CHAPTER 1

INTRODUCTION

1.1. Problem statement:

Today, when Vietnam is going to market economy, three different types of
business that operated for profit: manufacturing, merchandising, and service business
are more growing up rapidly. Each type of business has unique characteristics.
Manufacturing businesses change basic input into products that are sold to
individual customers, such as Thai Tuan Textile and Garment Corporation, Dong Tam
Joint Stock Corporation…Merchandising businesses also sell products to customers.
However, rather than making the products, they purchase them from other businesses
(such as manufacturers). In this sense, merchandisers bring products and customers
together, such as 3A Pharmaceutical Co., Ltd - Abbott Authorized Distributor, Thuy
Loc Co., Ltd - Shiseido Authorized Distributor in Viet Nam or Metro Cash & Carry…
Service businesses provide services rather than products to customers, such Equinox
Hair & Beauty, YKC Beauty Spa…
One of the key factors underlying the growth of the Vietnam economy is
the trend toward selling goods and services on credit. Because, in today’s global
marketplace, competitive pressure and industry practice mandate that products and
services be on a credit vs. cash-on-delivery basis. This practice often produces a
receivable asset is one of the largest tangible assets on a company’s balance sheet. A
review of the 2004 Fortune 500 certainly reveals this truth. Receivables ranked among
the top three tangible assets for 75% of the top 100 companies. Surprisingly,
management of this multi-million (or multi-billion) Vietnam Dong asset rarely
receives much senior management attention, except when a serious problem develops.
The custodians of the receivables asset are similar to umpires of a football game; they
are not noticed unless they do a bad job.
As you see above, merchandising is the type that is less complicated than
manufacturing, but more complex than service. So we choose merchandising business

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to discuss the importance of receivable management. This is the AAA Pharma Co.,
Ltd – John & John Authorized Distributor in Viet Nam.
1.2. Significance and contribution of the thesis:
It can be argued that revenue generation is the most critical function of a
company. Any business tries to expense their substantial resources to generate
increasing levels of revenue. But this revenue must be converted into cash since cash
is lifeblood of a company. In the result, every Vietnam Dong of a company’s revenue
becomes a receivable that must be managed and collected.
1.2.1. Benefits to the society:
The good receivable management can be able to:
• Decrease the risk of bankruptcy from receivable failure.
• Increase the trading environment well among business because of
higher credit.
1.2.2. Benefits to the business:
Effectively managing the receivables asset is:
• To Increase cash flow.
• To get higher credit sales and margins.
• To reduce bad debt loss.
• To get lower administrative cost in the entire revenue cycle.
• To decrease deductions and concession losses.
• To decrease administrative burden on sales force.
• To enhance customer service.
1.2.3. Benefits to myself:
Doing my thesis for two months, I get deeply inside receivable
management. It let me know how it affects on cash flow, runs effectively, and also
gives more ways to improve cash inflow. It means that the way I can increase
revenue, enhance customer satisfaction and reduce expense.

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 1.3. Objectives of the thesis:
After studying in real case, you may know how receivable management is
important by
• Identifying accounts receivable in merchandising business.
• Describing how accounts receivable are recognized, valued and
disposed in the accounts.
• Interpreting the statement presentation and analysis of receivable.
• Illustrating receivable asset management effectively.
• Optimizing receivables.
• Providing proven principles for achieving benefits such as increased
cash flow, higher margins, and a reduction in bad debt loss.
• Supporting technology.
1.4. Scope of the thesis:
1.4.1. By time:
AAA Pharma has expended their business more than ten years with many
changes in receivable management. Because of limit time, I just focus within two
years to analyze and improve it for current and coming year.
1.4.2. By space:
AAA Pharma has not only a head quarter at Ho Chi Minh City but also
many branches in all three areas in Vietnam: Ha Noi, Da Nang, Can Tho, Nha Trang,
Hai Phong, Dong Nai, Nghe An and a representative office in Hue. Because of limit
space, my major is receivable management at head quarter in Ho Chi Minh City.
1.4.3. By topic:
The focus is primarily on commercial receivables management (business
to business, and business to consumer) and fast-growing consumer product.

