Apart Msfinal

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
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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.
-
It cut cost and time.

-
Import / Exports data with General Ledger and BCMS.
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.
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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
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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 PLAN

3.1 Approach and Methodology
Conduct a planning/strategy measures on how to obtain resources or

information.

Page 4
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
Conducting of preliminary meeting
12:00 NN
4:30PM
4HRS
Information Gathering
5:00PM
9:00PM
4HRS
9:00 AM
5:00PM
8HRS
1:00 PM
2:00 PM
1HRS
Finalizing
3
the
technical
features
Identifying
systems
System
Design
Specification
9:00AM, Sept. 10:00 PM, Sept.

5
System Coding
21, 2014
System Design Prototyping
N/A
System Modelling
N/A
28,2014
7 Days
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%)

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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

Probability
Impact
(H-M-L)
(H-M-L)
Risk Management Action
Economical Changes H
Proper Budgeting
Competition
Cheaper Software
User Demands
User-related
Back-ups
Risk Factor
Technical
risks
related
3.6 Service Transition

These are the following activities that the company will surely comply
regarding with the systems software, hardware, system specifications, computer
personnel, system requirements and implementation procedure.
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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 Analysis

4.0 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 RESPONSIBILITIES

INFORMATION
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

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System Analyst
Langcauon, Joefel
Managing the project conflicts
Managing the project delivery
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

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responsible
for
designing
components and providing that

information to the developer.
Business Analyst
Programmer
Cabigas, Jayson
Goron, Mac Douglas
Business focused
Domain specific knowledge
Solve operational problems
Solves business process problems
Refines the business model
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,
Christian
Mark
Documenting the process
Craft the right message
Distil the message into effective

documents
Release the documentation
Evaluate the results

Page 9
6.0 PROJECT BUDGET

Budget Items
Description
Budget Cost
One Time Cost
Payment for the defense of the PS1

documentation of the proponents.
PS1 Payment
PS1
expenses
are
compulsory Php 1,000 *5
payment of the proponents.
This manual is used as a preference

PS1 Manual / Book
of the proponents in developing the

PS1 documentation.
Php 300 *5
Total One time Cost
Budget Items
Php 6,500
Description
Budget Cost
Ongoing Cost
Food
expenses
are
absolutely
important for the proponents to avail.

Food
This will also
included
ongoing
for
cost
development.
the
into
the
project Php
1,500
month

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Electricity expenses also included in

the ongoing cost. This includes the
Electricity
usage of the electricity service for the

development of APARTMS.
Php
1,000
month
The development of the APARTMS

must be documented. Therefore, this
includes the printing expenses of the
Printing of Documents
documents that will be presented

upon defense.
Php 1,000 / sem
Transportation expenses when the

proponents are going to meet the
client or going from other place in
Transportation
relation of the project development.
Php
2,000
month
Total Ongoing Cost
Php 5,500

Page 11

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
ABSTRACT
The 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 firms
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.
INTRODUCTION
In 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 nonfinancial 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
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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 REVIEW
Danielson 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
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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. Firms 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 CREDIT

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Various 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 Cost
Transaction 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 Models
Financial 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

Page 15

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 sellers 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 Variables
The 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
Page 16

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 Credit

A 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 Markets

Firm size and age are used to compute the firms creditworthiness and
access to capital markets. The natural log of firm age (Ln(1+ firm age)) is used as
Page 17

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 Rajans(1997).
Internal Financing
The study uses operating cash flow (earnings before depreciation and interest
minus taxes) divided y assets to gauge the firms 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).
AR = 0 + 1CF + 2CM + 3GR + 4KIB + 5SIZE
Model I:
Table
1:
Dependant
Variable:
Accounts Receivable/Assets
0
Coefficient 42.702
1.457* -698.612* 0.0533 0.634
15.291*
S.E
26.690
0.110 123.976
3.892
P-Value
(0.110) (0.000) (0.000)
R-Square 0.384
0.179
1.197
(0.766)
(0.596) (0.000)
F-Value 45.596*
AdjustedR2
0.376
DW
1.037
(0.000)

