand for the

trade credit level of accounts receivable increases with the increase in the interest

rate level. Additionally, they found that the level of accounts payable is affected by

the firm size, supply of trade credit, interest rate level, the ratio of current assets to

the total assets, and insufficient internal financing. Blasio (2005) tested the Meltzer

(1960) trade credit – bank credit substitution hypothesis on Italian manufacturing

firms’ inventory behavior and found that during money tightening Italian

manufacturing firms are more constrained than normal macroeconomic conditions.

THEORIESAND EMPIRICAL EVIDENCES ON TRADE CREDITVarious theoretical studies have tried to investigate the reason of providing

intermediary services by suppliers to their customers and to find out the rationale to

use trade credit as a substitute of less costly bank debt.

Transaction CostTransaction Costs have been declared to be one rationale to sustain

credit sales. Transaction costs theory describes that paying at once for

several shipments collectively saves transaction costs and permits flexibility

in payments (Ferris, 1981).Furthermore, money can be saved by keeping

smaller cash balances.



Financial ModelsFinancial models are based on capital market imperfections concerning

information asymmetries. These imperfections lead to the phenomena in

which firms, with lower cost of financing due to their better access to capital

markets, tender trade credit to other financially constrained firms (Schwartz,

1974). Furthermore, trade credit facilitates firms to support the growth of

their clients. It is also believed that trade credit can serve to alleviate credit

rationing problems as trade credit plays as a signal on the buyers’ good

quality to the financially intermediary (Frank and Maksimovic, 1998; Biais

and Gollier, 1997).

Financial theory proposes that the seller has a lead over financial

institutions in information gaining and controlling the consumer. In European

countries, all these gains speak about the nearer and greater relationship

between buyer and seller than between the financial institutions and buyers.

That is supplier have a threatening tool to stop future supplies when

consumer does not pay in time. On the other hand a financial institution may

not have a device like this to have power over consumers, while warning to

depart future lending may not have instant consequence on the consumers’

attitude (Petersen and rajan, 1997).

Price Discrimination

Price discrimination is a possibility of charging dissimilar prices for dissimilar

consumers. This can happen in a situation when credit conditions include

discounts on paying before time. These conditions are mostly presented by

leading firms in the industry (Brennan et al., 1988; Mian and Smith, 1992). These

firms have an advantage to collect extra sales to existing clients without

decreasing price. As a result these firms extend high priced trade credit which is

not acceptable for creditworthy customers. While for low rating companies this

credit may be acceptable as it might be less costly than borrowing from financial

intermediary (Brennan et al., 1988; Petersen and Rajan, 1997). Additionally,

trade credit offers a facility to gauge the quality of products earlier than paying for



it so this becomes an inherent guarantee for the seller’s manufactured goods

(Lee and Stowe, 1993). For small and less reputable sellers this facility of trade

credit may have a great importance (Frank and Maksimovic, 1998).

Macroeconomic Conditions

Macroeconomic conditions have also an effect on trade credit usage and

conditions which cannot be ignored and has been highlighted by many

researches. Kashyap et al., (1993) investigated the effect of macroeconomic

factors on trade credit and found that under restrictive monetary policy and

controlled money supply smaller firms are ready to extend trade credit on the

given conditions as increasing borrowing rates create trade credit a

supplementary viable type of short term funding. Petersen and Rajan (1997)

highlighted the same issue and found that firms extend trade credit when loan

from financial intermediaries is not present. They further added that, in this

scenario, the role of financial intermediary will be performed by larger suppliers

as firms having no access to institutionalized financial markets will borrow from

these larger firms.

Data Description and Dependant VariablesThe data sample of this study comprises of financial accounting information of

the firms listed at Karachi Stock Exchange during 2004 to 2009.This accounting data is

extracted from the Balance Sheet Analysis published by the State Bank of Pakistan.

After excluding missing firm year data from analysis 891 observations were analyzed

from 151 firms.

Results:DETERMINANTS OF ACCOUNTS RECEIVABLE

Carrying receivables has both direct and indirect costs but it also has an

important benefit that is increased sales. Receivable management begins with the

credit policy, but a monitoring system is also important. Corrective action is often

needed, and the only way to know whether the situation is getting out of hand is with

a good receivables control system.



Demand for Trade CreditA firms’ decision on how much to lend to its customers is determined

from the level of firms’ accounts receivables. Still the quantity of trade credit,

a firm offers, is influenced by a demand component (Petersen and Rajan,

1997). This demand on the whole is not possible to compute directly as

approaches of nearly all firms’ consumers to trade credit varies. This is due

to the reason that, just for example, a retail company can contain thousands

of credit consumers which can be either persons or other firms. Whereas,

the accounts payable of a particular company, can be similar in greater part

as they are payable to the other companies which are comparatively little in

number in any particular industry. As the demand curve for trade credit is

not identified, interpretation of estimated coefficients can help in

understanding this problem.

Petersen and Rajan (1997) found that large firms maintain higher

accounts receivables. One reason for this result can be, the greater access

of larger firms to capital markets which makes them less capital reserved.

Second reason can be the demand component from capital rationed firms

that causes the accounts receivable of larger firms higher than average.

Creditworthiness and Access to Capital MarketsFirm size and age are used to compute the firm’s creditworthiness and

access to capital markets. The natural log of firm age (Ln(1+ firm age)) is used as

proxy for creditworthiness and natural log of total assets (Ln(book value of

assets)) is taken to proxy the suppliers’ access to external capital. The results in

the Table 1 show that size is significant variable with (p = 0.000102129). These

results are consistent with earlier studies like Petersen and Rajan’s(1997).

Internal FinancingThe study uses operating cash flow (earnings before depreciation and interest

minus taxes) divided y assets to gauge the firm’s capability to produce cash from

internal sources to fund the trade credit which it extends to its customers. The

results indicate that internal financing effects positively to the level of accounts

receivables. The variable is positive and significant at (p= 0.00000000) which



indicates that the larger the positive cash flow the supplier has, the higher the

trade credit he is ready to offer to its customers. The results are consistent with

findings of Niskanen and Niskanen (2000) and are contradictory to the findings of

Petersen and Rajan (1997).

Model I: AR = β0 + β1CF + β2CM + β3GR + β4KIB + β5SIZETable 1: Dependant Variable:

Accounts Receivable/Assets

β0 β1 β2 β3 β4 β5

Coefficient

-

42.702 1.457* -698.612* 0.0533 0.634 15.291*

S.E 26.690 0.110 123.976 0.179 1.197 3.892

P-Value (0.110) (0.000) (0.000) (0.766) (0.596) (0.000)

R-Square 0.384 F-Value 45.596*

Adjusted-

R2 0.376 (0.000)

DW 1.037

*Significant at

α = 0. 01 **

Significant at

α = 0. 05

Price DiscriminationPrice discrimination is an act of billing the same product to different clients

with different prices, even when the costs of supplying them are same. This



practice is mostly observed by monopolists as they exploit their leading power for

discrimination. This study uses ratio of contribution margin (sales minus variable

costs) to assets to proxy for monopoly power to carry out price discrimination. In

our sample of all textile firms existing on Karachi Stock Exchange, it is found that

a significant but a negative relationship exist between price discrimination and

accounts receivable management policies which is validated by a p value of (p=

0.00000004). These results are contradictory to the findings of

Niskanen&Niskanen (2000).

Cost Of Alternative CapitalThe study uses annual average three month KIBOR rate to compute the basic

cost of capital. A positive relationship is expected between accounts receivable

level and level of interest rate. The reason behind this can be the demand for

trade credit which can be expected to be high when the cost of alternative capital

is increased. An insignificant coefficient is found in the results Table 1 with value

of (p= 0.59654834).

GrowthNormally firm’s target growth rates are attached with its trade credit policies.

Generally, credit conditions just as discounts and duration of payments play a role of

competitive instruments. In order to increase sales, firm may select a policy of offering

trade credit with delayed due periods than its competitors are offering. This proposes

that there is a positive relationship between growth and the level of accounts receivable.

Though, trade credit may be used to boost sales of those firms which could not maintain

a smooth rise in their sales. Even in conditions of declining sales a firm may offer more

trade credit than an average company in the industry (Petersen and Rajan, 1997).This

study computes growth by the annual sales growth percentage. Empirically, it is found

that sales growth is insignificant (p= 0.766271766) which can be interpreted as the

sales growth does not affect the level of trade credit offered.

DETERMINANTS OF ACCOUNTS PAYABLE (TRADE CREDIT)Firms generally make purchases from other firms on credit, recording the debt as

an account payable. Accounts payable, or trade credit, is the largest single category of



operating current liabilities, representing about 40% of the current liabilities of the

average US nonfinancial corporations. The percentage is somewhat larger for smaller

firms. Because small companies often do not qualify for financing from other sources,

they rely especially heavily on trade credit. Table 2 presents the outcome of proposed

determinants on which the accounts payable is regressed. This model uses the same

variables (including the control variables) used for accounts receivable model. Besides

these variables, two more variables are added in this model. First, to determine the

asset maturity RATIO OF CURRENT ASSETS (INVENTORIES AND FINANCIAL

ASSETS) TO TOTAL ASSETS is used. Second, to assess the supply of trade credit

PURCHASES TO TOTAL ASSETS is used.

Supply of Trade CreditNiskanen and Niskanen (2000) use the annual purchases as a proxy for the

supply of trade credit making an assumption that all purchases are on credit.

They believe that this assumption is not very restrictive, as large companies

normally do not pay their purchases in cash. This study also uses the purchases

as proxy to supply of trade credit and considers the same assumption. The result

relating the supply of trade credit is same as expected: a significant and positive

coefficient is obtained (p= 0.0005) which indicates that an increase in the supply

of trade credit increases the level of its use.

Creditworthiness and Access to Capital MarketsResult concerning asset size is quite significant in explaining the accounts

payable level. The coefficient is positive and significance level is also quite high

(p= 0.0000). This positive sign shows that financing of larger firms is comprised

of more trade credit than smaller firms. This may be due to their greater access

to capital markets. This finding is consistent with Niskanen and Niskanen (2000)

where as Petersen and Rajan (1997) found a weak positive relationship between

the firm size and accounts payable.

Model No II:

AP = β0 + β1GR + β2CA + β3SIZE + β4KIB + β5CF + β6PUR

Table 2: Dependant Variable:

Accounts Payable



β0 β1 β2 β3 β4 β5 β6

Coefficien

t

-

1273.16

1

-

0.84828

6

2.22140

9

225.909

2

9.69028

8 0.426306

0.10307

7

S.E

89.4942

1

0.26570

5 0.592596

14.8522

1

2.51317

1 0.156219

0.02944

1

P-Value (0.0000) (0.0015) (0.0002) (0.0000) (0.0001) (0.0066) (0.0005)

R-Square

0.64379

0 F-Value 157.5394*

Adjusted-

R2

0.63970

4

(0.000

)

DW

0.83927

6

*Significant at

α = 0. 01 **

Significant at

α = 0. 05

GrowthTheory suggests that healthier investment opportunities are available to the

firms which are growing and these firms require increased financing for these

new investment opportunities. It is assumed that trade credit may be used as

fractional source of financing for these growing firms. However, opposite is found

from empirical results. Sales growth is found to have a negative but significant



coefficient (p= 0. 0015) which implies that faster a firm is growing the less it uses

trade credit in its financing. Hence, firms growing slowly or not growing at all

utilize the trade credit most. Furthermore, these results are consistent with

Niskanen and Niskanen (2000) and contradictory to the findings of Rajan and

Zingales (1997).

Internal FinancingThe results reveal that operating cash flow is a significant variable in

explaining the accounts payable level with p-value of (p= 0066).

Asset MaturityIn explaining the level of accounts payable the asset maturity, measured

by the ratio of current assets to the total assets, is found to have a greater

proportion with a significant positive variable (p= 0002). This finding is

consistent with the view that firm’s assets are financed with funds having

same maturities. This is carried out to plan repayments of the funding to

match with the decline in the value of firm’s assets (Diamond, 1991). As a

result, short-term assets are usually financed with short-term debt just as

accounts payable, while long-term assets are financed with long-term debt

or equity.

Cost of Alternative CapitalMarket interest rate, measured as average 3 month KIBOR rate, is

appeared to be quite significant explanatory variable in explaining accounts

payable (p= 0001). Positive coefficient of market interest rate shows that

higher the interest rates the higher the demand for trade credit will be. As it

is vivid from the results that market interest rate is not significant in accounts

receivable model, this may support the idea that demand side is more

affected by the fluctuations in the market interest rate.

CONCLUSIONThis study empirically analyzed the determinants of Pakistani listed firms

accounts receivable and accounts payable management policies. The results show

that accounts receivable are strongly affected by the firms’ incentive to use trade

credit as a means of price discrimination and level of internal financing.



Furthermore, size of the firm also affects the level of accounts receivable a firm

maintains. The results of the accounts payable model show that all the variables,

which were taken to determine the level of accounts payable, were statistically

significant. Additionally, most significant determinants of accounts payable were

size of the firm, level of purchases and market interest rate. Dissimilarity in the

results of this study to earlier studies may greatly be due to the variation among

Pakistani, U.S., UK and Finnish capital markets. As it is evident, that ban-borrower

relationship, when analyzed as financial intermediaries, is supposed to be a

substitute source of capital for trade credit. This relationship can be studied as

further research line in this area. But the unavailability of data on this relationship

makes it bit a difficult task as statistics regarding relationship between banks and

firms are not publicly available.

REFERENCE: www.journal-archieves14.webs.com/240-251.pdf

2.0 IMPACT OF ACCOUNTS RECEIVABLE MANAGEMENT ON THE PROFITABILITY DURING THE FINANCIAL CRISIS: EVIDENCE FROM SERBIA

ABSTRACT:The competitive nature of the business environment requires firms to adjust

their strategies and apply financial policies to survive and enable growth. In most

firms, receivables represent large financial sources invested in asset and involve

significant volume of transactions and decisions. This paper investigates how

public companies listed at the regulated market in the Republic of Serbia manage

their accounts receivables during the recession times. A sample of 108 firms is

used, which are the most successful Serbian firms listed at the Prime and Standard

Listing as well as the Multilateral Trading Platform of the Belgrade Stock

Exchange. The accounts receivables policies are examined in the crisis period of

2008-2011. In order to explore the relation between accounts receivables and

firm’s profitability, the short-term effects are tested. The study shows that between

accounts receivables and two dependent variables on profitability, return on total

asset and operating profit margin, there is a positive but no significant relation. This



suggests that the impact of receivables on firm’s profitability is changing in times of

a crisis.

INTRODUCTIONAccounts receivable measures the unpaid claims a firm has over its customers at

a given time, usually comes in the form of operating line of credit and is mainly due

within a relatively short time period (up to one year). The volume of accounts receivable

indicates firm's supply of trade credit while accounts payable shows its demand of trade

credit. The study of accounts receivable and accounts payable during periods of

financial crisis is an important topic, particularly when the global economy is going

through a credit shock. During global financial crisis, characterized by high liquidity risk

faced by the banks, trade credits may increase, operating as a substitute for bank

credits, or decrease - acting as their complement. Bastos and Pindado (2012), for

example, suggest that credit constraints during a financial crisis cause firms holding

high levels of accounts receivable to postpone payments to suppliers, which act in the

same manner with their suppliers. This gives rise to a trade credit contagion in the

supply chain characterized by a cascading effect. The current financial crisis provides

economists a unique opportunity to study the role of alternative financial sources during

periods of breakdown of institutional financing.

Accounts receivables are one of the most important part of working capital.

Receivables often represent large investment in asset and involve significant volume of

transactions and decisions. However, there are considerable differences in the level of

receivables in firms around the world. Demirgüç-Kunt and Maksimovic (2001)present

evidence that in countries such as France, Germany, and Italy accounts receivable

exceeds a quarter of firms' total assets, while Rajan and Zingales (1995) find that 18%

of the total assets of US firms consists of receivables. In different theories, the existence

of receivables is explained by commercial reasons, transaction-cost motivations, and

financial incentives (Bastos&Pindado, 2007; Deloof&Jegers, 1999; Marotta, 2005;

Petersen &Rajan, 1997).Accounts receivable management is a crucial filed of corporate

finance because of its effects on a firm’s profitability and risk, and consequently on the

firm's value. Yet, the main body of the literature of accounts receivables focuses on



studying the relation with firm’s profitability at the developed capital markets and during

the non-crisis period.

Understanding the effects of a financial crisis on receivables management is

especially important to Serbia as a transition country. Trade credit is an important

source of finance for Serbian firms and, therefore, it can make a strong contribution to

firms' profitability and the development of the whole economy. In this context, the aim of

this paper is to examine the impact of accounts receivable management on the

profitability of the Serbian companies during the financial crisis, in the period 2008-

2011. The study investigates whether companies have to change their non-crisis

accounts receivables management policies when the economy is into a recession. In

order to test the relation between accounts receivables and a firm’s profitability, the

short-term effects will be tested in times of a crisis.

The contribution of the paper is twofold. Firstly, it extends the existing empirical

literature on relationship between firm's profitability and accounts receivables in

developing and transitional economies in the crisis period, by focusing the analysis on

the Serbian listed firms where, up to now, no research has been conducted. Secondly,

this study verifies some of the previous findings by testing the relationship between

accounts receivables management and the profitability of the sample firms, and thus

broadens the possibilities for cross-country comparisons in the field of profitability

determinants.