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 CHAPTER 2
LITERATURE REVIEW

i. Identify account receivables in merchandising business:

2.1.1. Types of receivables:
The term “receivables” refers to amounts due from individuals and other
companies. They are claims that are expected to be collected in cash. Receivables are
frequently classified as (1) accounts, (2) notes, and (3) other.
Accounts receivable are amounts owned by customers on account. They
result from the sale of goods. These receivable generally are expected to be collected
within 30 to 60 days. They are the most significant type of claim held by a company.
Notes receivable are claims for which formal instruments of credit are
issued as proof the debt. A note receivable normally extends for time periods of 60-90
days or longer and requires the debtors to pay interest.
Notes and accounts receivable that result from sale transactions are often
called trade receivable.
Other receivables include nontrade receivables. Examples are interest
receivable, loans to company officers, advances to employees, and income taxes
fundable. These are unusual. Therefore they generally classified and reported as
separate items in the balance sheet.
2.1.2. Reasons to offer credit: (chấp nhận cho nợ)
Most of companies want to sell for cash at that time they provide goods
because cash sales are normally rung up on a cash register (cashbox) and recorded in
the accounts. But competitive pressure in the world economy mandates that goods are
sold on credit as promotion, customer convenience. You may thinks this credit they
offer is to bring more benefits only for customers. That is not enough. The more
customers you have, the more profit you earn and the higher market share you get in

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competitive pressure. Credit had existed in business environment for long time ago;
therefore it is available to customers and become a criterion they make buy decision.
ii. Three primary accounting issues are associated with
accounts receivable:
2.2.1. Recognizing accounts receivable:
Every sales transaction should be supported by a business document that
provides written evidence of the sales. A sales invoice provides support for a credit
sale. Two entries are made for each sale.
The first entry records the sale:
• Accounts receivable is increased by a debit.
• Sale is increased by a credit.
The second entry records the cost of goods sold:
• Cost of goods sold is increased by a debit.
• Merchandise inventory is decreased by a credit.
2.2.2. Valuing accounts receivable: (đánh giá khoản phải
thu)
Once receivables are recorded in the accounts, the next question is: how
should receivables be reported in the financial statements? They are relatively liquid
assets, usually converting into cash within a period of 30 to 60 days. Therefore
accounts receivable from customers usually appear in the balance sheet as current
asset. But determining the amount to report is sometimes difficult because some
receivables will become uncollectible.
Reflecting Uncollectible Accounts in the Finance Statements
Each customer must satisfy the credit requirements of the seller before the
credit sale is approved. Inevitably, though, some accounts receivable become
uncollectible. For example, one of your customers may not be able to pay because of
a decline in sales due to a downtown in the economy. Similarly, individuals may be
laid off from their jobs or be faced with unexpected hospital bills. Credit losses are
recorded as debit to Bad Debts Expense (or Uncollectible Accounts Expense). Such
losses are considered a normal and necessary risk of doing business on a credit basis.

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 Two methods are used in accounting for uncollectible accounts:
2.2.2.1. Direct write-off Method for Uncollectible Accounts:
(phương pháp xóa sổ nợ khó đòi)
When a particular account us determined to be uncollectible, the loss is
charge to Bad Debts Expense. The entry is:
• Bad Debts Expense is increased by a debit.
• Accounts receivable is decrease by a credit.
Under the direct write-off method, Bad Debts Expense will show only
actual losses from uncollectible. Accounts receivable will be reported at its gross
amount. Although this method is simple, its use can reduce the usefulness of both the
income statement and balance sheet. Moreover, Bad Debts Expense is often recorded
in a period different from the period in which the revenue was recorded. No attempt is
made to match bad debt expense to sale revenues in the income statement. Nor does
the direct write-off method show accounts receivable in the balance sheet at the
amount actually expected to be receivable. Consequently, unless bad debts losses are
insignificant, the direct write-off method is not acceptable for financial reporting
purposes.
2.2.2.2. Allowance method for Uncollectible Accounts:
(Phương pháp dự phòng nợ khó đòi)
The allowance method of accounting for bad debts involves estimating
uncollectible accounts at the end of each period. This provides better matching on the
income statement and ensures that receivables are stated at their cash (net) realizable
value on the balance sheet. Cash (net) realizable value is the net amount expected to
be receivable in cash. It excludes amounts that the company estimates it will not
collect. Receivables are therefore reduced by estimated uncollectible receivable in the
balance sheet through use of this method.
The allowance method is required for financial reporting purposes when
bad debts are material in amount. It has three essential features:

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 • Uncollectible accounts receivables are estimated. This estimate is
treated as an expense and is matched against sales in the same accounting period in
which the sales occurred.
• Estimated uncollectibles are debit Bad Debts expense and are
credited to Allowance for Doubtful Account (a contra asset account) through an
adjusting entry at the end of each period.
• When a specific account is written off, actual uncollectible are
debited to Allowance for Doubtful Accounts and credited to Accounts Receivable.
2.2.2.2.1. Recording estimated uncollectible:
To illustrate the allowance method, assume that AAA Pharma has credit
sales of 120 million VND in 2002. Of this amount, 20 millions VND remains
uncollected at Dec 31. The credit manager estimates that 12 million VND of these
sales will be uncollected. The adjusting entry to record the estimates uncollectible is:
• Bad debts expense is increased by 12 millions debits.
• Allowance for Doubtful Accounts is increased by 12 millions
credits.
Bad debts expense is reported in the income statement as an operating
expense. Thus, the estimated uncollectible are matched with sales in 2002. The
expense is recorded in the same year the sales are made.
Allowance for Doubtful Accounts shows the estimated amount of claims
on customers that are expected to become uncollectible in the future. This contra
account is used instead of direct credit to Account Receivable because we do not
know which customers will not pay. The credit balance in the allowance account will
absorb the specific write-off when they occur. It is deducted from accounts receivable
in the current assets section of the balance sheet. Allowance for Doubtful is closed at
the end of the fiscal year.
2.2.2.2.2. Recording the write-off an uncollectible account:
Companies use various methods of collecting past-due accounts, such as
letters, calls, and legal action. When all means of colleting a past-due account have
been exhausted and collection appears impossible, the account should be written off.

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 To illustrate a receivable write-off, assume that CFO of AAA Pharma
authorizes a write-off of the 5 millions VND balance owed by Tien Viet Company on
March 1, 2003. The entry to record the write-off of is
• Allowance for Doubtful Account is decreased by 5 million debits.
• Account receivable is decrease by 5 million credits.
Bad debts expense is not increased when the write-off occurs. Under
allowance method, every bad debt write-off is debited to the allowance account rather
than to Bad debts expense. A debit to Bad debts expense would be incorrect because
the expense has already been recognized when the adjusting entry was made for
estimated bad debts. Instead, the entry to record the write-off of an uncollectible
account reduces both Account Receivable and the Allowance for Doubtful Accounts.
A write-off affects only balance sheet accounts. The write-off the account
reduces both Accounts Receivable and Allowance for Doubtful Accounts. Cash
realizable value in the balance sheet, therefore, remains the same.
2.2.2.2.3. Recovery of an uncollectible account:
Occasionally, a company collects from a customer after the account has
been written off. Two entries are required to record the recovery of a bad debt: (1) the
entry made in writing off the account is reversed to reinstate the customer’s account.
(2) The collection is journalized in the usual manner.
Recovery of a bad debt, like the write-off of a bad debt, affects only
balance sheet accounts. The net effect of the two entries is debit to Cash and a credit
to Allowance for Doubtful. Receivable is debited and the Allowance for Doubtful is
credited in entry (1) for two reasons: First, the company made an error in judgment
when it wrote off the account receivable. Second, after customers did pay, Account
receivable in the general ledger and customer’s accounting the subsidiary ledger
should show the collection for possible future credit purposes.
2.2.2.2.4. Bases used for allowance method:
Company must estimate the amount of the expected uncollectible if they
use the allowance method. Two bases are used to determine this amount: (1)
percentage of sales, and (2) percentage of receivables. Both bases are generally

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accepted. The choice is a management decision. It depends on the relative emphasis
that management wishes to give to expenses and revenues on the one hand or to cash
realizable value of the accounts receivable on the other. The choice is whether to
emphasize income statement or balance sheet relationships.

Figure 1: Percentage of sales

In the percentage of sales basis, manager estimates what percentage of
credit sales will be uncollectible. This percentage is based on past experience and
anticipated credit policy. The percentage is applied to either total credit sales or net
credit sales of the current year.
For example, AAA Pharma estimated 1 percentage of net credit sales will
become uncollectible. If net credit sales for 2002 are 800 million, the estimated bad
debts expense is 8 million (1% * 800 million).
This basis of estimating uncollectible emphasizes the matching of
expenses with revenues. As a result, Bad Debts Expense will show a direct percentage
relationship to the sales base on which it is computed. When the adjusting entry is
made, the existing balance in Allowance for Doubtful Account is disregarded. The
adjusted balance in this account should be a reasonable approximation of the
uncollectible receivable. If actual write-off differs significantly from the amount
estimated, the percentage for future years should be modified.