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*Significant at
= 0. 01 **
Significant at
= 0. 05
Price Discrimination
Price 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 Capital

The 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).
Growth
Normally firms 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.
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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 Credit

Niskanen 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 Markets

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Result 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
AP = 0 + 1GR + 2CA + 3SIZE + 4KIB +
II:
5CF + 6PUR
Table
2:
Dependant
Variable:
Accounts Payable
0
Coefficien 1273.16 0.84828
2.22140 225.909
9.69028
14.8522
2.51317
89.4942 0.26570
S.E
P-Value (0.0000) (0.0015)
0.592596 1
(0.0002) (0.0000)
0.10307
0.426306 7
0.02944
0.156219 1
(0.0001) (0.0066) (0.0005)
0.64379
R-Square
Adjusted-
0.63970
(0.000
F-Value 157.5394*
0.83927
DW

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*Significant at
= 0. 01 **
Significant at
= 0. 05
Growth
Theory 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 Financing
The results reveal that operating cash flow is a significant variable in
explaining the accounts payable level with p-value of (p= 0066).
Asset Maturity
In 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 firms 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 firms 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 Capital

Page 22

Market 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.
CONCLUSION
This 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:
Page 23

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
firms 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 firms profitability is changing in times of
a crisis.
INTRODUCTION
Accounts 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.
Page 24

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. Demirg-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 firms 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 firms 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 20082011. 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 firms 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
Page 25

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 REVIEW
The 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
Page 26

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 firms profitability
Research
Deloof (2003)
Sample, period
Type of relation
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
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
Exchange for the period 2005 2007
relation on
profitability
Garca-Teruel and
8,872 Spanish SMEs for the period 1996-2002
Martnez-
relation on
Solano(2007)
profitability
Samiloglu and
Istanbul Stock Exchange (ISE) listed
Demirgunes (2008)
manufacturing firms for the period of 1998-2007
relation on
profitability
Mathuva (2010)
30 firms listed on the Nairobi Stock Exchange
(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

Page 27

Baveld (2012)
37 large firms in The Netherlands, during the
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 firms 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 ANALYSIS
Sample and Data Description

Page 28

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
Page 29

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 statistics
The 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
Page 30

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

Page 31

Mean
,044636
,032373
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
17,716
,692
,867
,016
9,891
,461
,461
,461
,461
,461
,083
Std. Error of Kurtosis ,461
,194138 69,50925 5,864046 2,400914
Minimum
-,109028 -,846249
,027984 10,0000
4,696000 ,233524
Maximum
,220683
,625985 228,000
7,255000 15,843705
,377185
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 Demirg-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
Page 32

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
firms 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
ROTA
OPM
(,680)**
ARRR
(,329)**
,142
RTR
(,293)**
,127*
(,959)**
RTR
SIZE
LIQ

Page 33
SIZE
(,385)**
(,436)**
(,283)**
(,253)*
LIQ
(,298)**
(,405)**
-,116
-,059
,086
**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 MODEL
The regression analysis used in this study is based on the following equations:
OPMit = 0 + 1ARRRit + 2RTRit+ 3SIZEit + 4LIQit +it
ROTAit = 0 + 1ARRRit + 2RTRit+ 3SIZEit + 4LIQit +it
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
Page 34

receivables and firms 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
Independent
Std.
t-
Dependent variable: OPM
Coeff.
Std.
t-
Error
statistic
Sig.
variable
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
Adjusted
,300
R
,367
,343
,273
square
SE
of
,112
,057
regression
F-statistic
11,033
14,937

Page 35

* 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.
CONCLUSION
This 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 its 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.
Page 36

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.
Overview
Companies 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 clients 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.
Page 37
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 Focus
A 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 Taxpayers 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

Page 38

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;

Page 39
Whether the factor is a Controlled Foreign Corporation (CFC);
The name of any promoter/advisor or accounting firm involved in structuring the

taxpayers factoring arrangement.
The Factoring Arrangement

The 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 nonrecourse;
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 taxpayers industry to factor

receivables;

Page 40
If a related entity is utilized to perform factoring, explain the source of the

funding used by this entity to acquire the accounts receivable.
Securitization
If 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 nonrecourse;
Whether the taxpayer ever securitized its accounts receivable before;
Whether it is a common practice in the taxpayers 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.