The structure of this paper is as follows. In Section 1,a summary of previous

research on the effects of accounts receivable management on firm's profitability is

given. In the next section we describe the sample, define the measures of profitability as

well as the explanatory variables, and finally, test the potential determinants of on

profitability. In Section 3we provide conclusions, emphasize some limitations of the

study and propose the objectives of future research.

LITERATURE REVIEWThe goal of accounts receivables management is to maximize shareholders

wealth. Receivables are large investments in firm's asset, which are, like capital

budgeting projects, measured in terms of their net present values (Emery et al., 2004).

Receivables stimulates sales because it allows customers to assess product quality



before paying, but on the other hand, debtors involve funds, which have an opportunity

cost. The three characteristics of receivables – the element of risk, economic value and

futurity explain the basis and the need for efficient management of receivables.

According to Berry and Jarvis (2006) a firm setting up a policy for determining the

optimal amount of account receivables have to take in account the following:

The trade-off between the securing of sales and profits and the amount of

opportunity cost and administrative costs of the increasing account receivables.

The level of risk the firm is prepared to take when extending credit to a

customer, because this customer could default when payment is due.

The investment in debt collection management.

Academicians have studied accounts receivable individually, but mostly as a part

of working capital management, from various points of view. Bougheas et al. (2009), for

example, focuses the research on the response of accounts receivable to changes in

the cost of inventories, profitability, risk and liquidity. The other authors explore the

impact of an optimal receivables management, i.e. the optimal way of managing

accounts receivables that leads to profit maximization. Researches realized by

Deloof(2003), Laziridis and Tryfonidis (2006), Gill et al (2010), Garcia-Teruel and

Martinez-Solano (2007), Samiloglu and Demirgunes (2008) andMathuva (2010) done in

Belgium, Greece, USA, Spain, Turkey, and Kenyarespectively, all point out to a

negative relation between accounts receivables and firm profitability (Table 1). In other

words, having an accounts receivable policy which leads to a low as possible accounts

receivables has as a result the highest profitability. Contradicting evidence is found by

Sharma and Kumar (2011), who find a positive relation between ROA and accounts

receivables.

Table 1: Summary of previous research on the effects of receivables turnover on firm’s profitability

Research Sample, period Type of relation

Deloof (2003) 1009 large Belgian non-financial firms for the Significant negative



1992-1996 period relation on

profitability

Lazaridis and 131 companies listed in the Athens Stock Significant negative

Tryfonidis (2006) Exchange (ASE) for the period of 2001-2004 relation on

profitability

Gill et al (2010) 88 American firms listed on New York Stock Significant negative

Exchange for the period 2005 – 2007 relation on

profitability

García-Teruel and 8,872 Spanish SMEs for the period 1996-2002 Significant negative

Martínez- relation on

Solano(2007) profitability

Samiloglu and Istanbul Stock Exchange (ISE) listed Significant negative

Demirgunes (2008) manufacturing firms for the period of 1998-2007 relation on

profitability

Mathuva (2010) 30 firms listed on the Nairobi Stock Exchange Significant negative

(NSE) for the periods 1993 to 2008 relation on

profitability

Sharma and Kumar 263 non-financial BSE 500 firms listed at the Significant positive

(2011) Bombay Stock (BSE) from 2000 to 2008 relation on

profitability

Baveld (2012) 37 large firms in The Netherlands, during the Significant negative

non-crisis period of 2004-2006 and during the relation on

Financial Crisis of 2008 and 2009 profitability

However, the main body of the literature of accounts receivables focuses on studying

in the environment of developed capital markets and during the non-crisis period. The

consequences of a financial crisis on receivables is of enormous relevance, since a

crisis causes trade credit contagion as a consequence of financial contagion between

financial intermediaries (Bastos and Pindado, 2012). Researches on trade credit

during financial crises are done in case on Japan's crisis (Fukuda et al., 2006), for the

Asian crisis (Love et al 2007) and for the recent global financial crisis (Yang, 2001,

Bastos and Pindado, 2012). As to researches that study relationship between

profitability and accounts receivables during current global crisis period, it is worth



mentioning the study done by Baveld (2012). It this study that investigates how public

listed firms in The Netherlands manage their working capital, two periods are

compared - the non-crisis period of 2004-2006 and the financial crisis period of 2008 -

2009. Baveld'sstudy indicate a statistically significant negative relation between

accounts receivables and gross operating profit during non-crisis period. On the other

hand, during crisis period, no significant relation between these two variables is

observed. This result may suggest that the relation between accounts receivables

and firm’s profitability is changed in times of a crisis in the way that some firms should

not keep their accounts receivables at minimum in order to maximize profitability

during crisis periods.

Taking into consideration the results of study done by Baveld (2012) and the

others above mention studies, the aim of this research is to examine the impact of

accounts receivable management on the profitability of the Serbian companies during

the financial crisis, in the period 2008-2011.

EMPIRICAL ANALYSISSample and Data Description

We tested the regression model of profitability on the sample consisting of

real-sector publicly traded companies whose shares are quoted on the regulated

market of the Belgrade Stock Exchange. We compiled the basis of financial

statements (source: Serbian Business Registers Agency - SBRA) for those

publicly-listed companies that were quoted in all the segments of regulated stock

exchange market, that met the size criterion in all analyzed years (meaning big or

medium enterprises) and operated in real sector (financial firms are excluded

from the sample). In such an initial stadium of defining the sample, we had 432

firms in total. After the Decision on Stock Exchange Reorganization, brought on

27/04/2012, we excluded from the sample all the companies shifted from OTC

market to be quoted in MTP (Multilateral TradingPlatform) segment, since they

did not belong to Regulated market and were not activein the previous 180 days

regarding share trading of the particular issuer. We also excluded companies



with consolidated financial statements in any of the analyzed years, as well as

those companies whose loss was over the amount of capital so that they were

practically financed only from borrowed sources, and accordingly, the value of

financial leverage equals one.

The sample contains the financial data for 4 years in sequence, in period

from 2008 to 2011. The final sample, representing the basis for the empirical

study, comprises a total of 108 big and medium publicly-listed non-financial

companies, whose shares are quoted on the regulated segment of the Belgrade

Stock Exchange. These companies are mostly the result of mass corporatization

in Serbia at the beginning of 21st century, as a part of the process of Serbian

transition to market economy and private property. The most significant share in

the sample structure by the criterion of sector or business belongs to companies

from processing industry (52%), agriculture, forestry and fishing (14,9%),

transportation and storage (10,2%) and construction (8,4%).Financial statements

of these companies are prepared following the International Accounting

Standards (IAS), or International Financial Reporting Standards (IFRS).

Total number of observations for each variable is 432 (108*4). When we

consider the four-year value average or the value for one year only, total number

of observations is 108. We have processed the data from companies’ financial

statements and calculated dependent and independent variables within the

regression model, which is defined in the following text.

Descriptive statisticsThe ratio analysis mainly uses two types of profitability measures –

margins and returns. Margins ratios(Gross profit margin, Operating profit margin,

Net profit margin, Cash-flow margin)describe the firm's ability to translate sales

into profits at various stages of measurement. Ratios that calculate returns

represent the firm's ability to measure the overall efficiency of the firm in

generating returns for its shareholders (Return on asset, Return on equity,

Return on capital, Cash return on assets and so on). Many different

measurements of firm profitability are used by the researchers who studied the

relation between accounts receivable and profitability. The simplest and the most



used ratio, that relates the profitability of a company with its assets, is Return on

Assets (ROA). It is calculated as net income divided by total assets.

Two profitability measures are used in this study: Operating Profit Margin

(OPM), calculated as operating profit divided by total assets and Return on Total

Assets (ROTA) calculated as earnings before interest and tax divided by total

assets. ROTA measures the ability of general management to utilize the total

assets of the business in order to generate profits, while Operating Profit Margin

shows the profitability of sales resulting from regular business. Operating income

results from ordinary business operations and excludes other revenue or losses,

extraordinary items, interest on long term liabilities and income taxes.

The descriptive statistics of two profitability measures and explanatory

variables are reported in Table 2, while the correlation matrix is presented in

Table3. The measures of profitability, as well as the explanatory variables

(receivables turnover ratio, accounts receivable to revenue ratio, size and

liquidity), are averaged for the period 2008-2011. Size is the natural logarithm of

net sales. Liquidity is measured by current ratio (current assets/current liabilities).

Receivables turnover ratio measures the average period for which sales revenue

will be held in accounts receivable. This ratio is usually used to describe the

efficiency and effectiveness of receivables collection. The trends in accounts

receivable to revenue ratio highlight tendency in the degree of investment in

accounts receivable.

The results of dependent variables, Return on Total Assets (ROTA) and

OperatingProfit Margin (OPM), exhibit that the mean of ROTA (OPM) of all firms

analyzed is0.047 (0.032). The distribution of ROTA is positively skewed, with

kurtosis of 0.083, which describes that the scores for the ROTAs are clustered

around the mean in the right-hand tail. On the other hand, the distribution of OPM

is negatively skewed, with kurtosis of 17.716, which indicates that the more

peaked distribution is skewed to the left. It can be observed that the profitability

of Serbian companies whose shares are traded on a regulated market is not at a

significant level. But, having in mind the analyzed crisis period, the fact that they

still operate in profit zone is indicative.



The average number of days accounts receivables for the Serbian

companies listed at the regulated market is 69,5 days. This is far below the

value of RTR of the whole Serbian economy in 2011, which is, according to

Euro stat data, 128 days. The natural consequence of crisis environment is a

conservative behavior of Serbian companies. The most significant crisis effect

is related to corporate growth and is reflected in the fact that companies

postpone planned investments. All the attention is concentrated on providing

cash, given that the real sector is primarily faced with liquidity risk, and the

need for working capital is increasing in time of crisis. The difficulties in

collection of receivables are becoming serious as the crisis progresses. The

value of receivables turnover ratio continually increases in the analyzed crisis

period, starting from 66, 4 days in 2008, and reaching 73,1 days in 2011. The

increase in input prices and increased exchange rates, together with the

problematic collection of receivables affected the operating result.

Table2 Summary statistics

ROTA OPM ARRR RTR SIZE LIQ

Mean ,044636 ,032373 ,194138 69,50925 5,864046 2,400914

Median ,035425 ,03137716 ,143752 51,50000 5,816000 1,587933

Std. Deviation ,067246 ,13817079 ,136127 48,26746 ,492433 2,478863

Variance ,005 ,019 ,019 ,100 ,242 6,145

Skewness ,369 -2,883 1,120 1,151 ,408 2,850

Std. Error of Skewness ,233 ,233 ,233 ,233 ,233 ,233

Kurtosis ,083 17,716 ,692 ,867 ,016 9,891

Std. Error of Kurtosis ,461 ,461 ,461 ,461 ,461 ,461



Minimum -,109028 -,846249 ,027984 10,0000 4,696000 ,233524

Maximum ,220683 ,377185 ,625985 228,000 7,255000 15,843705

The average value of accounts receivable to revenue ratio describes the

accounts receivables management of Serbian companies in the crisis time too.

The value of this ratio for the sample is 19,41%, telling that almost 20% of total

sales revenue is related to the unpaid sales. As the crisis progresses, from 2008

to 2011, the value of ARRR increases (from 18% to 20,4%), indicating that

theamount of cash that is tied up with the slow paying customers is growing. Yet,

this numbers are still below the share of receivables in the net revenue of 25%

evidenced in France, Germany, and Italy by Demirgüç-Kunt and Maksimovic

(2001).

The results on the average collection period for Serbian companies are

higher than the findings of some studies done in non-crisis period. Deloof (2003)

find an average of RTR of 54,64 days in Belgium, Gill et al. (2010) of 53,48 days

in the US. On the other hand, Garcia-Teruel and Martinez-Solano (2007) present

evidence on the average receivables turnover ratio for Spanish firms of 96,82

days, Samiloglu and Demirgunes (2008) and Lazaridis and Tryfonidis (2006) find

average receivables turnover ratio in Turkey and Greece is 139,07 and 148,25

respectively.

Table 3 shows correlation coefficients of all variables. ROTA and OPM are dependent

variables. Concerning the explanatory variables, relatively high correlation coefficients

(higher than 0.5) are observed only in case of ARRR and RTR. The results of the

correlation analysis shows that the number of days accounts receivables as well as

accounts receivable to revenue ratio positively relate to both the dependent variables

- return on total assets and operating profit margin. This indicates that in crisis time, a

higher level of accounts receivables could induce a higher profit in the Serbian case.



Contradicting evidence is found with the correlation analysis of Bavald (2009), who

finds a negative relation between the number of days accounts receivables and a

firm’s profitability in the crisis time in the case of the Netherlands. The results of

Bavald's correlation analysis show a negative relation between the number of days

accounts payables and both return on assets and gross operating profit. This

indicates that managers can create value by keeping the levels of accounts

receivables to a minimum.

Table3: The correlation matrix of profitability and independent variables

ROTA OPM ARRR RTR SIZE LIQ

ROTA 1

OPM (,680)** 1

ARRR (,329)** ,142 1

RTR (,293)** ,127* (,959)** 1

SIZE (,385)** (,436)** (,283)** (,253)* 1

LIQ (,298)** (,405)** -,116 -,059 ,086 1

**Correlation is significant at the 0.01 level (2-tailed).

*Correlation is significant at the 0.05 level (2-tailed).

Sales and liquidity show also a positive relation on the dependent variables,

which is consistent with the findings of Deloof (2003), and Baveld (2012). A

shortcoming of Pearson correlations, that they are not able to identify the causes

from consequences(Deloof, 2003), will be overcome by the regression analysis.



REGRESSION MODELThe regression analysis used in this study is based on the following equations:

• OPMit = β0 + β1ARRRit + β2RTRit+ β3SIZEit + β4LIQit +εit

• ROTAit = β0 + β1ARRRit + β2RTRit+ β3SIZEit + β4LIQit +εit

where OPM and ROA measures the firm profitability, SIZE, the company size as

measured by natural logarithm of sales, ARRR, the accounts receivable to revenue

ratio, RTR, receivables turnover ratio, LIQ, the current liquidity ratio. The analysis

utilizes fixed effect regression model for the whole sample (Table 4).

The results of regression analysis indicate a positive relation between accounts

receivables and return on total assets, which is not statistically significant. Table 4 also

shows a stronger, but positive relation between accounts receivables and the second

dependent variable – operating profit margin. This finding is not surprising taking into

account that operating profit margin describes the profitability of sales resulting from the

core business, which is highly influenced by the amount of receivables and the

collection effectiveness.

As it is pointed out by Baveld (2012), the absence of any significant relation for

both the dependent variables may indicate that the relation between accounts

receivables and firm’s profitability is changed in times of a crisis. These regression

results could be explained by the fact that Serbia is an transition and emerging market

where most of the firms are seen more profitable if they give their clients more trade

credit. Indeed, these finding are contradicting with the results on the impact on

receivables on firm's profitability in many developed counties (see Table 1), but

consistent with Sharma and Kumar (2011), who also find a positive relation between

ROA and accounts receivables in the case of India. The conclusion can be made that

large and medium listed firms in Serbia use to keep their levels of accounts receivables

to a high level during crisis years.

Table 4 Regression model results for two dependant variables:Return on Total Asset and Operating Profit Margin

Dependent variable: ROTA Dependent variable: OPM



Independent Std. t- Std. t-

variable Coeff. Error statistic Sig. Coeff. Error statistic Sig.

(Constant) -,280* ,085 -3,281 ,001 -,908 ,167 -5,445 ,000

ARRR ,056 ,093 ,601 ,549 ,306 ,181 -1,686 ,095

RTR ,041 ,039 1,042 ,300 ,184 ,077 2,397 ,018

SIZE ,038* ,012 3,219 ,002 ,108* ,023 4,659 ,000

LIQ ,008* ,002 3,545 ,001 ,020* ,004 4,525 ,000

Weighted

statistics

R square ,300 ,367

Adjusted R

,273

,343

square

SE of

,057

,112

regression

F-statistic 11,033 14,937

* Significant at 5% level

Table 4 shows that R-squared value is 0.300 (0.367) indicating that 30% (36.7%)

variance in Return on Total Assets (Operating Profit Margin) as dependent variable

can be explained through four independent variables used.

CONCLUSIONThis study explores how large and medium sized companies listed at the

regulated market segment of the Belgrade Stock Exchange manage their accounts

receivables in the most profitable way during a crisis period, from 2008 to 2011.The

analysis of the relation between accounts receivables and two dependent variables on

profitability, return on total asset and operating profit margin, indicates a positive, but

no significant relation. This implies that managers of the most successful Serbian

companies are of the opinion that it’s profitable, and thus beneficial for their firms, to



support their financially constraint customers by increasing the level of the receivables.

In this way, companies secure their future sales and survival in crisis times. Companies

take into account the trade-off between extending trade credits and increasing the

default risk involved on the one hand, and the short-term and the long-term benefits of

such a receivables management on the other hand. Profitability and creation value for

shareholders over crisis time is achieved by increasing the accounts receivable levels.

This study is featured at least by three main limitations. In the first place, it is

based on the data of the Serbian non-financial firms listed at the regulated market.