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 Figure 2: Percentage of receivables
Under the percentage of receivable basis, manager estimates what
percentage of receivable will result in losses from uncollectible accounts. An aging
schedule is prepared, in which customer balances are classified by the length of time
they have been unpaid. Because of its emphasis on time, the analysis is often called
aging the account receivable.
After the accounts are aged, the expected bad debt losses are determined.
This is done by applying percentages based on past experience to the totals in each
category. The longer a receivable is past due, the less likely it is to be collected. So,
the estimated percentage of uncollectible debts increases as the number of days past
due increase. An aging schedule for AAA Pharma is shown:

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 Table 1: Aging schedule
Total estimated bad debts for AAA Pharma (2,228 millions) represent the
amount of existing customer claims expected to become uncollectible in the future.
This amount represents the required balance in Allowance for Doubtful accounts at
the balance sheet date. The amount of the bad debt adjusting entry is the difference
between the required balance and the existing balance in the allowance account. If the
trial balance shows Allowances for Doubtful account with a credit balance of 528
million, an adjusting entry for 1,700 million (2,228-528) is necessary.
Occasionally the allowance account will have a debit balance prior to
adjustment. This occurs when write-off during the year have exceeded previous
provision for bad debts. In such a case the debit balance is added to the required
balance when the adjusting entry made. Thus, if there had been a 500 million debit
balance in the allowance account before adjustment, the adjusting entry would have
been for 2,728 million (2,228+500) to arrive at a credit balance 2,228 millions.
The percentage of receivable method will normally result in the better
approximation of cash realizable value. But it will not result in the better matching of
expenses with revenues if some customers’ accounts are more than one year past due.
In such a case, bad debts expense for the current period would include amounts
related to the sales of a prior year.
2.2.3. Disposing of Account Receivable:
In the normal course of events, accounts receivable are collected in cash
and removes from the books. However, as credit sales and receivables have grown in
significance, their “normal course of events” has changed. Companies now frequently
sell their receivables to another company for cash, thereby shortening the cash-to-cash
operating cycle.
Receivables are sold for two reasons. First, receivable may be sold because
they may be the only reasonable source of cash. When money is tight, companies may
not be able to borrow money in the usual credit markets. Or, if money is available, the
cost of borrow may be prohibitive.

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 A second reason for selling receivables is that billing and collection are
often time consuming and costly. It is often easier for a retailer to sell the receivable
to another party with expertise in billing and collection matters.
A common sale of receivable is sale to a factor. A factor is a finance company or bank
that buys receivable from businesses and then collects the payments directly from the
customers Factoring arrangements vary widely. Typically the factor charges a
commission to the company that is selling the receivables. This fee ranges from 1-3
percent of the amount of receivable purchased.

Figure 3: Sales of receivable to factor

iii. The statement presentation and analysis of receivable:
2.3.1. Receivables on the balance sheet:
All receivable that are expected to be realized in cash within a year are
presented in the Current Asset section of the balance sheet. It is normal to list the
assets in the order of their liquidity. This is the order in which they are expected to be
converted to cash during normal operations.

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 Table 2: Balance sheet (partial)
2.3.2. Evaluating liquidity of receivable:
Business that grant long credit terms tend to have relatively greater
amounts tied up in accounts receivable than those granting short credit terms. In either
case, it is desirable to collect receivables as promptly as possible. The cash collected
from receivable improves solvency and lessens the risk of loss from uncollectible
accounts. Two financial measures that are especially useful in evaluating the
efficiency in collecting receivables are (1) the receivable turnover ratio, (2) the
number of days’ sales in receivable or average collection period.
The receivable turnover ratio measures how frequently during the year
the account receivable are being converted to cash. For example, with credit terms of
2/10, n/30 days, account receivable should turn over less than 36 times per year.
Receivable turnover ratio is computed as follow:

The average net receivable can be determined by using monthly date or by

simply adding the beginning and ending account receivable balances and dividing by
two.