Page 41
Provide all tax preparation work papers related to the factoring/securitization

arrangement.
Financial Statements
Indicate if and how the factoring arrangements are presented on the taxpayers
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 Studies

Taxpayers 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).
Page 42

Functional Analysis
When 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 History

Determine the bad debt history of the taxpayers 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.

Page 43

Dates the Receivables Were Collected and Transferred
The 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.

Page 44
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 6050P

Treas. 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 clients 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:
Page 45

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 arms-length principles under section 482 been applied with respect
to the sale of accounts receivable to a related party?
Did the foreign factors 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.
INTRODUCTION
Official statistics show that Finnish manufacturing companies accounts
receivable are on aver-age 9.7% and accounts payable 6.1% of total asset
Page 46

(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 firms 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 CREDIT

Several 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 firms 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
Page 47

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 buyers 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 buyers
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 sellers
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.
Page 48

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
Rajans (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.,
Page 49

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 yeardummies 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 Rajans 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 DESCRIPTION
The 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
Page 50

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

Page 51
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
Receivable
period
payable
period
to total assets (days)
to total assets
(days)
.147
56
.067
59
.079
55
.041
57
are in parentheses)
Manufacturing and mining (C, D)

Energy supply and construction (E,
F)

Page 52

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.
RESULTS
We 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 receivable
Table 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 firms
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
Page 53

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)
Variable
Coefficient
Model II (N = 894)
Significance
Coefficient
level
LN(book value of assets)
. 002
. 094
LN(1 + firm age)
. 002
. 493
% sales growth
. 0002
. 566
level
. 002
% sales growth if positive, 0

% sales growth if negative, 0
Operating cash flow
. 289
. 002
. 279
. 008
. 078
. 078
. 046
Significance
. 001
. 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

Page 54

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
Constant
. 009
. 790
. 035
. 298
Adjusted R - squared
. 238
. 000
. 248
. 000
. 012
. 203
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 dont 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 firms creditworthiness and
access tocapital markets are most commonly measured by firm size and age. We use
the natural log of the firms total assets (Ln (Assets)) and the natural log of firm age
(Ln(1 + Firm Age)) to proxy for the suppliers access to external capital.
Page 55

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 Rajans (1997) results show that after 19 years of operation a firms level
of accounts receivable peaks and starts to decrease.
The result that a firms 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 firms 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
Page 56

lower-growth firms. The results are exactly the mirror image to Petersen and Rajans
(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 firms sales
declined the more it used trade credit to finance its customers purchases, and thus
support both the above mentioned theories.
Internal financing
We use operating cash flow (earnings before depreciation and interestminus
taxes) divided by assets to measure the firms 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 firms 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 discrimination
Price 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).

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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).
Time
Our 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 19911993, 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 Payable
Table 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)
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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
firms 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 dont 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.