Therefore, a generalization of the results of this research for the whole economy

(financial firms, non-listed firms) is not acceptable. Secondly, the analysis is limited to a

four-year crisis period, not taking into account the impact on receivables on profitability

in a previous, non-crisis period. It this way, a comparative approach could not be

applied and the differences between non-crisis and crisis period could not be

compared and highlighted. Finally, the correlation and regression analysis is conducted

using the Return on Total Assets and Operating Profit Margin as dependent variables,

and four independent variables. In this respect, future research should comprise a

more comprehensive set of explanatory variables and should be based on a larger and

comprehensive database.

REFERENCES: http://www.asecu.gr/files/9th_conf_files/dencic-mihajlov.pdf

3.0 FACTORING OF RECEIVABLES AUDIT TECHNIQUES GUIDE

NOTE: This guide is current through the publication date. Since changes mayhave

occurred after the publication date that would affect the accuracy of this document, no

guarantees are made concerning the technical accuracy after the publication date.

OverviewCompanies generate accounts receivable by selling goods or services to their

customers on credit. Many companies who extend credit to their customers sell their

accounts receivable to a factor. A factor is a specialized financial intermediary who

purchases accounts receivable at a discount. Under a factoring agreement a company

sells or assigns its accounts receivable to a factor in exchange for a cash advance. The

factor typically charges interest on the advance plus a commission. The price paid for



the receivables is discounted from their face amount to take into account the likelihood

of un collectability of some of the receivables.

Factoring is a technique used by companies to manage their accounts receivable

and provide financing. Typically companies that have access to sources of

financing that is less expensive than factoring would not use factoring as source of

credit.

A factor may provide any of the following services:

• Investigation of the credit risk of customers of the client;

• Assumption of the credit risk of customers;

• Collection of the client’s accounts receivable from customers;

• Bookkeeping and reporting services related to accounts receivable;

• Provision of expertise related to disputes, returns and adjustments;

• Advancing or financing.

There are numerous types of factoring arrangements. Some of the basic types vary the

treatment of credit risk assumption and customer or debtor notification.

When the factoring agreement involves the purchase of accounts receivable where the

factor bears the risk of a customer or debtor failing to pay the client for reason of

financial inability it is a non-recourse or without-recourse agreement. In the situation

where the client must bear the risk of non-payment due to financial inability, the

agreement is a recourse agreement. In many instances, factoring agreements provide

for accounts to be purchased on both a recourse and non-recourse basis depending on

the credit worthiness of the customers or the debtors.

Compliance FocusA strategy has been identified in which multinational corporations use the

factoring of accounts receivable among related parties. The goal of this strategy is to

avoid U.S. taxation by shifting income offshore and to significantly reduce remaining

U.S. income by deducting expenses related to the same income.



Typical Fact Pattern:A U.S. subsidiary (“Taxpayer”) of a foreign parent earns sales income and books

accounts receivable. The Taxpayer then factors (sells at a discount) the accounts

receivable to a brother-sister foreign affiliate. The Taxpayer pays the foreign factor the

following fees: a discount; administration fees; commissions; and interest.

The Taxpayer deducts these fees or may net them against gross receipts.

However, the foreign factor does not perform any of the typical services of a factor,

including collection of the Taxpayer’s accounts receivable. Instead, the

Taxpayer agrees to continue doing all or most of its own collection work on its

accounts receivable. In some cases, factoring arrangements involve the use of a

domestic (U.S. based) factor instead of a factor located offshore. In cases involving a

domestic factor, some audit steps and issues discussed below may not apply. If the

transaction is between two domestic entities it may be structured for state tax purposes

and has no federal tax effect. In addition, insome cases, the Taxpayer and factor may

be engaged in a financing arrangement involving securitizing the accounts receivable.

General Audit Steps

Although U.S. taxpayers are taxed on their worldwide income, the income of foreign

subsidiaries of U.S. taxpayers is generally deferred from taxation in the U.S.

Consequently, the existence of a factoring arrangement may not be readily identified on

the face of a return. Therefore, at a minimum the following audit steps should be

utilized:

• Submit a specific IDR to determine if any accounts receivable were sold if yes,

were they sold to:

• A related entity; and/or

• Any entity located offshore.

• Review the tax return balance sheet to determine if the accounts receivable

reflected thereon are reasonable for the size and type of business.

• Perform a comparative analysis of the balance sheets for the current and atleast

5 prior tax years, noting any significant reduction in accounts receivable.

• Review the tax preparation work papers for large debits to income.



Review and analyze Form 5472 and the audited financial statements of both the

domestic entity and the related foreign entity for any footnotes reflecting the sales

and/or securitization of the accounts receivable. Request that theforeign entity provide

this information in English. Note whether this analysis demonstrates income shifting

from the domestic entity to the foreign entity. Also note whether there is evidence that

the foreign entity was conducting a trade or business within the United States.

The following facts should be determined during the audit through IDRs or functional analysis and by requesting documentary substantiation where appropriate.

The Factor• Name and location of the factor;

• Relationship of the factor to the taxpayer;

• The name and location of a common parent of the factor and the taxpayer;

• Whether the taxpayer and the factor are part of a consolidated group;

• Whether the factor is a Controlled Foreign Corporation (CFC);

• The name of any promoter/advisor or accounting firm involved in structuring the

taxpayer’s factoring arrangement.

The Factoring ArrangementThe factoring arrangement is usually set forth in a Factoring Agreement between

the factor and the taxpayer. Obtain a description of the terms of the factoring

arrangement including if applicable the following:

• The names of the parties that entered into the Factoring Agreement;

• The date the Factoring Agreement was signed;

• The services the factor agreed to provide;

• The services the factor contracted back to the taxpayer;

• The fees the taxpayer charged the factor for performing the services

contracted back to the taxpayer;

• The discount and fees charged by the factor for:



• discount on accounts receivable;

• administrative fees;

• commission fees;

• interest charges.

• The date the taxpayer was required to transfer accounts receivable to the

factor;

• The date the factor had until to accept or deny the factored accounts

receivable;

• Whether the sale of the receivables to the factor was recourse or non-

recourse;

• The reasons the taxpayer provided for entering into the factoring

arrangement;

• Whether the taxpayer ever entered a factoring arrangement before;

• Whether it is a common practice in the taxpayer’s industry to factor

receivables;

• If a related entity is utilized to perform factoring, explain the source of the

funding used by this entity to acquire the accounts receivable.

SecuritizationIf the factoring arrangement involves the securitization of factored accounts

receivable then obtain a description of the securitization process including:

• The purpose for securitizing the accounts receivable;

• The names and location of all entities involved in the securitization process;

• The relationship between the parties involved in the securitization

arrangement;

• Whether any of the entities involved in securitizing the accounts receivable were a

Special Purpose Vehicle (SPV);

• The fees charged by the parties involved in securitizing the accounts

receivable;

• A description of how the accounts receivable were securitized, including the flow of

funds;



• Whether the sale of the receivables to the factor was recourse or non-

recourse;

• Whether the taxpayer ever securitized its accounts receivable before;

• Whether it is a common practice in the taxpayer’s industry to securitize

accounts receivable;

• If a related entity is utilized to perform securitization, explain the source of the

funding used by this entity to acquire the accounts receivable.

Tax Return• Indicate where on the tax return the expenses from the factoring

arrangements are deducted. Identify if the factoring fees are netted

against other items such as sales. Also, indicate if the factoring

deductions are reflected as book/tax difference on Schedule M.

• Provide all tax preparation work papers related to the factoring/securitization

arrangement.

Financial StatementsIndicate if and how the factoring arrangements are presented on the taxpayer’s

financial statements. Compare the treatment of how the factoring arrangements are

presented on the financial statements with the presentation on the tax returns.

Transfer Pricing StudiesTaxpayers engaged in transactions with related parties are required to establish

an appropriate transfer price in accordance with prescribed methodologies. Analysis

and evaluation of the appropriate price is what is known as a Transfer

Pricing Study.

To obtain a copy of any and all Transfer Pricing Studies, prepare a separate

IDR consisting of the following two paragraphs:

Please provide within 30 days of this request any principal documentation

outlined in Treas. Reg. Section 1.6662-6(d) (2) (iii) (B) that has been prepared to



support your transfer pricing methodologies for all years under examination. This

information would generally be provided in the form of a study; however all principal

documentation outlined under the Code and associated Treasury

Regulation which was prepared for the years under examination, regardless of

form, is requested. This documentation should include all internal and/or external

studies.

It should be so noted that any documentation prepared by the taxpayer pursuant

to Section 6662(e) must be in existence when the return was filed in order to meet the

documentation requirement. In addition, if this documentation is not provided within 30

days of this request, and if there are significant adjustments to your transfer price as

determined under IRC Section 482, a penalty may be applicable under IRC Section

6662(e) or (h).

Functional AnalysisWhen determining the appropriate amount of factoring fee charged between

related parties, it may be necessary to perform a functional analysis to determine

the actual services performed; the entity which performed the services; and, any

compensation charged for these services.

A functional analysis prepared with respect to factoring arrangements should

include, but not be limited to, the following:

• Identity of the factor and its geographic location.

• Identity of the legal form (partnership, corporation, LLC, etc.) of the factor

• Identity of the tax form (partnership, corporation, disregarded entity) of the factor.

• Identity of the functions performed by the factor; and, if appropriate, the

functions which the factor contracts to be performed on its behalf.

• Identity of the number, names and location of any employees of the factor.

• Identity of duties specifically performed by each employee.

• Identity of who performs the factoring functions.

• Explanation, in detail, of any transfer pricing methodology used in determining

how a related entity reimbursed the taxpayer for services provided (i.e.

servicing rights).



• Explanation, in detail, of any risks assumed with regard to the factored

receivables and the entity assuming such risks.

• Analysis, in detail, of the amounts attributable to these risks, to be supported

by appropriate work papers.

Bad Debt HistoryDetermine the bad debt history of the taxpayer’s accounts receivable for the

years under exam and if possible the past 3 to 5 years. Calculate the percentage of

receivables written off as bad debts for each of the years. Identify the first time that the

taxpayer entered into a factoring arrangement and indicate the reasons the taxpayer

provided for entering into such an arrangement.

Dates the Receivables Were Collected and TransferredThe legal analysis of factoring arrangements may require identifying the dates and

amounts of receivables transferred to the factor. Accordingly, for all the factored

receivables determine:

• The dates and the amounts of the accounts receivable the taxpayer

transferred to the factor.

• The dates the taxpayer received collection on the accounts receivable; and

• The dates the factor had until to accept or deny the transferred accounts receivable.

Prior History on Sale of Accounts Receivable/Repeal of Mark-To-Market Treatment under Section 475/Tax Avoidance

Obtain answers to the following questions:

• Prior to July 1998, did the taxpayer utilize Section 475 to mark-to-market its

accounts receivable?

• Did the taxpayer start or complete setting up transactions involving the “sale” of

its accounts receivable to related corporations after July, 1998?

• Were any of these corporations created or acquired around or after July, 1998 to

carry out this sale of accounts receivable?



• Were any of these types of transactions set up and promoted/marketed by any

of the accounting firms or other promoters/advisors?

• Were any of the valuation services (for the accounts receivable) provided by

the same accounting firm which marketed the transaction? Who provided the

valuation services?

Other• Obtain a copy of the Accounting Manual; Standard Operating Procedures and/or

Flow Charts which describe the corporate factoring/securitization policies and/or

procedures.

• Obtain all legal, accounting, financial, and economic opinions and memoranda

secured by or on behalf of the taxpayer in connection with this transaction.

• Determine whether a Tax Contingency reserve was established for any

transactions.

• Obtain copies of any communications, brochures, memoranda or other

materials received from or sent to the Taxpayer or its representatives

describing the factoring arrangement.

Treas. Reg. section 6050PTreas. Reg. section 6050P contains final regulations to the information reporting

requirement under section 6050P of the Internal Revenue Code for discharges of

indebtedness. The preamble of the Treas. Reg. section 6050P regulations, describe

typical unrelated party pricing of factoring transactions and provide an example

demonstrating how a bona fide unrelated party factoring transaction is often priced.

The preamble states that factoring between unrelated parties ordinarily involves a

factor who performs the following functions:

• Initial credit investigation;

• Selective assumption of the risk of loss (sometimes referred to as

guaranteeing credit);

• On-going credit monitoring of the client’s customers, collection and

bookkeeping.



The preamble states that for typical transactions with unrelated parties factoring fees

range between 0.35 percent of the face value of the accounts receivable (if the client

retains the collection function) and 0.70 percent of the face value (if the factor

undertakes the collection function).

Accordingly, it may be indicative that a factoring arrangement between related parties

is abusive if the factoring fees are much higher than the typical factoring fees charged

for unrelated parties. This type of analysis should be made in determining whether a

section 482 adjustment is warranted.

Typical Issues:Potential issues include, but are not limited to:

• Were there deemed dividends from the U.S. taxpayer to its foreign parent in the

amount of collected accounts receivable transferred to the foreign factor; and, were

withholding taxes due on the dividends paid to a foreign recipient?

• Have the arm’s-length principles under section 482 been applied with respect

to the sale of accounts receivable to a related party?

• Did the foreign factor’s factoring activities generate income from a trade or

business within the United States?

• Should losses between the related parties in the factoring transaction be

adjusted under Section 267?

• Was the factor a controlled foreign corporation (“CFC”) conducting intercompany

transactions with the Taxpayer pursuant to Treas. Reg. 1502?

• Should losses from the factoring transaction be disallowed under Section 269

because the factor was acquired or created to evade or avoid incometax?

REFERENCES: www. lrs.gov/pub/lrs-utl/tactoring of receivables atg final.pdf

4.0 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYBLE IN LRGE FIRNISH FIRMS’ BALANCE SHEETS: WHAT DETERMINES THEIR LEVELS?

ABSTRACT



This study empirically examines the determinants of Finnish listed firms’ accounts

receivable and accounts payable. The results show that accounts receivable are most

likely to be affected by the firms’ incentive to use trade credit as a means of price

discrimination. Increases in the interest rate level also increases the amount of

accounts receivable through increased demand for trade credit. The most important

determinants for the level of accounts payable appear to be the supply of trade credit,

firm size, interest rate level, the ratio of current assets to total assets, and insufficient

internal financing.

INTRODUCTIONOfficial statistics show that Finnish manufacturing companies’ accounts

receivable are on aver-age 9.7% and accounts payable 6.1% of total asset

(firms with more than 20 employees). For retail firms the respective percentages

are 8.1% and 16.0% and for wholesale firms the numbers are as high as 24.1%

and 23%, respectively.1 The importance of trade credit varies by country, and is

likely to be highest in industrialized countries, although there is substantial

variation across them (Marotta, 1997). Rajan and Zingales (1995) investigate

non-financial firms in the G7 countries, and find that the proportional share of

accounts receivable varies between 13% (Canada) and 29% (Italy), whereas

the range for accounts payable is between 11.5% (Germany) and 17%

(France). It is thus apparent that accounts receivable may form a substantial

fraction of a firm’s assets, and accounts payable may be an important source of

outside funding. Several theories have been developed to explain trade credit

use. However, firm level empirical evidence is scarce and it is all on U.S. data.

This paper tests the available theories using data on Finnish listed firms.

THEORIES AND SOME EMPIRICAL EVIDENCE ON TRADE CREDITSeveral theoretical studies attempt to explain why suppliers provide financial

intermediary services to their clients, and why these are willing to use trade credit

instead of, e.g., bank debt even if trade credit is well known to be a more expensive

source of funds.



Transaction costshave been stated to be one reason to maintain credit sales.

Ferris (1981)argues that the existence of trade credit allows flexibility in payments and

makes it possible to cumulate the payments of several successive shipments to be paid

at once thus leading to savings of transaction costs. Furthermore, trade credit allows the

buyers to hold smaller cash balances and save money accordingly. Other versions of

the transaction costs theories relate to seasonalities in the consumption pattern of the

selling firm’s products (for a detailed de-scription, see Petersen and Rajan, 1997).

Financial modelsare based on capital market imperfections relating to information

asymmetries. Schwartz (1974) suggests that firms with better access to the

institutionalized capital market and with lower cost of financing will offer trade credit to

firms with high costs when borrowing from financial intermediaries. As Schwartz points

out, the institutional arrangement of trade credit enables established firms to help

finance the growth of their customers. It may also be argued that trade credit can serve

to mitigate credit rationing while trade credit provides a signal on the buyer’s good

quality to the financial intermediary (Frank and Maksimovic, 1998; Biais and Gollier,

1997).2

Other financial models suggest that the seller has an advantage over financial

intermediaries in information acquisition and controlling the buyer. In the Anglo-Saxon

countries, all these advantages relate to the closer and more ’physical’ relationship

between the seller and the buyer than between the buyer and financial intermediaries.

E.g., if the buyer does not pay in time, the supplier can threaten to cut off future

supplies. A financial intermediary may not have such powerful tools in use, since the

threat to withdraw future finance may not have an immediate effect on the buyer’s

behavior (Petersen and Rajan, 1997).