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 The number of days’ sales in receivable or average collection period is an
estimate of the length of time the account receivable have been outstanding. With
credit term of 2/10, n/30 days, the number of days’ sales in receivable should be more
than 10 days. The number days’ sale in receivable is computed as follows:

An average daily sale is determined by dividing net sales by 365 days.

For the measures to be meaningful, a company should compare its current

measures with those from prior periods and with industry figures. An improvement in
the efficiency in collecting accounts receivable is indicated when the receivable
turnover ratio increases and the numbers of days’ sales in receivable decreases.

Table 3: Evaluate the liquidity of receivables

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 iv. Account receivable management:

Figure 4: Receivable management process

2.4.1. Receivables Antecedents:
Receivables antecedents are defined as all the up-front operations required
creating a receivable. The antecedents are absolutely critical to the management of the
receivables asset. They directly impact the quality and collectability of the asset and
are the key driver of the cost to manage a company’s revenue stream. A simple
formula to illustrate this point is:
High customer satisfaction + Accurate invoice = Excellent receivables results
This formula holds true even if the core receivables management functions
(i.e., credit control and collections) are lacking. Excellent order fulfillment drives high
customer satisfaction. In combination with accurate invoicing, the cost of
delinquency, concessions, and management of the receivables asset can be
dramatically reduced. When competent credit control and collections are added, the
total receivables management benefits are maximized.
2.4.1.1. Quotation:

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 Quotation is the process of extending a formal offer for a product or
service to a prospective or existing customer. A clear, complete quotation lays the
foundation for excellent fulfillment of a customer order and accurate invoicing. The
two key attributes of a quotation that promote excellent receivables results are:
• Feasibility/deliverability of offering.
• Clear commercial terms and conditions agreed by both parties. The
six elements of a quotation that affect receivables results are:
1. The unit and total price (clearly stated including all
discounts)
2. Applicable sales or use tax
3. Freight/delivery (actual versus allowance, who pays it)
4. Payment terms (when is payment due?)
5. The timing of issuing the invoice (upon shipment, at the
start or completion of a project, on reaching a milestone)
6. Description of product or service offered (product
number, layman’s description, proper or trademarked product
name).

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 2.4.1.2. Contract administration:
From a receivables management perspective, contract administration is all
about charging the correct price on the invoice. Price discrepancies are the
leading cause of disputed invoices, which result in delayed payments, short payments,
and substantial rework.
Contracts are used for larger customers who will receive frequent
shipments of products and/or delivery of services over a period of time and are
looking to ensure supply and receive the lowest price. Infrequent customers are
usually served via individual orders covered by their written, electronic, or verbal
purchase order. Contracts govern the commercial terms and conditions of the orders
(or releases against the contract) that are received during the time period in which the
contract is in effect. As we said in the “Quotation” section, it is vital that the contract
clearly define the agreed commercial terms and conditions.
In addition, the time period covered by the contract must be specified.
2.4.1.3. Pricing administration:

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 Price discrepancies are the leading cause of invoice disputes. This is not
surprising when you think of all the pricing incentives and promotions offered to give
a company a competitive advantage and/or to affect customer buying behavior.
Examples of pricing mechanisms designed to alter buying behavior are:
• Shifting orders from a busy season of peak demand to a slow season
• Increasing individual order or shipment size
• Increasing total volume purchased within a specified time period and so
on.
Many of these pricing incentives overlap and can be quite complex,
causing confusion among the supplier’s pricing and billing staff and the customer’s
accounts payables and procurement staff. System tools may not be able to
accommodate complicated pricing schemes and accurately price invoices.
Unfortunately, the results can be very damaging.

2.4.1.4. Credit controls:

The objective of credit controls is to manage the risk inherent in the
extension of credit to promote sales. This risk is known as credit risk, and is the same
risk incurred by lenders of money, such as banks. A company that sells only on cash-
in-advance or cash-on-delivery terms and requires a secure form of payment has no
credit risk. However, global marketplace runs on credit. Goods are routinely delivered