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Dependent
variable:
accounts
payable/assets
Model III (N = 911)
Variable
Coefficient
Model IV (N = 909)
Significance
Coefficient
level
Significance
level
Purchases
. 018
. 000
. 019
. 000
LN(book value of assets)
. 005
. 000
. 004
. 000
LN(1 + firm age)
. 001
. 402
% sales growth
. 0006
. 006
% sales growth if positive, 0

% sales growth if negative, 0
Operating cash flow
. 085
. 002
. 134
. 012
. 000
. 082
. 000
. 083
. 001
. 000
Cash flow when positive, 0
. 128
Cash flow when negative, 0
. 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

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Constant
. 062
. 001
Adjusted R - squared
. 241
. 000
. 053
. 281
. 005
. 000
Creditworthiness and access to capital markets

The 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 research 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
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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 firms 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 financing
The 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 Rajans (1997) results.
Asset maturity
The 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 firms assets (Myers, 1977; Diamond, 1991;
Hart and Moore, 1991). Therefore, short-term (current) assets are financed using shortterm debt such as accounts pay-able, while long-term assets are financed using longterm debt or equity.
Cost of alternative capital

Market 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
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accounts receivable. This result may support the notion that movements of the market
rate affect in particular the demand side of trade credit.
Time
The 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.
Industry
Industry 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.
CONCLUSION
This 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
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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_0
4_a2.zip&app=pdf2word#
5.0 Management of Accounts Receivable
PREFACE
This guide accompanies the Auditor-Generals 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 agencys
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.
INTRODUCTION
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Effective 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 agencys 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 PROCESS

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A 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 RECEIVABLE

Some large private sector organizations have achieved real cost reductions and
performance improvements by re-engineering the accounts receivable process. Reengineering is a fundamental rethink and re-design of business processes which
incorporates modern business approaches.
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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 Processing
A 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 Payments
Research 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.
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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 options

Private 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 thepurchasers 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
Page 68

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 agencys 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 Incentives

Private 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
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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 approach

Where 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
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benefits in the management of accounts receivable. In particular, processes can be redesigned 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 debtors

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The 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 Integration
Improvements 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:
Page 72
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 Commerce
Electronic 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."

Page 73

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 nongovernment 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 processes

Debt 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

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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 Measurement
An 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:

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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
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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
Hours
Set 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
Current
Current Target
% Time
Hours
Time
Determine repayment schedule with NVA
debtor
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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
Best
Benchmark
Practice
Bench
mark
Efficiency Measures
Invoices
processed per Full
Time Equivalent
1000
5000
2000
8000
(FTE) staff
member per month

Remittances processed
per
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
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will be influenced by factors outside accounts receivable management such as
accounting policy.
APPENDIX
The 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 its customers. This is
recognized in the document by stating the risk factors.
The policy:
Explains the nature of debts and debtors
Outlines the agencys 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

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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
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.
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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
Includes Treasury Mgmt.
Originally doesnt include Treasury is now a part of the
Online-based transactions
Synthesis/Analysis
treasury mgmt.
core processes of AP/AR
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 Displays
and AR
form
of
AP
designation and has a table

representing
the
descriptive
aspect s of AP and AR.

End of the month Report Daily
presentation
Legality
addressed
update,
directly Directly updates the transactions
generated in the GL
issues
to
business anomaly
being Business
avoid considered,
rules
but
is
being processed
also Follows
the
legal
way
with transaction process.
minimal definitions.

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of
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?

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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 Systems 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?

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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?

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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, theres 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

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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 M
2.1.2 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%
Process Risks
Low product quality
35%
Product Size
Where size estimates could be wrong
30%
Development Risks
Insufficient resources
30%
Customer Risks
Customer may fail to participate
20%
Technology Risks
Obsolete technology
10%
Business Impact
Product may harm the business
10%
Table-Risk Table (sorted)

Impact Values
Description
Catastrophic
Critical
Marginal
Negligible

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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 M
3.1.1 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.

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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 M

3.2.1 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.

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3.2.4 PROCESS 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 RISKS
Time and Cost Resources is limited.
Miscommunications among members can occur and personnel
related cases are expected.
3.3 RISK MANAGEMENT FOR RISK M
3.3.1 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 managements clients the proponents assigned for
us to know if there is/are some adjustments to be done with the proposed
system.