Trade credit may serve as a means of price discrimination when law (e.g.,

the Robinson-Patman Act in the U.S.) prohibits companies from directly using

different prices for different customers. This is possible when credit terms

contain an early payment discount. Firms with market power are more likely to

offer such terms (Brennan et al., 1988; Mian and Smith, 1992). Such firms are



operating with a high contribution margin, and have a strong incentive to gather

additional sales but without cutting the price to existing customers. Therefore,

they offer trade credit that creditworthy customers will avoid because of its high

price. On the other hand, risky customers will take the credit because it may still

be cheaper than to borrow from other sources (Brennan et al., 1988; Petersen

and Rajan, 1997).

Trade credit can be considered an implicit guarantee for the seller’s

products. The idea is that the buyer is given time to become convinced on the

quality of the product before he pays for it (Lee and Stowe, 1993). Frank and

Maksimovic (1998) argue that trade credit as a guarantee is likely to be of

particular importance for small and less well established sellers.

Some studies discuss the effect of changing macroeconomic conditions on

the use and terms of trade credit. Schwartz (1974) argues that trade credit

reduces the efficacy of any given amount of monetary control, but also mitigates

the discriminatory effects generated by restrictive monetary policy. When loan

supply is constrained, larger firms with easier access to institutionalized capital

markets can extend trade credit to smaller firms (Kashyap et al., 1993). Under

those circumstances it can be expected that smaller firms are willing to extend

the term of the offered trade credit because rising interest rates make trade

credit a more competitive form of short-term financing.

As Petersen and Rajan (1997) point out, there is little empirical evidence on

the above theories in addition to their own study. They use firm level data from

the National Survey of Small Business Finances that was conducted in 1988–

89, and find that firms use trade credit more when credit from financial

institutions is not available. Their evidence also shows that well established

suppliers might act as financial intermediaries by lending to firms with no access

to the financial markets. The study further finds some evidence to support the

theorythat trade credit is used as a means of price discrimination.

There are several differences between our data set and Petersen and

Rajan’s (1997) data. One important difference is that between the Finnish and

U.S. capital markets. The Finnish capital markets are bank-based and highly



concentrated. A number of studies on relationshiplending suggest that close

bank-borrower relationships enhance credit availability. These studies also

suggest that firms operating in concentrated as opposed to competitive markets

have easier access to funds (Petersen and Rajan, 1995; Boot and Thakor,

1999). One distinguishing feature of the bank-based systems is that banks

monitor the performance of firms more closely than in the market-based

systems such as that of the U.S., play an active part in the administration of

many large corporations, and may even own substantial amounts of their share

capital. Under the Finnish circumstances, this fact may provide banks a relative

advantage over suppliers as opposed to the financial intermediaries in the U.S.,

and thus have an effect on the firms’ patterns of using trade credit in their short

and intermediate term funding.

Second, we use time series data that allow us to test the determinants of trade

credit over time, whereas Petersen and Rajan (1997) used a cross-sectional one-year

sample. We include explanatory variables such as the interest rate level and year-

dummies that cannot be used when the data are available for only one year. A third

difference is that our data consist of firms that are among the largest in Finland,

whereas Petersen and Rajan’s sample mainly consisted of small firms.

The study proceeds as follows. Section 3 describes the data sample used. Section 4

presents the results on the determinants of accounts receivable and accounts payable.

Section 5 concludes the study.

DATA DESCRIPTIONThe data sample consists of financial accounting data on firms that were listed on

the Helsinki Stock Exchange either in the main list or in the OTC list during the research

period 1989– 1997. For some firms data are available for shorter periods. The entire

sample size is 1018 observations from 121 firms.

Table 1 shows the time-series behavior of median accounts receivable (divided

by as-sets) in firm size quartiles during the research period. Table 2 reports the

respective results for accounts payable. The data have been classified into firm size

quartiles based on annual sales.



The relative amounts of trade credit offered and used remain quite stable during the

research period, and neither accounts receivable nor accounts payable display a trend

in time in any quartile of sales. However, there are certain differences in trade credit

policies between the different quartiles. Especially, firms in the smallest sales quartile

clearly havethe smallest accounts receivable and accounts payable relative to assets,

while differences between the three larger quartiles are smaller and less consistent. The

relative difference between the lowest sales quartile firms and other firms is much larger

for accounts payable. The lowest sales quartile firms borrow from suppliers on average

only 50% compared to the

TABLE 1. Median accounts receivable to total assets: time-series behavior in different firm size quartiles. The smallest firms are in quartile < 0.25 and the largest firms in quartile > 0.75.

Years

Quartile of sales 1989 1990 1991 1992 1993 1994 1995 1996 1997 All years

< 0.25 0.108 0.101 0.102 0.068 0.099 0.106 0.102 0.091 0.119 0.102

0.25 – 0.50 0.133 0.151 0.129 0.151 0.142 0.177 0.170 0.164 0.148 0.149

0.50 – 0.75 0.162 0.146 0.125 0.117 0.130 0.133 0.148 0.147 0.128 0.138

> 0.75 0.135 0.134 0.125 0.128 0.129 0.130 0.147 0.141 0.162 0.136

All firms 0.138 0.134 0.119 0.123 0.131 0.132 0.144 0.140 0.143 0.133

TABLE 2. Median accounts payable to total assets: time-series behavior in different sales quartiles.The smallest firms are in quartile < 0.25 and the largest firms in quartile > 0.75.



Years

Quartile of sales 1989 1990 1991 1992 1993 1994 1995 1996 1997 All years

< 0.25 0.035 0.045 0.025 0.020 0.030 0.027 0.034 0.033 0.039 0.031

0.25 – 0.50 0.062 0.057 0.045 0.052 0.053 0.071 0.072 0.073 0.080 0.082

0.50 – 0.75 0.069 0.059 0.054 0.066 0.055 0.069 0.058 0.055 0.058 0.059

> 0.75 0.081 0.075 0.061 0.067 0.070 0.085 0.082 0.079 0.086 0.078

All firms 0.068 0.059 0.050 0.051 0.053 0.071 0.062 0.060 0.071 0.060

median firm of the total sample, whereas the respective ratio when lending to

customers is about 75%.

The result concerning the differences between large and small firms may

not be quite generalizable because there in fact are only large firms in our

sample in the context of the entire population of Finnish firms. However, also

Petersen and Rajan (1997) found that larger firms tend to offer more trade

credit to their customers and they also hold larger balances of accounts

payable. Their results were similar for a sample of large COMPUSTAT firms as

well as for their primary sample consisting of small and medium sized firms.

Table 3 shows the median percentages of accounts receivable and

accounts payable classified by industry. The data are divided into four industry

categories (classification codes used by Statistics Finland since 1995 are in

parentheses): manufacturing and mining (C, D), energysupply and construction

(E, F), retail and wholesale firms (G, H) and other services (I, J, K, O).Firms in

wholesale and retail industries have the largest accounts receivable and

accounts payable (16.6% and 13.3%, respectively). Accounts receivable are an

important part of assets (14.7%) also in manufacturing and mining firms,

whereas the level of accounts payable in



TABLE 3. Accounts receivable and accounts payable by industry.

Industry (classification codes Median Median Median Median

used by Statistics Finland Accounts collection accounts payment

are in parentheses) Receivable period payable period

to total assets (days) to total assets (days)

Manufacturing and mining (C, D) .147 56 .067 59

Energy supply and construction (E, F) .079 55 .041 57

Trade (G, H) .166 44 .133 53

Other services (I, J, K, O) .095 42 .042 74

Total .133 51 .060 60

these firms’ balance sheets is only 6.7% of total liabilities. In general, it is true

for all industries that firms hold more accounts receivable than accounts

payable. The medians for the whole sample are 13.3% and 6%, respectively.

RESULTSWe regress accounts receivable and accounts payable on variables that can

be argued to be their determinants based on the theories discussed earlier. We

shortly discuss the theoretical relevance of each variable while presenting the

empirical results from the estimations. Table 4 first summarizes the variables of

primary interest and presents correlations between them.

Accounts receivableTable 5 presents the results from regressing accounts receivable (scaled

by assets) on the different explanatory variables.4 Model I in table 5 is



estimated using the variables listed in table 4 above. Since it seems possible

that the relationship of accounts receivable with sales growth and cash flow is

not linear, we estimate model II. The sales growth and cash flow variable are

now both separated into two variables by multiplying them with (0,1) dummies

indicating whether a particular observation has been positive or negative.

Demand for trade credit. It is convenient to think that the level of a firm’s

accounts receivable depends on how much it decides to lend to its customers.

However, as Petersen and Rajan (1997) point out, there is most probably also a

demand factor that affects the amount of The number of observations varies

slightly across the different regressions because of list wise deletion of

observations with missing data on some variable(s).As it is the common

practice in related literature, assets is used as the scaling variable for both the

dependentvariable and independent variables when scaling is needed.

Potential problems related to this practice are dis-cussed in Kasanen and Lukka

(1993).

TABLE 5.The determinants of accounts receivable.

Dependent variable: accounts receivable/assets

Model I (N = 896) Model II (N = 894)

Variable Coefficient Significance Coefficient Significance

level level

LN(book value of assets) . 002 . 094 . 002 . 289

LN(1 + firm age) –. 002 . 493 –. 002 . 279

% sales growth –. 0002 . 566

% sales growth if positive, 0 –. 008 . 078



% sales growth if negative, 0 . 078 . 001

Operating cash flow –. 046 . 227

Cash flow when positive, 0 –. 082 . 067

Cash flow when negative, 0 –. 007 . 992

Contribution margin . 091 . 000 . 087 . 000

Market interest rate 1 . 198 . 080 1 . 111 . 099

Year - dummy 1989 –. 094 . 141 –. 088 . 159

Year - dummy 1990 –. 120 . 101 –. 113 . 119

Year - dummy 1991 –. 122 . 069 –. 111 . 096

Year - dummy 1992 –. 126 . 066 –. 118 . 081

Year - dummy 1993 –. 059 . 059 –. 054 . 080

Year - dummy 1994 –. 025 . 138 –. 022 . 189

Year - dummy 1995 –. 031 . 106 –. 029 . 123

Year - dummy 1996 –. 009 . 356 –. 008 . 371

Manufacturing and mining . 049 . 000 . 049 . 000

Wholesale and retail trade . 041 . 000 . 042 . 000

Other services –. 015 . 133 –. 012 . 203

Constant . 009 . 790 . 035 . 298

Adjusted R - squared . 238 . 000 . 248 . 000

trade credit a firm is able to extend. This demand is practically impossible to measure

directly. Most firms have many customers whose individual attitudes towards trade

credit differ from each other. For instance, a retail firm may have thousands of credit

customers who may be either individuals or other firms. On the contrary, the accounts

payable of a given firm may be more homogenous since they usually are payables to

other firms whose number at least in certain industries may be relatively small.

Since we don’t know the demand curve for trade credit, this issue must be taken

into account when interpreting the estimated coefficients. Petersen and Rajan (1997)

illustrate the alternative interpretations of the result that large firms have higher



accounts receivable. First, this result may mean that larger firms are less capital

constrained because they have better access to capital markets. An alternative

interpretation is that a part of large firms’ customers may be credit rationed for one

reason or another, and the larger than average accounts receivable of large firms may

be explained by the demand factor. However, we believe that the use of industry

dummies in our regression partly mitigates this problem since they divide the customers

of the sample firms into more homogenous groups.

Creditworthiness and access to capital markets.A firm’s creditworthiness and

access tocapital markets are most commonly measured by firm size and age. We use

the natural log of the firm’s total assets (Ln (Assets)) and the natural log of firm age

(Ln(1 + Firm Age)) to proxy for the supplier’s access to external capital.

The results in table 5 show that asset size is significant in model I (p = 0.094), but

insignificant in model II. Firm age remains insignificant in both models, even when the

square of the log of firm age is added in the model (the coefficient of the squared age

variable is not reported in table 5). We added the squared age variable, because

Petersen and Rajan’s (1997) results show that after 19 years of operation a firm’s level

of accounts receivable peaks and starts to decrease.

The result that a firm’s creditworthiness and access to capital markets does not

affect the level of trade credit it extends is theoretically unexpected, and it also differs

from previous empirical findings by Petersen and Rajan (1997). Table 4 shows that firm

size and age are correlated by factor 0.4. Although the correlation is not very large, it

may be one reason be-hind the insignificance of firm size and age as predictors for

trade credit extended.

Growth.Firms may have trade credit policies that are in connection with their target

growthrates. Traditionally, credit terms such as trade credit discounts and time of

payment are believed to be used as competitive tools. A firm willing to grow may choose

a strategy of extending trade credit with longer due periods than its competitors. This

suggests that growth should be positively related to the level of accounts receivable.

However, also firms whose sales have developed inadequately, may use trade credit to



enhance their sales. Especially, a firm whose sales are declining may extend more

trade credit than the average firm in its industry (Petersen and Rajan, 1997). In this

study, we measure growth by the annual sales growth percentage.

Empirically, it appears that neither of the above theories holds. When negative and

positive observations are in the same variable, the regression coefficient is insignificant.

However, when the variable is partitioned on the basis of the signs of the observations,

it appears that the coefficient of the variable with negative sales growth numbers has a

significant positive coefficient. When interpreted, this result means that the more

negative a firm’s sales growth, the less trade credit it extends. On the other hand, the

coefficient of the variable including positive growth observations is significantly negative

(p = 0.078), indicating that firms with high growth rates extend less trade credit than

lower-growth firms. The results are exactly the mirror image to Petersen and Rajan’s

(1997) results, who found that firms with high growth rates extend more credit than firms

with lower growth rates. Additionally, their results showed that the more a firm’s sales

declined the more it used trade credit to finance its customers’ purchases, and thus

support both the above mentioned theories.

Internal financingWe use operating cash flow (earnings before depreciation and interestminus

taxes) divided by assets to measure the firm’s ability to generate cash from internal

sources to finance the trade credit that it offers to its customers. The results in Table 5

are mixed and difficult to interpret. When the initial cash flow variable is used, the

coefficient is insignificant. However, when positive and negative observations are

separated into two variables, the variable with positive observations has a negative

coefficient (significant at the 6.7% level), while the variable with negative observations is

insignificant. This result means that the larger positive cash flow the supplier has, the

less trade credit it is willing to extend to its customers. Petersen and Rajan (1997) find

that the firm’s ability to generate cash internally from operations is statistically significant

but its sign is unexpectedly negative. However, when they elaborate their analysis, they

find that only losses are significantly negatively correlated with accounts receivable, and



conclude that firms in trouble extend more credit to maintain sales. Our results may be

considered exactly the opposite to theirs.

Price discriminationPrice discrimination is a practice whereby different buyers arecharged different

prices for the same product for reasons other than any differences which exist in the

costs of supplying them. Monopolists will often enjoy the power to discriminate in this

way. Our measure for price discrimination is the monopoly power of the firm measured

by the ratio of contribution margin (sales minus variable costs) to assets. (See, e.g.,

Ferguson et al., 1993, for formal derivation and discussion).

In our sample of large Finnish firms, it appears that price discrimination is by far the

most important variable explaining accounts receivable management policies. Its

coefficient is positive and statistically very significant in both models I and II in table 5.

Cost of alternative capital. We use the annual average three-month HELIBOR rate

to measure the underlying cost of capital. We expect to find a positive association

between accounts receivable and the interest rate level, because the demand for trade

credit can be expected tobe highest when the cost of alternative sources of funds is

high. Table 5 shows that the interest rate has a significant positive coefficient in both

models I and II (p = 0.099).

TimeOur model includes eight year-dummies to control for annual changes with

1997serving as the control year. All coefficients of the year-dummies are

negative indicating that the level of trade credit was highest in 1997.

Interestingly, the negative coefficients are statistically significant during the

period 1991–1993, when the economic conditions in Finland were weak. Thus,

it seems that the deep economic recession reduced the amount of trade credit

extended.

Industry



The coefficients of the industry dummies for manufacturing and mining

firmsand for retail and wholesale firms are both positive and very significant.

This indicates that firms in these industries extend more trade credit than in the

two other industries (electricity supply and construction; other services).

Accounts PayableTable 6 presents the results from regressing accounts payable on their

suggested determinants. The variables (including control variables) are for the

most part the same as above in the model estimated for accounts receivable.

Additionally, there are two new variables: purchases (scaled by assets)

describing the supply of trade credit and the ratio of current assets (financial

assets and inventories) to total assets measuring asset maturity.

Model III in table 6 is estimated using the ’original’ explanatory variables,

whereas in model IV the sales growth and cash flow variables are both

separated into two variables one containing positive observations and the other

negative observations.

Supply of trade credit.Petersen and Rajan (1997) use the fraction of the

firm’s annualpurchases made on account as a proxy for the quantity of trade

credit offered to the firm. Their sample consists of small firms some of which

may be credit rationed by suppliers. Since our sample firms are larger firms we

make an assumption that all purchases are on credit and use their annual

purchases as a proxy for the supply of trade credit. We believe that this

assumption is not very restrictive, since large firms typically don’t pay their

purchases in cash. In measuring the supply of trade credit we have an

advantage over previous research since we know the exact amounts of the

sample firms’ annual purchases. Petersen and Rajan had to estimate the

amount of purchases to measure supply of trade credit since U.S. firms do not

provide information on the division of cost of goods sold into different cost

categories such as wages and purchases.

Because we use a proxy for the supply of trade credit, we can be more

confident in interpreting the coefficients of the other variables in the model. The



regressions for accounts receivable and accounts payable differ in this respect,

since the coefficients of the former regression are reduced form coefficients that

include both demand and supply side. (Petersen andRajan, 1997).