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with the expectation that payment will be made according to the agreed payment
terms. Credit risk has two dimensions: The first is the risk that payment will never be
made. The second risk is that payment will be made late.
Credit Limits: Credit limits quantify the VND amount of risk a
company is willing to bear with an individual customer. It is analogous to the size of a
loan or line of credit a bank would extend to one of its customers. In principle, it is a
“line in the sand” beyond which the risk is intolerable.
• Establishing Credit Limits for New Customers: A credit
investigation is necessary to establish a credit limit for a new customer.
o Start with a credit application from the customer to your
company requesting a credit account.
o Investigate the applicant’s credit, secure payment, default,
litigation reliable payment history information.
o If you are unable to establish a credit limit with the above
sources of information, proceed to check the trade and bank references.
o Evaluate the information and assign a credit limit and a date the
limit expires or is to be reevaluated.
- Financial strength (financial ratio analysis).
- Exposure calculated by the sum of estimated
monthly sales and customized inventory to be held for the customer, multiplied by the
payment terms. The exposure to any related parties must be added to aggregate total
exposure to an entity.
- Payment history with other suppliers as reported
by credit reporting service.
- Profitability of sales to customer.
- Building a Specific Reserve for High-Risk
Customers
• Building a Specific Reserve for High-Risk Customers:

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 If management still wants to sell on credit beyond the limits the credit
investigation indicates is prudent, an innovative technique is to provision the bad debt
reserve for a specific customer at higher rates until the reserve is adequate to cover the
risk of the exposure of that customer. Thus, the sale is made, but the added risk is
recognized, and over time, the reserve is built up to cover any bad debt loss incurred
from the customer(s). For example, management wants to sell VND 100,000 millions
per month to a very high-risk customer on net 30-day payment terms. A credit
investigation judges a VND 30,000 millions credit limit to be prudent. To enable this
trading and cover the risk, all sales to this individual customer would be accompanied
by an additional provision to the bad debt reserve of 25% of sales. Over a period of
four months, assuming no bad debt loss and the customer paying promptly, thereby
maintaining its receivable at VND 100,000 millions, a specific reserve would exist
sufficient to totally cover the VND 100,000 millions exposure to bad debt loss. At that
point, the specific provisioning would be tailored to maintain the reserve at the same
level as the receivable. The company will have gained the profit from the additional
sales yet still have recognized the risk of a potential bad debt loss.
Credit management forwards these to the designated managers for
approval with a summary of the financial impact of the nonstandard terms expressed
in:
• The cost of financing the receivables for the extended period of time
• The incremental exposure to bad debt loss and the additional expense for
the provision for bad debt loss
• The cost of prompt payment discounts
• The profitability of the sales to the customer
• Updating Existing Credit Limits:
In many respects, updating a credit limit involves repeating the steps taken
in establishing the initial credit limit. However, there are two significant differences:
(1)You have the customer’s historical payment performance for your
invoices. This may be the most reliable and valuable data you have, particularly the
trend in that payment performance.

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 (2) You may have better access to the customer’s financial statements (if
privately held) and better insight into its operations and financial strength. For
example, if the volume of orders to you is rising, you can discuss with the customer
how its business is progressing, new customers, sources of capital, and so on. As a
supplier extending credit and bearing risk, you have a legitimate interest in this
proprietary information.
• Credit Control over Ongoing Business:
The speed and volume of business today combined with lean staffs makes
it easy for credit controls to be evaded or ineffectively applied. To counteract this
pressure, two principles must be followed:
1. Some controls should be absolute and enforced by the system.
2. Controls requiring manual involvement should be periodically
evaluated to ensure the staff time they consume is worth the benefits they generate.
The most important control in the category of manual involvement is the
limitation of risk exposure to customers who are over their credit limit and/or
delinquent.
2.4.1.5. Order processing:
Order processing is all about fulfilling a customer order properly, quickly,
and invoicing it accurately. This creates a happy customer, and sets the stage for a
prompt, full payment. Failure to fulfill and bill an order accurately guarantees a
delayed and/or short payment, a dissatisfied customer, and the extra cost of reworking
the order, processing a return, issuing a credit, reinvoicing, and so on. In other words,
it is a mini business disaster. The longer-term effect is to drive customers to the
competition, which will fulfill and bill their order properly.
2.4.1.6. Invoicing:
The purpose of presenting an invoice to a customer is to secure payment
for having provided a product or service. Accurate invoicing directly drives:
• Lower receivables delinquency and increased cash flow.
• Reduced exposure to bad debt loss.
• Lower cost of administering the entire revenue cycle.