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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 groups Project Manager.
The proponents will search/find other techniques for us to make our
clients agree on the proposed system.
3.3.6 DEVELOPING RISKS
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

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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 clients side just to inform
that all of the changes for the client to be accepted. The changes that do not
really affect users knowledge of the software will be presented to a selected
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member on the clients 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 clients
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 clients 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 cant afford to have one
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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.

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Document the change.
Once the change/s are approved, the project team will document
the change in the library.
2.2 CONFIGURATION CONTROL

2.2.1 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 CONTROL

2.3.1 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

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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 userfriendliness 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.
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)

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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.
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 OVERVIEW

3.1 SCOPE AND INTENT OF SQA ACTIVITIES
3.2 REVIEWS AND AUDITS
3.2.1 GENERIC REVIEW GUIDELINES
3.2.2 FORMAL TECHNICAL REVIEWS
3.2.3 SQA AUDITS
3.3 PROBLEM REPORTING AND CORRECTIVE ACTION/FOLLOW-UP
3.3.1 REPORTING MECHANISMS
3.3.2 RESPONSIBILITIES
3.3.3 DATA COLLECTION AND VALUATION
SOFTWARE QUALITY ASSURANCE PLAN
1.0 INTRODUCTION
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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.
1.1 SCOPE AND INTENT OF SQA ACTIVITIES
The Objectives of SQA are:
1.2 SQA ORGANIZATION ROLE
EGO-Structure
Manayan, Jun
(Project Manager/Resolving
the issue)
San Diego, Mark Christian

(Documentary Specialist/
release the documentation)
Cabigas, Jayson
(Business Analyst/ Analyze
Business process)
Goron, Mac Douglas

(System Analyst/ System
design)
Langcauon, Joefel
(Lead Programmer/
Handling system software
process)
2.0 SQA TASKS

2.1 TASK OVERVIEW
2.2 STANDARD, PRACTICES, AND CONVENTIONS (SPC)
2.3 SQA RESOURCES
3.0 REVIEW 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:
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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 GIODELINES
3.2 FORMAL TECHNICAL REVIEWS
3.3 SQA AUDITS
4.0 PROBLEM, REPORTING, AND CORRECTIVE ACTION/FOLLOW-UP
4.1 REPORTING MECHANISMS
4.2 RESPONSIBILITIES
Since we use the egoless team model, we wont 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 hes 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
4.3 DATA COLLECTION AND VALUATION

4.4 STATISTICAL SQA
5.0 SOFTWARE PROCESS IMPROVEMENT ACTIVITIES
5.1 GOALS AND OBJECTIVES OF SPI
5.2 SPI TASKS AND RESPONSIBILITIES
6.0 SOFTWARE CONFIGURATION MANAGEMENT AND OVERVIEW
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7.0 SQA TOOLS, TECHNIQUES, METHODS
SYSTEM SPECIFICATIONS
1.0 INTRODUCTION
This section gives a general overview of Account Payables, Accounts Receivables
and Treasury Management System (APART MS).
1.1 GOALS 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.
1.2 SYSTEM 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
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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.
1.3 SYSTEM 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.
1.4 MAJOR CONSTRAINTS
-
TIME
The proponent has been given 10 months to finish all project
charter, software copy, and other add-ons. The proponents is

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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
cant have a permanent sponsor to create the project. We also

encountered several technicalities due to a limited number of
PCs to integrate the said IS.
-
PERSONNEL
Since this is a group work, others cant 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.
2.0 FUNCTIONAL 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.