The result concerning the supply of trade credit is clear and expected:

purchases are statistically significantly associated with accounts payable, and

their coefficient is positive. That is, an increase in the supply of trade credit

enhances the level of its use.

TABLE 6.The determinants of accounts payable.

Dependent variable: accounts payable/assets

Model III (N = 911) Model IV (N = 909)

Variable Coefficient Significance Coefficient Significance

level level

Purchases . 018 . 000 . 019 . 000

LN(book value of assets) . 005 . 000 . 004 . 000

LN(1 + firm age) –. 001 . 402 –. 002 . 134

% sales growth –. 0006 . 006

% sales growth if positive, 0 –. 012 . 000

% sales growth if negative, 0 . 082 . 000

Operating cash flow . 085 . 000

Cash flow when positive, 0 . 083 . 001

Cash flow when negative, 0 –. 128 . 062

Current assets % total assets . 041 . 000 . 043 . 000

Market interest rate . 825 . 037 . 795 . 037

Year - dummy 1989 –. 076 . 040 –. 074 . 039



Year - dummy 1990 –. 091 . 020 –. 085 . 038

Year - dummy 1991 –. 091 . 020 –. 082 . 029

Year - dummy 1992 –. 088 . 027 –. 085 . 026

Year - dummy 1993 –. 044 . 016 –. 041 . 019

Year - dummy 1994 –. 019 . 049 –. 016 . 083

Year - dummy 1995 –. 027 . 014 –. 026 . 014

Year - dummy 1996 –. 007 . 163 –. 007 . 194

Manufacturing and mining . 023 . 000 . 023 . 000

Wholesale and retail trade . 047 . 000 . 049 . 000

Other services . 004 . 528 . 006 . 299

Constant –. 062 . 001 –. 053 . 005

Adjusted R - squared . 241 . 000 . 281 . 000

Creditworthiness and access to capital marketsThe results in table 6 show that asset sizeis a very significant explanatory

variable for accounts payable in both models III and IV. How-ever, firm age remains

insignificant in both models, even when the square of age is added in the model

(coefficient not reported). We add the squared age variable, because previous re-

search provides evidence that older firms have less investment opportunities than

younger firms,and therefore they need less external funding.

The results concerning size and age contradict the notion that larger and older

firms would use less trade credit than smaller and younger firms. The positive sign of

the size variable indicates that large firms which even otherwise have easier access to

the capital market use more trade credit in their financing. Also Petersen and Rajan

(1997) find that there is a weak positive correlation between the level of accounts

payable and firm size.

Growth



Theoretically, it may be argued that rapidly growing firms have better investment

opportunities than other firms and would thus be willing to use more trade credit as a

partial source of financing for new investments. However, the empirical results show

just the opposite. As a whole, sales growth is negatively associated with accounts

payable (model III). When this variable is separated into two variables one containing

the positive values (negative values are set to be zeros) and another containing the

negative observations (positive values set to be zeros), both variables are very

significant. On one hand, the coefficient of positive growth is negative indicating that the

faster a firm is growing the less it uses trade credit in its financing. On the other hand,

the larger the sales decrease, the less trade credit a firm will use. Therefore, the

maximum amount of trade credit is used by firms who grow slowly or not at all.

Consistently with the theory explained above, Petersen and Rajan (1997) observe the

mirror image of our results while they find that the more a firm’s sales is growing or

decreasing the more it uses trade credit. One explanation to the different results is that

Finland is traditionally a bank-dominated environment, and firms may rather turn to

financial intermediaries (banks) than to extend the use of trade credit when their level of

growth deviates from normal growth in one direction or another.

Internal financingThe results show that operating cash flow is a significant explanatoryvariable for

accounts payable with an initially positive coefficient (model III). However, when it is

separated into two variables (model IV), it appears that the coefficient of positive cash

flows is positive and the coefficient of negative cash flows is negative. This result means

that the most liquid firms use more trade credit than the average firm and the same

holds for firms with negative internal financing. The latter part of this result is consistent

with the notion that firms in trouble use more trade credit, and it is also in line with

Petersen and Rajan’s (1997) results.

Asset maturityThe proportional share of current assets (current assets/total assets) is a(very)

significant explanatory variable for the level of accounts payable. This is in line with the



theories stating that firms attempt to finance assets of certain maturity with funds having

the same maturity. This is done to schedule repayments of the financial capital to

correspond with the decline in value in the firm’s assets (Myers, 1977; Diamond, 1991;

Hart and Moore, 1991). Therefore, short-term (current) assets are financed using short-

term debt such as accounts pay-able, while long-term assets are financed using long-

term debt or equity.

Cost of alternative capitalMarket interest rate is a significant explanatory variable foraccounts payable. It

may be noted that it is statistically more significant than in the model(s) estimated for

accounts receivable. This result may support the notion that movements of the market

rate affect in particular the demand side of trade credit.

TimeThe results concerning the year-dummies indicate that the level of accounts payable

was highest during the control year 1997. All dummies except that of the year 1996

have statistically significant negative coefficients.

IndustryIndustry effects are similar to the regressions for accounts receivable. The

coefficients of the manufacturing and mining industries and the retail and wholesale

industries are both positive and very significant indicating that firms in these industries

use more trade credit in their financing than in the two other industry groups.

CONCLUSIONThis study empirically examined the determinants of Finnish listed firms’ accounts

receivable and accounts payable management policies. The results show that accounts

receivable are strongly affected by the firms’ incentive to use trade credit as a means of

price discrimination. Market cost of capital also has an effect on their level. The latter

result may be largely explained by increasing demand of trade credit when market

interest rates rise.



All the variables that were used to explain the level of accounts payable were

statistically significant although their signs were not always expected. The results show

that the most important variables behind accounts payable policies are supply of trade

credit, firm size, level of interest rates, asset maturity, and internal (insufficient)

financing.

The results of this study differ in many aspects from previous results obtained using

U.S. data. These differences may largely be due to differences between the Finnish and

U.S. capital markets, since Finland has a bank-based system much like those of

Germany and Japan. Corporate bond markets are basically non-existent, and banks

form the major source of capital even for most large firms. One obvious line of further

research would be to examine the role of bank-borrower relationships, as financial

intermediaries are an alternative source of capital for trade credit. However, data on

relationships between firms and banks is private, and data samples containing such

information are not publicly available

REFERENCES: http://www.htmlpublish.com/convert-pdf-to

html/success.aspx?zip=DocStorage/da1132e3bdaf4baab53963a75cda2442/

lta_2000_04_a2.zip&app=pdf2word#

5.0 Management of Accounts Receivable

PREFACEThis guide accompanies the Auditor-General’s Audit Report No. 29, Management

of Accounts Receivable in the Commonwealth. It is intended toprovide an overview of

the current trends and "better practice" approaches that are being adopted by

organizations in managing accounts receivable.

In the commercial world the way in which organizations manage their accounts

receivable has significant implications for the financial health of those organizations.

This creates an imperative to ensure the management of receivables is both

efficient and effective. The practices used in common business processes such as

accounts receivable management have universal application and are not industry



specific. In this regard there are lessons to be learned by others from the practices

followed by organizations for whom accounts receivable is a core business process.

The better practices discussed in this guide are therefore recommended for

consideration by Commonwealth government agencies.

Not all of the practices outlined in this guide will suit each agency’s

circumstances, however, it is considered that most agencies, which derive revenue on

sale of goods and services on credit terms, will benefit from benchmarking their current

practices against those detailed in the guide.

INTRODUCTIONEffective management of accounts receivable presents important opportunities

for agencies to achieve strategic advantage through improvements in customer service,

cash management and reductions in costs.

The primary objective of accounts receivable in the Commonwealth public sector

is to collect monies due and to assist in meeting cash flow requirements. An effective

accounts receivable function can assist in achieving the desired cash flow outcome

through the timely collection of outstanding debts.

All agencies also have an objective of continually improving customer service. A

large number of agencies which operate as businesses are required to perform public

services under a full or partial cost recovery arrangement. Effective accounts receivable

management can assist agencies improve customer service through providing timely

information on customer requirements and by making dealing with the agency as easy

as possible.

All government agencies, including those operating in a monopoly, are required

to demonstrate contestability - that is delivery of a high quality standard of service at a

cost that is comparable to providers of similar services operating in similar

environments. Improvements in accounts receivable management which reduce the

cost of collecting monies can improve an agency’s ability to demonstrate contestability

and accountability.

INPORTANCE OF ORGANIZATIONAL CULTURE



An international receivables management benchmarking study commissioned by

the Australian Taxation Office has highlighted the importance that organizational culture

has in the successful management of accounts receivable. The study, which involved

the survey of five international taxation agencies and eight domestic organizations for

which accounts receivable is a strategic issue, indicated that management attitudes

need to support practices for minimization of debt.

All agencies should adopt a culture whereby staff are encouraged to obtain

payment, where required, and not just focus on program or service delivery.

THE ACCOUNTS RECEIVABLE PROCESSA typical accounts receivable process is mapped below.

The process commences with a receipt of a customer order and ends with the

collection or write off of a debt.

Financial management functions such as accounts receivable have been

traditionally viewed as transaction processing activities. An international benchmarking

study referred to in the Paying Accounts Better Practice Guide issued by the ANAO in

November 1996 indicated that up to 65 per cent of time was spent on non-value added

activities across all government and industry sectors. The study suggested that the

elimination or reduction of non-value tasks can be effected through better work

practices and automation ofprocesses. This can be achieved by analyzing current

processes and redesigning them to remove as much manual intervention as possible,

reducing rekeying and appraisal activities and minimizing operator error. An important

part of this analysis is a formal, structured risk assessment which identifies and

measures exposures associated with the accounts receivable process.

The following diagram highlights the opportunities available for improvement

through better practices.

Significant advances in accounts receivable performance and process efficiency

are available to agencies through the following five complementary key management

initiatives:

• Re-engineering accounts receivable

• Risk assessment



• Use of advanced technology

• Debt collection processes

• Performance Measurement

These matters are addressed in the following chapter.

RE-ENGINEERING ACCOUNTS RECEIVABLESome large private sector organizations have achieved real cost reductions and

performance improvements by re-engineering the accounts receivable process. Re-

engineering is a fundamental rethink and re-design of business processes which

incorporates modern business approaches.

The nature of accounts receivable is such that decisions made elsewhere in the

organization are likely to effect the level of resources that are expended on the

management of accounts receivable. An illustration of this point is the extra effort that

must be put into debt collection where credit policy is poorly administered or too freely

given. The strong linkages between different processes means that true improvements

cannot be achieved without focusing on all aspects of the management of accounts

receivable.

The following better practices present opportunities to improve the accounts

receivable function.

Centralized ProcessingA better practice for the delivery of finance services is the adoption of centralized

processing for finance functions such as accounts payable and accounts receivable.

Centralized processing groups are typically high volume transaction processing centers

servicing multiple operating groups. Their establishment achieves a number of benefits

for the organization. These include the achievement of a high degree of specialist

expertise in the function supported, the establishment of centers of excellence that

develop and enforce common practices and standards and the achievement of cost

efficienciesthrough the co-locating of systems and staff. The establishment of these

centers also frees up other staff for more value adding work.



One private sector firm reduced its total finance staff numbers by 12 per cent

through centralized processing.

Standing PaymentsResearch into better practice indicates that repayment rates are significantly

enhanced by providing customers and debtors with alternative payment approaches. In

addition to there being alternative payment methods there are also alternatives to

issuing invoices in the traditional accounts receivable processing approach. These

alternative payment strategies result in efficiencies in the management of accounts

receivable.

An approach that is available to agencies which deliver services on a regular

basis resulting in recurring invoicing and receipting cycles is to arrange for the provision

by customers of standing payments. An annual or bi-annual settlement can be

undertaken to reconcile payments to services provided. The process can be facilitated

by providing customers with regular updates of fees charged.

The benefits of this approach to the service providers is the reduction of costs

through the removal of the need for an invoicing and debt collection function and the

more timely receipt of revenues. There is also benefit to the customer through the

streamlining of payment processes. The approach is most effective if adopted in

conjunction with payment by direct debit of customer bank accounts.

Alternative payment optionsPrivate sector organizations and public authorities are finding that payment of

accounts outstanding is likely to be quicker where a number of payment alternatives are

made available to customers. They also find that the availability of convenient payment

methods is a marketing tool that is of benefit in attracting and retaining customers.

The following modern payment methods are available and provide the benefits of

added customer service, reducing remittance processing costs and improving cash flow

through faster debtor turnover.



Direct debit - involves authorization for the transfer of funds from thepurchaser’s bank

account; this approach has the advantage of reduced processing costs, however it can

present security exposures.

Integrated Voice Response - a system which combines use of human operatorsand a

computer based system to allow customers to make payments over the phone,

generally by credit card; this system has been proved highly successful in organizations

which process a large number of payments regularly.

Outsourced Agency Collection - payments are collected by an external agencyunder

a contractual arrangement (e.g. Australia Post). The payment methodunder this

approach can be either cash, check, credit card or EFTPOS. This method increases

flexibility and convenience to the customer which may lead to improvements in the rate

of payment. A variant on this approach is BPAY, a system whereby banks act as

outsourcing partners by collecting payments from suppliers’ customers and directly

crediting supplier accounts.

Lock Box processing - an outsourced partner captures check and invoice dataand

transmits the file to the client agency for processing in that agency’s systems. This

approach transfers the cost of data collection to service provider.

Other payment methods such as use of data kiosks by customers in public use

areas and payment for goods and services via the Internet are likely to become readily

available in the near future.

Each of the above payment types have advantages and disadvantages which are

likely to be peculiar to the environment that particular agencies operate in. Agencies

need to balance the benefits in both the payment and receipting processes against the

costs that some payment options may present to the agencies themselves.

Marketing and educational activities can be used to promote timely payment.

Agencies should provide information on the nature of products or services

available, the required payment cycle, payment options available and the consequences

of non payment.



Customers should be aware of their liability at all times. A practical way of

achieving this objective is the issue of monthly customer statements.

Use of Payment IncentivesPrivate sector practice has been to, over time, reduce the level of reliance on

discounting as an incentive for prompt payment. However, the practice is still used in

government instrumentalities in Australia and should be considered by agencies which

have problems with debtor turnover. Discounting can be used as an incentive for

customers to pay upon receipt of services, thereby avoiding the use of credit terms.

While discounting has the advantage of potentially shortening the average

collection period it also reduces net revenue. Before deciding to offer discounts

agencies should conduct an analysis of the effect that the utilization of discounting will

have on net revenue. This estimate should be balanced against the costs of continuing

to hold receivables at their existing levels, which is effectively the market interest rate

applied to the annual carrying cost of receivables. Another issue for consideration is the

alternative uses to which the funds tied up in receivables could be put.

In addition to developing a range of incentives for early payment agencies should

consider the imposition of penalties on late payment. In designing penalties agencies

should be aware of legislative and policy considerations which may reduce the potential

for major penalties such as removal of service.

Case management approachWhere individual customers have strategic importance to the agency a case

management approach may be adopted to the management of the agency-customer

relationship. Under this approach all aspects of the relationship are drawn together

including debt management. The increased knowledge of the customer that derives

from the adoption of a case management approach can assist in the design of

strategies for the prompt repayment of debt.

Risk assessment



Risk assessment is a major component in the establishment of an effective

control structure. Once risks have been properly identified, controls can be introduced to

either reduce risks to an acceptable level or to eliminate them entirely. A proper risk

assessment also creates opportunities for freeing processes from inefficient practices.

In managing accounts receivable the key areas that management should focus

on for the purpose of conducting a risk assessment are:

• debt management processes, and

• outstanding debts and debtors.

Debt management processes The risk analysis involves a re-think of processes and questioning the way that

tasks are performed. A risk assessment opens the way for efficiency and effectiveness

benefits in the management of accounts receivable. In particular, processes can be re-

designed to achieve the following benefits:

• the establishment of clear and concise policies for issuing credit and for

recovery of debt;

• the removal of non-value adding tasks and clarification of roles and

responsibilities, by, for example, streamlining delegations;

• the establishment of controls where exposures are noted;

• allowing staff to apply more initiative and ingenuity to everyday tasks and;

• the identification of new and more effective ways of delivering services.

A credit policy document is a key component of the accounts receivable control

environment and needs to cover all aspects of revenue and debt collection practices. It

needs to be:

• written in plain English so that it is understandable by staff and customers;

• accessible to all staff who are required to administer it; and

• made available to customers in summary form. In addition, it should

• establish a financial threshold under which it is uneconomical to pursue

recovery action;

• set down criteria against which a debt might be considered for waiver;



• be kept up to date. This means it should be reviewed at regular intervals so

that consideration can be given to incorporating new practices or initiatives,

and

• be endorsed by executive management

Agencies should be aware that the credit term set in a credit policy will have a direct

impact on their terms of trade.

A checklist of features which should exist within a good policy document is included as

an appendix to this Guide.

Outstanding debts and debtorsThe application of a credit policy will not be fully effective unless there has been

a comprehensive risk analysis of the customer population performed. This can be

achieved by having detailed information on the characteristics of customers (and

potential customers) and through the establishment of criteria against which to assess

the credit worthiness of individual customers.

