COURSE TITLE: SEMINOR IN FINANCE COURSE CODE: MPH 622

Presentation on

A Survey and Analysis of Receivables Practices in American Corporations

by:

Cecillia Wagner Ricci, Seton Hall University, USA

Published in: Financial Practice and Education, Fall/Winter (1999)

May 6, 2011

Presentation Outline

Purpose and motivation

Research Methodology

Respondents Profile

Major Findings

Critical appraisal

Purpose & motivation

To obtain information on whether firms are maximizing the value of their shareholders’ wealth in the area of receivables.

In another terms, to test the objective function as maximization of shareholders wealth in terms of areas of receivables

Purpose & motivation…..

Financial theory

Motivation of the study

Objective of the firms

Existing research gap (review based)

Population: Listed firms in the 1996 Business WeekGlobal 1000.

Sample: 200 American firms

Response rate: 44.5% (89/200)

Respondents: Credit managers

Study period: 1996

Focus of the study: Receivable management in presale, postsale and ongoing issues.

Methodology

Profile of respondent

Remarks: Majority are managers, followed by controller and VP of finance

Remarks: 7 industries, Largest from consumer goods industry, followed

by technology industry, and the least transportation industry

Profile …………..

Only the assets

value is

significantly

different

ROE is higher in

respondent group

but it is not

significant

The indicators; market value, sales,

profits: as well as assets are lower in

respondent set and higher in non-

respondent set.

Profile …………..

55.1% of the respondents do not have any of their receivables automated, followed by 34.8% of

respondents in range 81-100 percentage automated, and the least is no respondents in class 21-40.

45.9% have percentage overdue in range 1-20, followed by any of their percentage overdue for

30.3% of respondents, and the least respondents lie on 61-80 class.

Profile …………..

Only 10.1% of

respondent outsource

some of the receivables

process,

Only 2.2%

factor the

receivables

1.1% (1/89)

or only 1

respondent

pledge the

receivables

Further use of receivables (Outsourcing the receivables, Factoring & Pledging),

Major findings…..

Presale issues

Using different methods for determining to

whom to grant credit, firms are not maximizing

shareholders’ wealth in terms of receivables.

Obtaining information from more than one

sources impact against the objective function.

Major findings…..

The association between past dues and credit

investigating costs shows the maximization of

shareholders wealth.

Majority of the respondents set credit limit for

their customers, supported by statistically

significant relationship between credit limit and

past due, that maximize the function.

Major findings…..

Postsale issues

Based on due date and postmark date survey,

US firms are receiving payments more quickly so

that maximize the objective function. But, it is

not free of response bias.

The use of more than one method for payment

collection, speed the collections that support the

goal of maximizing the shareholders wealth or

increase the cash inflows.

Major findings…..

Ongoing issues

The use percentage of sales method to forecast

the receivables results, decrease in administrative

costs and finally maximize the wealth.

The association in two standard deviation

between monitoring the credit and past dues

accounts, confirmed the maximization of wealth.

Major findings…..

The significant relation between number of

methods use for reporting to management and

existence of past due accounts support the

objective function.

No sig.; Not maximizing

No sig.; Not maximizing

Sig.; max. wealth

Sig.; max. wealth

Sig.; max. wealth

In Sum…..

Setting credit limits, monitoring receivables and reporting to management are in favor of

maximizing shareholders wealth i.e. minimization of cost , or increase cost and progressively

accelerate the wealth.

Two variables are against the objective

function i.e. only increase

administrative cost!

Strength

The simple methodology of analysis provides the elementary insight regarding the working capital management practices in corporate America.

Specifically, this study is very much useful for early practitioners, academic people, and with the same extent it helps to researchers.

Critical appraisal

Weaknesses

The study bear the pitfalls of the survey methodology, thus the generalization of the results might not be possible, and depends on few samples.

The responses tend to clusters usually in the same magnitude in majority of the response options. For instance, the responses usually sticks on 70-80% range, may be due to small sample size.

Thank you.