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2.1 SYSTEM ARCHITECTURE
2.1.1 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.
2.2 DATA DESCRIPTION
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2.2.1 MAJOR DATA OBJECTS
2.2.2 RELATIONSHIPS
2.3 HUMAN INTERFACE DESCRIPTION

3.0 SUB-SYSTEM DESCRIPTION
3.1 SUB-SYSTEM FLOW DIAGRAMS
Here are some of the diagrams regarding subsystem dataflows.
3.1.1 CREATE CLIENT INFORMATION

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3.1.2 CREATE/ADD VENDORS

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3.1.3 CREATE/PRINT CHECK VOUCHER

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3.1.4 CREATE/PRINT INVOICES

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3.1.5 CREATE PAYMENTS

Page 107

3.1.6 CREATE JOURNAL ENTRY/PRINT (DFD)
3.1.7 LEDGER/T-ACCOUNTS
3.1.8 TRIAL BALANCE

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3.1.9 VIEW/PRINT REPORT OF INCOME STATEMENT
3.1.10 VIEW/PRINT REPORT OF BALANCE SHEET

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4.0 ENHANCED 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
Page 110

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 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 in which they could view data that has been entered into the
database prior to our software.
The APART MS will provide an interface enhancement to achieve
the user-friendliness and usability functionality that is requested by the
client / users.
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 ENHANCEMENT

1.3 SYSTEM 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

Page 111

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.
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 cant have a
permanent sponsor to create the project. We also encountered several technicalities

due to a limited number of PCs to integrate the said IS.
PERSONNEL
Since this is a group work, others cant 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.
2.0 USAGE 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.
2.1 USER 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)

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Read/ Write/ Modify own (Encoder)
2.2 USE CASES

3.0 DATA MODEL DESCRIPTION
3.1 DATA DESCRIPTION
3.1.1 DATA OBJECTS AND DICTIONARY
3.1.2 RELATIONSHIPS
4.0 FUNCTIONAL MODEL AND DESCRIPTION

4.1 SUB-SYSTEM FLOW DIAGRAM
Here are some of the diagrams regarding subsystem data flows.
4.1.1 CREATE CLIENT INFORMATION

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4.1.2 CREATE/ADD VENDORS

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4.1.3 CREATE/PRINT CHECK VOUCHER

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4.1.4 CREATE/PRINT INVOICES

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4.1.5 CREATE PAYMENTS

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4.1.6 CREATE JOURNAL ENTRY/PRINT (DFD)

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4.1.7 LEDGER/T-ACCOUNTS
4.1.8 TRIAL BALANCE
4.1.9 VIEW/PRINT REPORT OF INCOME STATEMENT

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4.1.10 VIEW/PRINT REPORT OF BALANCE SHEET
4.2 HUMAN INTERFACE

5.0 RESTRICTIONS, LIMITATIONS, AND CONSTRAINTS
Time

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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.
Funding
6.0 VALIDATION CRITERIA

SOFTWARE DESIGN SPECIFICATIONS
1.0 INTRODUCTION
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
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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.
1.3 GENERAL REQUIREMENTS
The following general requirements were laid out for our project named
APARTMS:
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 in which they could view data that has been entered into the
database prior to our software.
The APART MS will provide an interface enhancement to achieve the
user-friendliness and usability functionality that is requested by the client /
users.
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.
1.4 SYSTEM 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.
Page 122

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
cant have a permanent sponsor to create the project. We also

encountered several technicalities due to a limited number of
PCs to integrate the said IS.
PERSONNEL
Since this is a group work, others cant 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.
2.0 DATA DESIGN
2.1 DATABASE DESCRIPTION
3.0 ARCHITECTURAL AND COMPONENT-LEVEL DESIGN
3.1 PROGRAM STRUCTURE
3.1.1 OVERALL

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Accounts
Receivable
Login
Main
Screen
Accounts Payable
Treasury
Password
Maintenance
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

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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
Accounts
Receivable
entry
ass vendor
input details
print invoice
update
Treasury
3.1.3 VIEW AP ENTRY REPORTS
Invoice
inquiry
select
vendors
name
view AP
records
print
reports
3.1.4 POST TREASURY REPORTS
AP and AR
records
select vendors
to view AP or
AR
view AR
records only
print reports

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AP and AR
records
select vendors
to view AP or
AR
view AP
records only
print reports
AP and AR
records
select records
to view AP or
AR
view AP
andAR
records
print reports
3.2 DESCRIPTION OF COMPONENTS