The criteria needs to be laid out in the credit policy. Sufficient information on

customers will need to be held on a comprehensive customer database. Key

components of the database are:

• billing name and address;

• credit information;

• place of purchase;

• date of purchase;

• special service requirements (will vary with the nature of the service);

• method of payment;

• payment history; and

• customer type.

This database will need to be regularly maintained and updated.

Use of Advanced Technology



Advances in technology present an opportunity for improvement in accounts

receivable processes. The principal innovations available are the integration of systems

used in the management of accounts receivable, the automation of debt collection

processes and the use of electronic commerce.

Systems IntegrationImprovements are available from the integration of the revenue and accounts

receivable systems. This integration results in remittances being automatically credited

against a customer account with a simultaneous update of the general ledger. This

process avoids the downloading of data and re-keying.

A fully integrated system could exhibit some or all of the following features:

• electronic invoice; which extracts details from database of approved

customers, credit terms and which is authorized electronically;

• quantity, price and account code for sales entered once only, on invoice;

• electronic notification of delivery of goods/services;

• customer and account code details extracted automatically from

customer order for payment;

• automation of reminder letters, and

• automatic triggering of write-off or waiver action.

Electronic CommerceElectronic commerce is a term applied to the use of computer and

telecommunications technologies, particularly on an inter organizational basis, to

support trading in goods and services. It uses technologies such as electronic data

interchange (EDI), electronic mail, electronic funds transfer(EFT) and electronic

catalogue systems to allow the buyer and supplier to transact business by exchanging

information between computer applications systems. This achieves cost savings by

removing the need for direct negotiation between the parties.

The Commonwealth government has required departments, through

itsCommonwealth Electronic Commerce Service, to ensure that all suppliers



andpotential suppliers of goods and services are given the opportunity to transact their

business electronically. In its Statement of Direction on electronic commerce issued in

July 1996 the government noted:"There is, in addition, an unrealized potential for the

wider application of other electronic commerce technologies."

The Statement indicated that individual departments should:"take account of the

opportunities offered by electronic commerce in their business planning processes, and

include in their information technology and telecommunications strategic plans relevant

provisions covering the use or intended use of electronic data interchange both for core

functions and in support applications."

The objective of the Commonwealth Electronic Commerce Service to date has been to

promote the use of electronic commerce by government agencies in purchasing. It is

proposed to extend the system to payment of accounts in the near future. In situations

where the government service recipients are other government agencies or non-

government organizations which operate IT systems which have electronic commerce

capabilities the potential exists for use of electronic commerce in accounts receivable.

This potential is likely to increase in the future.

Debt Collection processesDebt collection processes should be undertaken with the objective of reducing

outstanding accounts while keeping sight of the need to maintain customer goodwill, in

an environment of cost restraint.

Better practice in debt collection includes the following:

• assessment of debts against a financial threshold before proceeding with

recovery action;

• review of the accuracy of invoices following failure by debtors to respond to a

letter of demand;

• categorize debtors in accordance with their ability and willingness to pay.

• Tailor debt collection processes in accordance with results of this analysis;



• prioritize debt on the basis of risk indicators. The indicators could include the

payment history of the customer, debt level, demographics, etc;

• communicate directly with debtors most probably by phone and obtain

personal commitment as to repayment schedule;

• staff have the authority to negotiate payment options within guidelines,

without further approval from management;

• treat debt collection as a specialist function. Recruit specialists as required

and provide appropriate training; and

• consider outsourcing all or part of the debt collection process to a private

collection agency. Where debt collection is outsourced agencies should

ensure that the Information Privacy Principles as laid down in the Privacy Act

1988 are complied with.

Of vital importance in the design of debt collection procedures is the need to be

proactive about the recovery process. Credit industry advice is that the more a debt

ages, the greater is the risk of non-recovery. Estimates are that allowing a debt to age

more than 90 days increases the risk of non-recovery by at least 20 per cent.

Performance MeasurementAn integral part of the re-engineering of any finance function is to develop a suite

of indicators which will measure progress over time.

The following tables may be used by agencies both to establish performance

indicators and to measure improvements which result from re-engineering the accounts

receivable process. Each list should be modeled and adapted as necessary to suit the

requirements of individual agencies.

Table 1 is an example of a type of value analysis. Under this approach the data

on time spent on each part of the process would most likely be based on estimates. The

benefit of this approach is that it makes clear to managers the proportion of time that is

spent on non-value adding activities in the accounts receivable cycle. This type of

analysis is not an absolute indicator of cost effectiveness of processing as it takes no

account of costs, however, it does demonstrate the interrelationship between the



various steps in the process and therefore opportunities to reduce non value added

activities.

Table 2 provides examples of the types of performance indicators that agencies

can use to measure themselves against both standard and best practice, at a point in

time and over time.

Following is an outline of the possible uses of some of the measures of effectiveness

in accounts receivable management:

Debtors turnover - This ratio measures the average period for which salesrevenue

will be held in accounts receivable. This measures the efficiency and effectiveness of

receivables collection.

Accounts Receivable to Revenue ratio - This ratio can be used to highlighttrends in

the level of investment in accounts receivable. Where accounts receivable as a

proportion of monthly revenue exceeds an established bench mark, thereby indicating

the possibility of interest foregone, the matter can be highlighted for management

attention.

Receivables Aging Schedule - This schedule is a listing of debtors by agingcategory.

Analyzing this schedule allows Accounts Receivable management to spot problems in

accounts receivable early enough to protect the agency from major revenue problems.

It may also assist in highlighting individual delinquent accounts.

In addition to measuring the effectiveness of the accounts receivable process as a

whole specific debt collection techniques and their effectiveness should be monitored.

This information can be used when assessing alternative debt collection strategies. It

is of assistance when conducting assessments of this type to be cognisant of the costs

of the relative collection strategies.

An important consideration in this process is the cost of measuring and

analyzing performance data. Where possible agencies should seek to have



performance information on activities such as accounts receivable part of their

Financial Management Information Systems.

The current move ofCommonwealth agencies from cash based accounting

systems to accrual systems presents an opportunity for agencies to include the

production of performance information as a feature of any new systems.

It is also critical that reports be timely, present information in a readily digestible

fashion and that they are directed to the appropriate levels of management. Reports

presented to higher levels of management are more effective when they are presented

in summary form, often with table or chart form presentations. Reports containing too

much data are unlikely to be effective. Better practice would be to obtain management

input into the design of reports to ensure that the reports are used as intended. A good

starting point in designing management reports is to carry out a survey of users to

establish what they like and dislike about the current suite of reports.

Table 1 - Example of Value Analysis of Accounts Receivable Activities

Activity Value Current Current Target

Hours% Time Hours

TimeSet price VA

Grant credit BR

Make sale VA

Issue Invoice BR

Update receivables ledger BR

Deal with customer inquiry NVA

Receipt payment VA



Issue monthly statement NVA

Issue letter of demand NVA

Determine repayment schedule with NVA

debtor

Match payment to invoice BR

Code: VA - value adding; NVA - non value adding; BR - business requirement

Table 2 - Suggested performance indicators

Indicator Current Target Common BestBenchmark Practice

Benchmark

Efficiency MeasuresInvoices processed per Full 1000 5000

Time Equivalent (FTE) staff

member per month

Remittances processed per 2000 8000

FTE per month

Debtors contacted per FTE

per month

Direct labour cost per *

invoice/remittance/debt

collection action

Cost of accounts receivable 0.3% 0.15%



as a percentage of revenue

from credit sales

Cost of accounts receivable

as a proportion of total administrative costs

costs will vary with the nature of invoice production and issue, the nature of

remittance and the type of debt collection actiondependent on nature of businessa

relatively low figure will indicate better practice, however, the level of doubtful debts

will be influenced by factors outside accounts receivable management such as

accounting policy.

APPENDIXThe following is a checklist of features which should exist within a good policy or procedure document.

The policy is endorsed by an Executive Officer

The policy is based on a risk assessment of the agency and it’s customers. This is

recognized in the document by stating the risk factors.

The policy:

• Explains the nature of debts and debtors

• Outlines the agency’s rights and duties with debtors; and legal

consequences.

• Details the terms of trade and circumstances when a delegate may

change the terms of trade

• Identifies other related procedure manuals, legislation which can guide

processing of debts.

• Outlines mode of payment accepted and under what conditions (eg any

transaction less than $1,000 must be by credit card)

• Identifies mechanisms for reviewing requests from debtors



• Outlines general procedures for handling unusual requests or events

• Outlines who is responsible for debt collection

• States how and when to communicate with a debtor regarding an

overdue amount

• States procedures to recover debts from employees

• Lists options for recovering an overdue debt (e.g. allow installments)

• Describes the use of commercial debt collection agencies

• Identifies whom has the authority for determining the mode of collecting an

overdue debt (e.g. installments) and identifies circumstances to guide the

decision.

• Identifies when to record a debt as overdue (including whether a period

of grace applies).

• Details procedures for imposing charges

• Details the preparation of and requirement for certain report production

• Identifies means of monitoring debts

• Outlines the process of managing dishonored checks

• Lists circumstance when debts no longer need to be pursued and whom

has the authority to decide not to pursue a debt

• States clear and comprehensive standards of performance (including the

desired relationship with the customer) and targets for the timing of debt

collection (e.g. 80% within 30 days from date of invoice).

• Details the requirement to review the policy and procedures - when,

whom by

REFERENCE: www.ahao.gov.au/uploads/.../Management of Accounts

Receivable.pdf

ANALYSIS/SYNTHESIS:The proponents notice the complex process of the AR and AP in different

firms, from household AP/AR to a commercial and business organizations. They

have different Payables components. Same is true in what they receive. But one


http://www.ahao.gov.au/uploads/.../Management%20of%20Accounts%20Receivable.pdf

http://www.ahao.gov.au/uploads/.../Management%20of%20Accounts%20Receivable.pdf


thing in common that matters most is the generation of a specifically detailed report

that an accountant can rely on. Though it differs from time-to-time updates (weekly,

monthly, quarterly, annually, etc.), they still spread out the clear details of where the

company's budget is allocated. They also have a good communication along with

the governing bodies of law that constitutes their economical process. Of course,

each company mentioned above has a unique set of computations of their

accounting process. We observed how relevant the AR/AP process in accounting.

It serves as a "balancer" in accounting core group. But due to economic

differences, some AP/AR structural figures are differently defined along with other

accounting subsystems.

SYNTHESIS/ANALYSIS MATRIX

Rel. Literature Findings Proposed system specs Synthesis/Analysis

Includes Treasury Mgmt. Originally doesn’t include

treasury mgmt.

Treasury is now a part of the

core processes of AP/AR

Online-based transactions Not connected online Due to scope definition,

It does not need to be connected

online.

Bank-Related process No banking processes For easy monitoring, it has no

bank accounts included.

Report Generation Generates Report It generates a more detailed

report, ready to be viewed and

to be printed.

Credit/Debit presentation Description/Viewing of AP

and AR

Displays a form of AP

designation and has a table

representing the descriptive

aspect s of AP and AR.

End of the month Report

presentation

Daily update, directly

generated in the GL

Directly updates the transactions

being processed



Legality issues being

addressed to avoid

business anomaly

Business rules is also

considered, but with

minimal definitions.

Follows the legal way of

transaction process.

BESTLINK COLLEGE OF THE PHILIPPINES

College of Information Technology#1 044 Brgy Sta. Monica, Quirino Hi-way Novaliches, Quezon City

Questionnaires :

1. Can we have the origins of the previous system being used?

2. What is the difference between AR and AP? (Accounts Payable/Receivables) in

your system?

3. What particular accounts do you handled difficult?

4. Can we know how you compute the AP/AR in your existing system?

5. What specific reports do you issue?

6. Who is/are the personnel using the system?



7. In your case, as a Security Agency, what particular payables and receivables do

you have?

8. Do you use Purchase Order? How?

9. Do you use Receiving Reports? How it goes along with the system?

10.How about the Vendors invoice.

11. Can we have a sample of your forms/reports?

12.How do you update your account payables and receivables? Is it weekly,

monthly, quarterly, etc?

13.Do you encountered problems while using the system?

14.Can we know the System’s scope?

15.When using the system, do you have in mind that you must have an assistant?

Why or why not?



16.How the Manager/Head monitors the transaction process?

17.What database management you use?

18. How can you describe its connection with your treasury system? Can we view

them?

19.Just in case, what particular perspective do you want to your existing system to

change?

20. Is this system can be operated only by accountants, or it is an easy-to-use to

other assigned personnel?



Chapter III-EIS PROJECT MANAGEMENT AND DEVELOPMENT

RISK MITIGATION, MONITORING, AND MANAGEMENT PLAN

1.0 INTRODUCTION

This section gives a general overview of the risk mitigation, monitoring, and

management for the APART MS.

1.1 SCOPE AND INTENT OF RMMM ACTIVITIES

The proponents targets a goal to create an IS software with less defects, but

in reality, there’s no such thing as a perfect software. In this regard, risk

management plan must be considered as a must in creating a system software.

Early identification of errors is the best possible ways to prevent it. The goal of

RMMM in creating system software is to check out future risks that the creators

and the proponents may encounter.

1.2 RISK MANAGEMENT ORGANIZATION ROLE

Proponents are assigned to handle each task of managing the risk. It is a

must so that every errors they encounter, they have possible remedies to apply.

Software development can avoid having errors by double-checking their

schedule, product size, estimated time and cost, etc.

Providing all necessary software during the early phase of the

development.



Software development team can avoid risk by getting all the details of the

equipment that are provided or accessible to them.

Client can avoid risk by making all necessary business changes before

initialization of request.

2.0 RISK DESCRIPTION

This section describes the risks that are likely to be encountered during this project.

2.1 RISK TABLE

The following table describes the risks associated with the project. The

appropriate categories of the risks are also given, as well as probability of each

risk and its impact on the development process.

2.1.1 DESCRIPTION OF RISK M2.1.2 PROBABILITY AND IMPACT FOR RISK M

The following is the sorted version of the above table by probability

and impact.

Category Risks Probability Impact

Employee Risks Lack of training and experience 40% 1

Process Risks Low product quality 35% 1

Product Size Where size estimates could be wrong 30% 2

Development Risks Insufficient resources 30% 2

Customer Risks Customer may fail to participate 20% 3

Technology Risks Obsolete technology 10% 2

Business Impact Product may harm the business 10% 3

Table-Risk Table (sorted)Impact Values Description1 Catastrophic



2 Critical

3 Marginal

4 Negligible

3.0 RISK MITIGATION, MONITORING, AND MANAGEMENT

This section in detail describes Risk Mitigation, Monitoring, and Management for

each of the possible risks. It will talk about ways to avoid, monitor, and derive the

information of the risk.

3.1 RISK MITIGATION FOR RISK M3.1.1 PRODUCT SIZE

To limit risks, the existing process of Accounts Payable and

Receivables subsystem under the Service Management System (SMS)

must be mitigated/reduced, without affecting the core process. Simply put,

it only expresses a report of what is paid and received.

3.1.2 BUSINESS IMPACT

The subsystem proposed processes only the Accounts Payable

and Receivable alone, with Treasury for reference.

3.1.3 CUSTOMER (USER) RISKS

To avoid and lessen the mishandling or incorrect operation of the

proposed system, simplification and “HELP” Button on the Information

System must be present.

3.1.4 PROCESS RISKS

Risk factors including data redundancy, in terms of input and Import

and Export process may not function well along with other related IS.

3.1.5 TECHNOLOGY RISKS



Capacity of the required unit (computer/s) cannot meet the

specifications needed for the user and database of the system.

The possibility of a low-end unit being used for a high-end IS.

Competition with other IS being proposed is a risk.

Upgrading of the proposed system in future use.

3.1.6 DEVELOPMENT RISKS

When creating the said Information System, the developer can

encounter several risks:

Unwanted changes

Bypassing or overlapping process that the systems scope may

take in.

Technical error in means of Power Supply, Unit incapability etc.

Can also encounter Piracy cases.

3.1.7 EMPLOYEE RISKS (TEAM MATES) Informal brainstorming, waste of time, knowledge does not meet

system requirements.

Irresponsible members

3.2 RISK MONITORING RISK M3.2.1 PRODUCT SIZE

To limit risks, the existing process of Accounts Payable and

Receivables subsystem under the Service Management System

(SMS) must be mitigated/reduced, without affecting the core

process. Simply put, it only expresses a report of what is paid and

received


The subsystem proposed processes only the Accounts Payable

and Receivable alone, with Treasury for reference.






3.2.4 PROCESS RISKS



3.2.5 TECHNOLOGY RISKS*Capacity of the required unit (computer/s) cannot meet the

specifications needed for the user and database of the system.

*The possibility of a low-end unit being used for a high-end IS.

*Competition with other IS being proposed is a risk.

*Upgrading of the proposed system in future use.

3.2.6 DEVELOPMENT RISKSTime and Cost Resources is limited.

3.2.7 EMPLOYEE RISKS (TEAM MATES)Miscommunications among members can occur and personnel

related cases are expected.

3.3 RISK MANAGEMENT FOR RISK M3.3.1 PRODUCT SIZE

When monitoring our proposed systems process, the proponents

will focus in monitoring the system, in terms of giving time to our proposed

systems process.


While the monitoring is on process, the proponents shall

communicate with the management’s clients the proponents assigned for



us to know if there is/are some adjustments to be done with the proposed

system.


The proponents will put a HELP BUTTON in the proposed system

for them (the user/s) how the proposed system works.

3.3.4 PROCESS RISKS

As a back-up in case of unexpected problems in performing the

work, each proponent must be knowledgeable in the work of each other

given by the group’s Project Manager.

3.3.5 TECHNOLOGY RISKS

The proponents will search/find other techniques for us to make our

clients agree on the proposed system.

3.3.6 DEVELOPING RISKS3.3.7 EMPLOYEE RISKS (TEAM MATES)

4.0 SPECIAL CONDITION

Special conditions that are associated with the software are as follows:

Use of laptops/computers:

The proponents need to make sure that all inspectors at the facility are

comfortable with the use of the units.

Login:

The proponents need to make sure that the person logged in will only

have access to the certain parts of the application, this depends on the rights

granted to the users. The proponents must explain to each user why they are

not able to use some of the certain parts of the applications.



SOFTWARE CONFIGURATION MANAGEMENT PLAN

1.0 INTRODUCTION

During the time of the software development the proponents will be making changes

to our original plans. Software Configuration Management Plan is developed so that the

proponents can identify the change, control the change, make sure that the plans are

implemented correctly and to make sure that the changes will be reported to others.

1.1 SCOPE AND INTENT OF SCM ACTIVITIES

The main purpose of SCM is to make, report and track any changes made to

the original software development plan. It is applied throughout the software

development process and will help the proponents to keep track of changes and

also go through and make changes. SCM procedures will give the proponents a

good map of the software so that if the proponents need to make more changes

it will be relatively east to do. SCM will maximize productivity by minimizing

mistakes.

SCM activities are developed to:

Identify the Changes

Control the Changes

Implementation of Change/s are ensured

The changes have to be documented.

1.2 SCM ORGANIZATIONAL ROLE

Since the proponents have rather a small development team, each member

of the team should accept the responsibility for the software configuration

management. This is necessary since there are only five members in the team.

Each of the five members has to report the sudden changes and the remaining

three members have to take up a job of authorizing change and to ensure that

change is properly implemented. This will ensure that the conflict within the

proponents will be reduced or it should be eliminated.



The proponents will also keep a member on the client’s side just to inform

that all of the changes for the client to be accepted. The changes that do not

really affect user’s knowledge of the software will be presented to a selected

member on the client’s side. These changes will be noted in a specific section so

that the proponents can refer back to them to know what the original plan was

and why the changes were made. If the changes are made or suggested so that

the proponents will affect the way customer uses the software, then those

changes will be discussed with the entire client team. Once a client has decided

to go with the change then and only then will changes be implemented. The

proponents extensively report or document all the changes so that client will have

access to it after the software is packed and delivered.

2.0 SCM TASKS

In this section we will try to detail all-important SCM tasks and will assign

responsibilities for each. All of the SMC tasks will be performed by five members of the

software development team members. We will try to keep one-person from the client’s

team informed of all the changes that do not affect users. All the changes that affect the

use of the software will discussed with entire team on the client’s team during the

meetings.

2.1 IDENTIFICATION

In this section the proponents will describe the way software configuration

items will be identified for the software configuration management plan.

2.1.1 DESCRIPTION Identify change

During the software development phase, a member of a team

suggests a change in the software then the proponents need to have a

team work on the suggestion and figure out if the change/s is

necessary and is justified.



APPROVE CHANGE

The proponents want to be able to have the control over any

change/s within the software. The proponents can’t afford to have one

member of software development team thinks of a change or

implement it without telling the other proponents of the team. This can

be a huge technical problem for the software. The team leader of the

team or proponents Project Manager will create rules so that the

members of the team will ask for permission before to think of and

implement changes in the software.

DOCUMENT THE CHANGE

The proponents will document every little change/s during the

software development in order for the documentation would be

synchronized to the software development. Since change has to be

documented from the time that a team member suggests change to the

time change is finalized, the proponents will end up with extensive

documents.

ENSURED THE IMPLEMENTATION OF CHANGE

The proponents have to look over the change. Since the project

team is working separately, it is possible to have made mistake in

implementing the change. To make sure to settle this, the project team

will set up times when team members will look over the change that

other members have implemented and make it finalize.

2.1.2 WORKS, PRODUCTS, AND DOCUMENTATION Identify change

Once the change/s are identified, a change request form will be

produced and will be send to all the proponents of the project team.

Control change



After the evaluator got the change request form, change report form

will be generated.

Ensured the implementation of change.

Document the change.

Once the change/s are approved, the project team will document

the change in the library.

2.2 CONFIGURATION CONTROL2.2.1 DESCRIPTION

Changes will be controlled by using human procedures and

automated tools. Here are the steps which will be taken in order to control

change/s.

Request for change/s

Change report will be evaluated

Finalized decision on change/s will be made.

If the change/s are approved:

- Define constraints

- Check the tools for changes

- Implement the change/s

- Apply the SQA Activities

- Apply testing Activities

- Rebuilt the software

- Distribute the software

2.3 VERSION CONTROL2.3.1 DESCRIPTION

As a result of the changes, the version number of various modules

will be increased accordingly. The proponents will also have a final

version of the entire product.



Major documentation will also have version numbers, such as User

Manual or Design Specification.

2.3.2 INCREASING VERSION NUMBER

When a change request is filed, a change report will be created.

After the change is finalized, it will be documented in the library. The

proponents will be using a decimal point version number system:

<Major update>.<minor update><bug fix>

Bug Fix

If enough bug fixes have been done on the product, the bug

fix portion of the version number will be increased. The number of

user visible bug fixes will also affect when the bug fix number is

increased. The more visible bug fixe have been made, the closer

the bug fix number will need to be increased.

Minor Update

If the software come up a new process or functionality that

has been added that will make the software increase the user-

friendliness and performance but does not change the way a

function work, the minor update number may be increased.

Major Update

The proponents do not foresee any change in major version

number. The product will be labeled as version 1.

2.3.3 WORKS, PRODUCTS, AND DOCUMENTATION

A single document titled Version Revision History will be used to

document all the version revisions. An online bug report and tracking



system will also be used to monitor and document all the bug fixes and

enhancement requests.

2.4 CONFIGURATION STATUS ACCOUNTING (CSA)

The Project Team will be using three different ways to communicate with the

proponents and to inform others that changes may concern.

2.4.1 DESCRIPTION

There are ways or tools that the proponents will be using to

communicate with the other project team members or the people

associated with software development.

Verbal communication:

Since the software development team is small and all the team

members are in constant touch with each other it would be better to

communicate verbally.

2.4.2 WORKS, PRODUCTS, AND DOCUMENTATION Change request report generator

Emails

Test errors will be documented electronically

All suggestion made during pre interview will be noted.

3.0 SOFTWARE QUALITY ASSURANCE OVERVIEW3.1 SCOPE AND INTENT OF SQA ACTIVITIES3.2 REVIEWS AND AUDITS

3.2.1 GENERIC REVIEW GUIDELINES3.2.2 FORMAL TECHNICAL REVIEWS3.2.3 SQA AUDITS

3.3 PROBLEM REPORTING AND CORRECTIVE ACTION/FOLLOW-UP3.3.1 REPORTING MECHANISMS3.3.2 RESPONSIBILITIES



3.3.3 DATA COLLECTION AND VALUATION

SOFTWARE QUALITY ASSURANCE PLAN

1.0INTRODUCTION

This section gives a general overview of the Software Quality Assurance Plan (SQA)

for the Accounts Payables and Accounts Receivables with Treasury Management

System (APART MS). SQA will focus on the management issues and the process

specific activities that enable a software organization to ensure that it does the right

things at the right time in the right way.

1.1SCOPE AND INTENT OF SQA ACTIVITIES

The Objectives of SQA are:

1.2 SQA ORGANIZATION ROLE

EGO-Structure

2.0SQA TASKS2.1TASK OVERVIEW2.2STANDARD, PRACTICES, AND CONVENTIONS (SPC)



2.3SQA RESOURCES3.0REVIEW AND AUDTIS

A formal technical review (FTR) is a software quality assurance activity that is

performed by software engineers. The Objectives of the FTR are:

1. To uncover errors in function, logic, or implementations for any representation of

the software;

2. To verify that the software under review meet its requirements;

3. To ensure that the software has been represented according to predefined

standards;

4. To achieve software that is developed in a uniform manner;

5. To make projects more manageable.

3.1 GENERIC REVIEW GIODELINES3.2FORMAL TECHNICAL REVIEWS3.3SQA AUDITS

4.0PROBLEM, REPORTING, AND CORRECTIVE ACTION/FOLLOW-UP4.1REPORTING MECHANISMS4.2RESPONSIBILITIES

Since we use the egoless team model, we won’t select a team leader, But

since Manayan, Jun has a lot of real world experience on software development

and has great knowledge on the project, so he’s the de facto leader for the team.

But as far as decision making, no changes will be make unless all five members

agree on it.

- Project Manager/resolving the issue: Manayan, Jun

- Lead Programmer/Handling System Software: Langcauon, Joefel

- Business Analyst/Analyze Business Process: Cabigas, Jayson

- System Analyst/System Design: Goron, Mac Douglas

- Documentary Specialist/release the documentation: San Diego, Mark

Christian



4.3DATA COLLECTION AND VALUATION4.4STATISTICAL SQA

5.0SOFTWARE PROCESS IMPROVEMENT ACTIVITIES5.1GOALS AND OBJECTIVES OF SPI5.2SPI TASKS AND RESPONSIBILITIES

6.0SOFTWARE CONFIGURATION MANAGEMENT AND OVERVIEW7.0 SQA TOOLS, TECHNIQUES, METHODS

SYSTEM SPECIFICATIONS

1.0INTRODUCTION

This section gives a general overview of Account Payables, Accounts Receivables

and Treasury Management System (APART MS).

1.1GOALS AND OBJECTIVES



and treasury. The goal of APARTMS is:

To provide a detailed scenario of our subsystem is been provided.

To provide a view of financial reports being paid and received can

be seen.

Definite journal is been exported directly to GL, while importing

financial updates with BCMS and PMS.

This MS can be accessible in different personnel, whether Admin or

Accountant use.

It includes Treasury Account for viewing, so that any amount that

has been declared as Receivables or Payables, it can be updated

into the Treasury IS.

1.2SYSTEM STATEMENT OF SCOPE



The general statement of the Accounts Payable and Accounts

Receivables with Treasury Management System (APART MS) should be

specified and provided in this section. That is the information has to be produced,

what the major functions are implemented and what data are provided as the

input to Accounts Payable and Accounts Receivables with Treasury

Management System.

1.2.1 GENERAL REQUIREMENTS

The following general requirements were laid out for our project

named APARTMS:

- A way that users could add new facilities to the database.

- A way in which users could generate financial reports.

- A button in which AP and AR reports can be clicked and

viewed.

- A way in which it can import and export valuable data in

other related IS.

- A way it can be easily understood by the user.

- A way in which they could view data that has been entered

into the database prior to our software.

- Interface Enhancements

The APART MS will provide an interface enhancement to

achieve the user-friendliness and usability functionality that is

requested by the client / users.

- Database Administrative Interface

The APART MS will provide a secured database on which

the user could retrieve and save data and information at ease

with the use of MS SQL database.

1.3SYSTEM CONTEXT



Eventually, multiple users will be using the product altogether. Therefore,

concurrent connection will be an issue for implementation. Also, because of

eventual use, it can encounter technical issues.

1.4MAJOR CONSTRAINTS- TIME

The proponent has been given 10 months to finish all project

charter, software copy, and other add-ons. The proponents is

been pressured due to a short time period, and some changes

of the system process has been considered.

- MONEY

Lack of financial support is one of our major constraints. We

can’t have a permanent sponsor to create the project. We also

encountered several technicalities due to a limited number of

PC’s to integrate the said IS.

- PERSONNEL

Since this is a group work, others can’t perform the creation

of system software. Those who are assigned in creating the

project documents have also need other members to research

for the related literature of the proposed IS.

2.0FUNCTIONAL DATA DESCRIPTION

In this section, the overall system functions and the information domain of the

Accounts Payable and Accounts Receivable with Treasury Management System

(APART MS) are being identified and described on which it is implemented and

operated.



2.1SYSTEM ARCHITECTURE2.1.1 ARCHITECTURAL MODEL

2.1.2 CURRENT SUB-SYSTEM OVERVIEW

Help Functions



Each IS has an interface for the user to learn on how to

operate the system well. It is necessary to have a help menu in

order to guide the user when they are having a hard time to operate

the developed system. The instruction under the help menu must

be readable and understandable so that the user can adopt easily.

2.2DATA DESCRIPTION2.2.1 MAJOR DATA OBJECTS2.2.2 RELATIONSHIPS

2.3HUMAN INTERFACE DESCRIPTION3.0SUB-SYSTEM DESCRIPTION

3.1SUB-SYSTEM FLOW DIAGRAMS

Here are some of the diagrams regarding subsystem dataflows.

3.1.1 CREATE CLIENT INFORMATION



3.1.2 CREATE/ADD VENDORS



3.1.3 CREATE/PRINT CHECK VOUCHER



3.1.4 CREATE/PRINT INVOICES



3.1.5 CREATE PAYMENTS



3.1.6 CREATE JOURNAL ENTRY/PRINT (DFD)

3.1.7 LEDGER/T-ACCOUNTS

3.1.8 TRIAL BALANCE



3.1.9 VIEW/PRINT REPORT OF INCOME STATEMENT

3.1.10 VIEW/PRINT REPORT OF BALANCE SHEET



4.0ENHANCED INTERFACE PROTOTYPING

SOFTWARE REQUIREMENTS SPECIFICATIONS


The main purpose of APARTMS is to manage and provide statement of account,

especially AP/AR and helps the accounting personnel to update assets and treasury.

The goal of APARTMS is:

- To provide a detailed scenario of our subsystem is been provided.

- To provide a view of financial reports being paid and received can be seen.

- Definite journal is been exported directly to GL, while importing financial updates

with BCMS and PMS.

- This MS can be accessible in different personnel, whether Admin or Accountant

use.

- It includes Treasury Account for viewing, so that any amount that has been

declared as Receivables or Payables, it can be updated into the Treasury IS.




The general statement of the Accounts Payable and Accounts Receivables with

Treasury Management System (APART MS) should be specified and provided in this

section. That is the information has to be produced, what the major functions are

implemented and what data are provided as the input to Accounts Payable and

Accounts Receivables with Treasury Management System.

1.2.1 GENERAL REQUIREMENTS

The following general requirements were laid out for our project named

APARTMS:

- A way that users could add new facilities to the database.

- A way in which users could generate financial reports.

- A button in which AP and AR reports can be clicked and viewed.

- A way in which it can import and export valuable data in other related IS.

- A way it can be easily understood by the user.

- A way in which they could view data that has been entered into the

database prior to our software.

Interface Enhancements

The APART MS will provide an interface enhancement to achieve

the user-friendliness and usability functionality that is requested by the

client / users.

Database Administrative Interface

The APART MS will provide a secured database on which the user

could retrieve and save data and information at ease with the use of MS

SQL database.

1.2.2 EXTENDED ENHANCEMENT1.3SYSTEM CONTEXT



Eventually, multiple users will be using the product simultaneously. Therefore,

concurrent connection will be an issue for implementation. In addition, this is a pilot

product that hopefully, if successfully, can be used in other locations as well. This leads

to issues about future support for a larger user base.

1.4MAJOR CONSTRAINTS TIME

The proponent has been given 10 months to finish all project charter, software

copy, and other add-ons. The proponents is been pressured due to a short time

period, and some changes of the system process has been considered.

MONEY

Lack of financial support is one of our major constraints. We can’t have a

permanent sponsor to create the project. We also encountered several technicalities

due to a limited number of PC’s to integrate the said IS.

PERSONNEL

Since this is a group work, others can’t perform the creation of system software.

Those who are assigned in creating the project documents have also need other

members to research for the related literature of the proposed IS.

2.0USAGE SCENARIO

This section will define the user level of the Accounts Payable and Accounts

Receivable with Treasury Management System (APART MS). This will define the user

type and the accessibility level upon logging in into the system.

2.1USER PROFILES

The Accounts Payables and Accounts Receivables with Treasury

Management System (APART MS) will have the following levels of users:

Read / View (User)



Full Control (Admin)

Read/ Write/ Modify All (APART Manager)

Read/ Write/ Modify own (Encoder)

2.2USE CASES3.0DATA MODEL DESCRIPTION

3.1DATA DESCRIPTION3.1.1 DATA OBJECTS AND DICTIONARY3.1.2 RELATIONSHIPS

4.0FUNCTIONAL MODEL AND DESCRIPTION4.1SUB-SYSTEM FLOW DIAGRAM

Here are some of the diagrams regarding subsystem data flows.