3.2.1 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
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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 users 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
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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
vendors 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.
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4.0 USER 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

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SAMPLE REPORTS OF AP

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VENDORS INQUIRY

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4.1.2 OBJECTIVES AND ACTIONS

4.2 INTERFACE 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.
4.3 COMPONENTS 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
systems front-end. Basically, the proponents are already having a lot of readymade components available to develop the proposed system. The following is a
list that the proponents will use for the software development.
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4.3.1 INSTRINSIC CONTROLS
Label
TextField/TextBox
ListBox
CheckBox
ComboBox
OptionBox
Menu Bar
Image
CommandButton
Etc.
4.3.2 ACTIVE X CONTROLS
5.0 RESTRICTION, 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.
6.0 TESTING ISSUES
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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 systems
processes but focused on the correct output of the APART MS.
6.1 CLASSES 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 companys 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.
6.2 PERFORMANCE BOUNDS
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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.
6.3 IDENTIFICATION OF CRITICAL COMPONENTS
TEST SPECIFICATIONS
1.0 INTRODUCTION
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 users 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.
1.2 STATEMENT 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 Testing
o MS SQL Database
o PC Application
o Java Net Beans
Integration Testing
o MS SQL Database
o PC Application

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o Java Net Beans
Portability Testing
o MS SQL Database
o APART MS
o PC Application
Security Testing
o MS SQL Database
o APART MS
o PC Application
Performance Testing
o MS SQL Database
o APART MS
o PC Application

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 clients when it comes to testing because of we cannot test the proposed
system during the companys 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 dont 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.
2.0 TESTING PLAN
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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.
2.1 SOFTWARE (SCIs) TO BE TESTED
2.1.1 INTERFACES
2.2 TESTING 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 clients office location and try to run the system. This
means that the software will be testing upon the clients 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
Page 138

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
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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.
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2.3 TESTING 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
Companys PC
Software Applications
2.4 TEST 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.
2.5 TESTING 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 clients facilities.
2.6 TESTING SCHEDULE
The following is the schedule for the testing of the HRMS.
Project Test Plan

-
System Testing
-
To be scheduled
To be scheduled
Generating the test reports

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To be scheduled
System Implementation
-
To be scheduled
3.0 TEST PROCEDURE

In this section the proponents will describe the test procedures in detail.
3.1 SOFTWARE (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.
3.2 TESTING 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 TESTING
3.2.4 HIGH-ORDER TESTING

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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.

Page 143

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Bestlink College of the Philippines

Chapter I Project Charter

Time Consuming Task

Present application software being used is not sufficient to execute core

Needs integration/interconnection with related Information Management

Bestlink College of the Philippines

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

It displays Accounting processes which are compose of Journal

Daily update of Treasury and funds.

Income Statement and Financial Report has been displayed.

In addition, the APARTMS are intertwined and interconnected with

It cut cost and time.

Import / Exports data with General Ledger and BCMS.

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

Higher data security compared to the existing system.

Uses MySQL for data management.

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

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

Bestlink College of the Philippines

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

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

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

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

APART MS can be accessible in selected personnel whether Admin or

Bestlink College of the Philippines

manipulativeways of gathering data.

Testing and Integration

Operation and Maintenance

2.3 OUT OF SCOPE

Electricity Issues: The APARTMS cannot be used in the midst of power

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

APARTMS is yet to be connected online.

3.0 PROJECT PLAN

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

Service Management System Accounts Payables and Accounts Receivables

Bestlink College of the Philippines

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

Conducting of preliminary meeting

9:00AM, Sept. 10:00 PM, Sept.

System Design Prototyping

3.3 Success Criteria

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

It has a fast processing speed (5%)

User-Friendly features (15%)

Service Management System Accounts Payables and Accounts Receivables

Bestlink College of the Philippines

Import/Export execution (40%)

Zero-Data Redundancy system (10%)