4.1.1 CREATE CLIENT INFORMATION



4.1.2 CREATE/ADD VENDORS



4.1.3 CREATE/PRINT CHECK VOUCHER



4.1.4 CREATE/PRINT INVOICES



4.1.5 CREATE PAYMENTS



4.1.6 CREATE JOURNAL ENTRY/PRINT (DFD)



4.1.7 LEDGER/T-ACCOUNTS

4.1.8 TRIAL BALANCE

4.1.9 VIEW/PRINT REPORT OF INCOME STATEMENT



4.1.10 VIEW/PRINT REPORT OF BALANCE SHEET

4.2HUMAN INTERFACE5.0RESTRICTIONS, LIMITATIONS, AND CONSTRAINTS

Time



The proponents only have two months to finish all documentation, software

creation and enhancements. We have a lot of ideas but cannot implement them due

to time constraint. One of the major ones is to move the application to be completely

browser-based.

Funding6.0VALIDATION CRITERIA

SOFTWARE DESIGN SPECIFICATIONS

1.0INTRODUCTION

This section gives a general overview of Account Payables, Accounts Receivables

and Treasury Management System (APART MS).




and treasury. The goal of APARTMS is to provide a detailed scenario of our

subsystem is been provided.

To provide a view of financial reports being paid and

received can be seen.

Definite journal is been exported directly to GL, while

importing financial updates with BCMS and PMS.

This MS can be accessible in different personnel, whether

Admin or Accountant use.

It includes Treasury Account for viewing, so that any amount

that has been declared as Receivables or Payables, it can

be updated into the Treasury IS.


The general statement of the Accounts Payable and Accounts

Receivables with Treasury Management System (APART MS) should be



specified and provided in this section. That is the information has to be produced,

what the major functions are implemented and what data are provided as the

input to Accounts Payable and Accounts Receivables with Treasury

Management System.

1.3GENERAL REQUIREMENTS

The following general requirements were laid out for our project named

APARTMS:

A way that users could add new facilities to the database.

A way in which users could generate financial reports.

A button in which AP and AR reports can be clicked and viewed.

A way in which it can import and export valuable data in other related IS.

A way it can be easily understood by the user.

A way in which they could view data that has been entered into the

database prior to our software.

Interface Enhancements

The APART MS will provide an interface enhancement to achieve the

user-friendliness and usability functionality that is requested by the client /

users.

Database Administrative Interface

The APART MS will provide a secured database on which the user could

retrieve and save data and information at ease with the use of MS SQL

database.

1.4SYSTEM CONTEXT

Eventually, multiple users will be using the product altogether. Therefore,

concurrent connection will be an issue for implementation. Also, because of

eventual use, it can encounter technical issues.



1.5MAJOR CONSTRAINTS TIME

The proponent has been given 10 months to finish all project

charter, software copy, and other add-ons. The proponents is

been pressured due to a short time period, and some changes

of the system process has been considered.

MONEY

Lack of financial support is one of our major constraints. We

can’t have a permanent sponsor to create the project. We also

encountered several technicalities due to a limited number of

PC’s to integrate the said IS.

PERSONNEL

Since this is a group work, others can’t perform the creation

of system software. Those who are assigned in creating the

project documents have also need other members to research

for the related literature of the proposed IS.

2.0DATA DESIGN2.1DATABASE DESCRIPTION

3.0ARCHITECTURAL AND COMPONENT-LEVEL DESIGN3.1PROGRAM STRUCTURE

3.1.1 OVERALL



Menu Items

The following shows the Architecture of the main menu:

Accounts Receivable (AR)

Accounts Receivable Entry

Manage Invoices

Receivable Aging

Manage Reports

Print Invoices

Control Billing

Adjusting Entries

Quit Accounts Receivable

Back to main menu/main screen

Accounts Payable (AP)

AP Entry

Vendors Inquiry

Manage Invoices

G/L Distribution

Reports

Quit AP




Treasury

AP/AR Reports

Assets

Tax Declaration (ask on hand)

Quit treasury


Password Maintenance

Change password

Add user

Exit


3.1.2 CREATE AR ENTRY

3.1.3 VIEW AP ENTRY REPORTS

3.1.4 POST TREASURY REPORTS



3.2DESCRIPTION OF COMPONENTS3.2.1 ACCOUNTS RECEIVABLE

Major Form(s):AP_Frame,AR_Entry,Inv,Aging,MReports,PrintInv,cntrcBill,AdjEntry

Major Action(s): View, search, create, edit, save, delete, quit, back

Create

Object-name:cmdCreate

The create button should disabled unless no historical data have been found or selected

for the AR Entry, The users needs to enter a new invoice # and other important details

Edit/Modify

To edit/modify a AR entry, user needs to enter an existing invoice # in txtInvNum Field.

Save

Object-name: cmdSave

The save button should be disabled unless the txtInvNum Field in filled in, and any

changes have been made to any field on the AR Entry form. When the save button is

clicked, new record will be generated but if the Invoice number does not exist in the

system, otherwise current record will be updated.

Delete



Object-name: cmdDel

The delete button should be disabled unless no historical data have been found for AR

Entry.

View

Object-name: cmdView

The view button should be disabled unless historical data have been selected for the

AR entry, contract billing, adjusting entry, manage reports.

Search

Object-name: cmdSearch

To search for a AR entry/Invoices, user can search on invoice number field, when the

existing invoice number is filled in, user can highlight a AR entry in the result grid, then

click OK and all information on AR Entry will be filled in.

Exit

Object-name: cmdExit

When cmdExit is clicked, a warning message will appear to confirm user’s action. If the

user confirms, the form will be closed, and if the user does not confirm on the user

select no option, user will simply be returned to the form.

Back

Object-name: cmdBack

When cmdBack is clicked, the interface will return to the main screen.

3.2.2 ACCOUNTS PAYABLE

Major form(s): AP_Frame, AP_Entry, Vendors_Inquiry, Manage_Inv, Reports

Major Action(s): view,edit



View

cmdViewEntry, cmdViewVendors, cmdViewInv, cmdViewReports

The view button should be disabled unless no historical data have been selected or

found for the AP Entry, vendors inquiry, manage invoice, report.

Edit

Object-name: cmdExitAP

If the user choose a vendor from the list or highlighted a vendor(s), the user can edit the

contents of the vendors information and click save to update the database or the

vendor’s information.

3.2.3 TREASURY

Major form(s): AP_reports, AR_reports, assets, tax_dec

Major Action(s): view

View

When the user selects AP and AR reports or either both,the user can view the reports

by clicking the VIEW button. And also the user can view the assets and tax declaration

by doing the same procedure.

3.2.4 PASSWORD MAINTENANCE

Major Form(s): Pass_Main, change_pass, add_user

Major Action(s): edit, save

Edit

Object-name: cmdEditPass

The user can edit or change his/her password by clicking the PASSWORD

MAINTENANCE in the main menu.



4.0USER INTERFACE DESIGN

There will be about 11 interfaces in the program. This is not the exact number of

interfaces that our system has, because the clients still have to think over on several

interfaces.

4.1 DESCRIPTION OF THE USER INTERFACE

Below are some of the forms in the system. After launching the program, the

login screen will appear. If the user inputs the correct username and password, it

will immediately take the user to the main interface of APART MS.

4.1.1 SCREEN IMAGES

LOGIN SCREEN

MAIN INTERFACE



SAMPLE REPORTS OF AP



VENDORS INQUIRY



4.1.2 OBJECTIVES AND ACTIONS4.2INTERFACE DESIGN RULES

Interface design rules are focused on these areas of concerns:

1. The system must be user-friendly

2. The system must be easy to navigate

3. The system should be readable

4. The system should be easy to learn

5. The system should be maintainability

6. The system should use a minimum of two color and maximum of three

colors

7. The system must be reliable.

4.3COMPONENTS AVAILABLE

The proponents are allowed to use Java Programming language as a general

rule given by the project evaluation committee. The Java Net beans chose by the

proponents to develop the APART MS and as a reference for creating the

system’s front-end. Basically, the proponents are already having a lot of ready-

made components available to develop the proposed system. The following is a

list that the proponents will use for the software development.



4.3.1 INSTRINSIC CONTROLS Label TextField/TextBox ListBox CheckBox ComboBox OptionBox Menu Bar Image CommandButton Etc.

4.3.2 ACTIVE X CONTROLS5.0RESTRICTION, LIMITATIONS, AND CONSTRAINTS

TIME

Time is so far the biggest restriction or constraint for our project as we only have

around three months to finish entire project. It is very important for us to watch the

time we spend over every phase of the software development project. We could

have included many more components to the software like online help menu but

time restricts us from doing so.

Employee Skills

Employees programming and design skills is also one of the restriction. It does

not have as big of an impact on the project as time but it sure does limit us from

doing more addition to the projects.

Insufficient Resources

Not having all the necessary instruments also is a problem for our software. We

planned to use latest equipment for the project like hand held PC with keyboard etc.

but the employees so we had to abandon the plans.

6.0TESTING ISSUES



The APART MS have to validate is functions by means of testing. The proponents

test the APART MS in order to check the possible error that may occur. During the

testing, the proponents are concerned about the input and their expected output when it

process into the system. Emphasizing the input data as they processed and compare

the results as the output. Basically, the proponents are not concerned on the system’s

processes but focused on the correct output of the APART MS.

6.1CLASSES OF TESTS

The APART MS has many different function and forms that describes its

functionalities. The proponents will go through each of the interfaces and other

function to describe different types of test performed on them.

Interface / Forms

The proponents are creating new interfaces using the Java Net Beans. This

interfaces allows the user/clients to manage the AP/AR with Treasury processes

particularly the monitoring of the company’s AP/AR/Treasury, able to print necessary

documents of employees.

Login Window

The proponents will use several different username and password. The

proponents will have to use either correct and incorrect username or password to

access the APART MS and thus access its database. The user will not be logged in if

they insert the wrong username or password. When the correct username and

password will be inserted, the user will be able to log into the next window. This will be

possible upon checking the OK button by performing a proper testing of the function.

SMS-APART MS (Main Form)

This is the main window of the APART MS that the user will use to access the

database using the Java Net Beans.

6.2PERFORMANCE BOUNDS



The proponents have to setup a certain performance bounds or criteria for

the APART MS so that by following this criteria. The proponents will be able to

maintain quality and user friendliness and usability of the software.

6.3IDENTIFICATION OF CRITICAL COMPONENTS

TEST SPECIFICATIONS

1.0INTRODUCTION

This section gives a general overview of the Test Specification for the Accounts

Payables and Accounts Receivables with Treasury Management System (APART MS).


A better information system will work effectively in favor of the user’s needs.

The proposed system will go through tests, all the test outputs will be listed for

the proponents to be aware on unnecessary objects, data flows, limits and

boundaries.

The proponents wants to have a test to monitor future errors in the proposed

system.

1.2STATEMENT OF SCOPE

An overall plan for integration of the software tests are documented in this

section. Below are the different kinds of tests that the proponents will take to

ensure the quality of the software.

Unit Testingo MS SQL Database

o PC Application

o Java Net Beans

Integration Testingo MS SQL Database



o PC Application

o Java Net Beans

Portability Testingo MS SQL Database

o APART MS

o PC Application

Security Testingo MS SQL Database

o APART MS

o PC Application

Performance Testingo MS SQL Database

o APART MS

o PC Application

1.3MAJOR CONSTRAINTS

In this section, the proponents will talk about the business, technical and

resource related constraints that may keep us from performing all the tests

necessarily.

The proponents has a limitation on the time to test the proposed system at

the client’s when it comes to testing because of we cannot test the proposed

system during the company’s working hours.

The proponents have limited funds for testing, the proponents only have one

laptop to make software testing for APART MS. It means that the proponents

cannot test the software using laptop / PC from other brand and other

hardware specification that is lower / lesser price than of the laptop / PC that

the proponents are currently using.



The proponents don’t have enough manpower to perform the software testing and

identify the results. This might be the reason for not be able to test the APART MS into

the larger user base.

2.0TESTING PLAN

The proponents want the product to be bug free. Also want to make sure that there

are no defects in the product. So the proponents will be spending large amount of the

total software development time on the testing. Below is the description of the testing

procedure and strategy. And also be presenting the timing and scheduled of the tests to

be carried out.

2.1SOFTWARE (SCI’s) TO BE TESTED2.1.1 INTERFACES

2.2TESTING STRATEGY

In this section we will describe the testing strategy. The proponents will use

four different methods to test the proposed system APART MS.

2.2.1 UNIT TESTING

In unit testing, the proponents will be testing the separate modules

of the software. The proponents will carry out white box testing where

each module or component of the software are tested individually. The

proponents will test the components by passing data through it and the

proponents will be monitoring data to find the errors.

The proponents will be looking for entry and exit conditions of the

data and will make sure that all the components work without any troubles.

The test primarily be carried out by the lead programmer who

designed and implemented the module and the System Analyst will then

carry out on the modules to finalize the testing.

2.2.2 INTEGRATION TESTING



In this method of testing, the proponents will implement the

software at the client’s office location and try to run the system. This

means that the software will be testing upon the client’s network. The

proponents are looking for the compatibility of the software through the

network of the client. This testing will make sure that there is no confusion

among the applications on the network when they are running with the

software will have to install properly together with the other application

needed for the implementation and demonstration of the APART MS at

the same time. This will make sure that the APART MS are working

properly and able to transact its functions correctly. The proponents will

start with the login window to the other component of the APART MS

respectively and try to figure out when there are collision among the

application with the APART MS.

2.2.3 VALIDATION TESTING

In this method of the test the proponents will be working with the

user/customer to find out if the software developed in valid for the clients.

The proponents want to make sure that the clients are getting what he/she

asked for. The proponents will look at the software requirement document

in the case of conflict or misunderstanding with the client regarding

software components.

The proponents will perform the block testing where the software is

completed and test all the software components together. The proponents

will have several input data or test data that the proponents will derive

results for. The proponents will insert this data and will get results from the

software. The proponents will compare the results from the software with

the results that the proponents derived. In case there are problems with

the software, the proponents will create a deficiency list and will record all

the problems that the software has. The proponents will test all the



components and subcomponents of the software to perform the validation

test.

The proponents will try their best for the developers to avoid listing

of deficiency list. This is necessary because if errors are found at this

stage of the software development, the proponents cannot fix the

problems encountered by the time the proponents reach the software

deliverance date. In this case, the proponents have to negotiate with the

clients to give the developers extension on the project.

2.2.4 HIGH-ORDER TESTING

In this test method, the proponents will combine several different other

types of testing, the proponents will test for different conditions by

following several methods.

Recovery Testing

In this type of testing method, the proponents are concerned with the

ability of the software to retrieve lost data. The proponents want to make

sure that the software is fault tolerance and does not loose data in case of

system shutdown or if the system ceases.

Security Testing

in this type of testing method, the proponents wants to make sure that

the security checks are working properly and no one is able to temper with

the data except the head manager and employees.

Stress Testing

In this type of testing method, the proponents will monitor stress

caused to system and the software due to simultaneous use. The

proponents wants to make sure that the system does not break down

under the extreme use conditions.



Performance Testing

In this type of testing method, performance bounds are set during the

design part of the software being developed. This bounds will help the

proponents in determining the effectiveness of the software. It will also

help the proponents to minimize stress level that is caused to user

because of our software.

2.3TESTING RESOURCES AND STAFFING

The proponents will use several different resources to carry out the test on

the APART MS. Since the time is a part of project constraint, the proponents will

try to use help from everyone that is essential to take the responsibility and

evaluate the software during the testing phase.

The Company Staff

The Proponents

Company’s PC

Software Applications

2.4TEST RECORDING KEEPING

Test record keeping and test work products are described in section 3.4 of

test specifications document. For more information regarding these topics,

please refer to section 3.4 of the test specification document.

2.5TESTING TOOLS AND ENVIRONMENT

The proponents will have to provide the testing tools such as the

desktop/laptops to be used, computer resources, application needed, hardware

specifications, other devices and the company office that serves as the main

venue for the testing of the APART MS. The proponents will also use resources

available to software development team outside of the client’s facilities.

2.6TESTING SCHEDULE



The following is the schedule for the testing of the HRMS.

Project Test Plan

- To be scheduled

System Testing

- To be scheduled

Generating the test reports

- To be scheduled

System Implementation

- To be scheduled

3.0TEST PROCEDURE

In this section the proponents will describe the test procedures in detail.

3.1SOFTWARE (SCIS) TO BE TESTED

The following software that has to be tested is listed on the section 2.1

from the test specification document. For detailed list of the software component

items you can refer to the previous section of the document.

3.2TESTING PROCEDURE

In this section, the proponents will try to describe the overall software

specification of the APART MS. It includes the description of the methods for all

the different tests to be performed and will also declare the expected outputs.

3.2.1 UNIT TESTING

In this section, the proponents will try to describe over all software

specification. The proponents will be testing all the important paths to find

any errors within the boundary of the module. The proponents will apply

sort of white box search. The proponents will be testing parts of software

rather than the entire software. The modules are as follows:

3.2.2 INTEGRATION TESTING



3.2.3 VALIDATION TESTING3.2.4 HIGH-ORDER TESTING

BESTLINK COLLEGE OF THE PHILIPPINES

College of Information Technology#1044 Brgy Sta. Monica, Quirino Hi-way Novaliches, Quezon City

ACCOUNTS PAYABLES, ACCOUNTS RECEIVABLES, AND TREASURY MANAGEMENT SYSTEM (APARTMS)

(Service Management System)

Adviser:

Mr. Dennis Gonzales

Members:

Manayan, Jun I.

Goron, Mac Douglas P.

Cabigas, Jayson C.

Langcaoun, Joefel

San Diego, Mark Christian R.


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