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 • Fewer concessions of disputed items.
• Enhanced customer service and satisfaction
2.4.2. Collection process:
Management of the receivables asset begins when all of the antecedent
functions are completed and a receivable is posted to the detailed accounts receivable
ledger (a comprehensive list of all amounts owed the company). The receivables
begin aging immediately, increasing the cost of financing them and increasing the risk
of nonpayment.
Management of this asset (which is one of the largest assets of the
company) involves safeguarding the asset and accelerating cash inflow (increasing
asset turnover). If you view this asset as a vault of cash, think of the precautions a
bank takes to protect its cash reserves. However, receivables are much more fluid and
an integral part of doing business, so the safeguarding and acceleration of turnover
must be accomplished:
• At low cost
• Without strangling sales volume
• Without alienating customers and colleagues.
Collection Timeline:

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 Figure 5: Collection Timeline
The starting point for the collection process is the collection timeline. The
collection timeline defines which steps are taken at which points in time and by whom
in both:
• The normal collection process.
• The increasingly severe actions that will be taken with a customer who is
seriously past due.
It is important that this timeline is agreed to by all of senior management,
so that when it is time to invoke its more severe remedies, sales, general management,
and finance present a united front to the customer.
Customer Contact Timing:
The general rule of thumb for collection contact is: More (contact) is better
than less, and earlier (contact) is better than later. Best Practice for collection contact
is proactive collection contact; that is, calling the customer prior to the due date. The
major benefit of this approach is to identify problems with an invoice prior to the due
date, in the hope they can be resolved quickly and payment received within terms.
The basic principles of proactive collection contact are:

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 • It is customer service–oriented, to promptly identify and resolve any
discrepancies with the order fulfillment or invoice. If no problems exist, inquire if the
invoice is scheduled to be paid by the due date.
• It occurs prior to the due date, so resolution can be effected to ensure that
payment can be received by the due date. It also educates the customer that you are
serious about enforcing your payment terms.
• It is still a collection call. Ask for the payment on the due date.
Proactive contact should be focused on large balance accounts, as it is
more time consuming than a “straight” collection call on past due invoices.
Customer Contact Methods:
The most effective method of customer contact is made via telephone,
which can elicit a timely or, it is hoped, immediate response. Once you have the
proper person on the phone, you are well positioned to secure a commitment to pay or
determine the reason for nonpayment.
E-mail is a very effective method of communicating with accounts
payable departments. Many people respond more promptly to e-mails than voice
mails, and the e-mail message is much better at conveying invoice numbers, amounts
due, and so on.
Collection letters have limited effectiveness. They are best used with low-
priority, small-balance accounts that probably will not receive a call or personalized
e-mail. For such accounts, a collection letter is better than no contact at all.
Negotiation Skills and Empowerment:
In practices, collection process includes empowering collectors to
negotiate and to concede charge during negotiation. Limits must be placed on the
amount that can be conceded. Concessions can also be limited to late payment fees
and unearned prompt payment discounts. However, to achieve best results most
efficiently, a collector must be empowered to write off certain amounts. This
empowers collectors with the customer and eliminates the time required to secure
approvals.
2.4.3. Evaluating the liquidity of receivables:

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 As I mention in part 2.3.2, we have to evaluate the efficiency in collecting
receivables by (1) the receivable turnover ratio, (2) the number of days’ sales in
receivable or average collection period.
After evaluating liquidity of receivable, we get two points: (1) how much
money we are able to collect at due day, (2) how much money we have to collect for
past due invoices, then making critical collection process.
2.4.4. Financing of the receivable asset:
There are various techniques for using the receivables asset to obtain
accelerated funding instead of waiting for customers to pay the invoices. All of these
techniques:
• Involve an incremental financing or borrowing cost.
• Impose duties and restrictions on the borrower.
• Are structured differently.
Sales of receivables:
This is the simplest form of financing, where a company sells its
receivables asset to a financing entity. The financing entity takes title to the asset and
pays a lump sum in return. Of course, the seller does not receive 100 cents for every
dollar of receivables sold. The purchase price is reduced for:
• The interest value of the money advanced by the buyer. The rate is based
on prevailing interest rates, the length of time the lender expects to wait before
receiving payment for all invoices purchased, and the risk premium the lender
perceives for the risk of nonpayment of the purchased receivables.
• Expected dilution (deductions, discounts, etc.) incurred in collecting the
receivables.
• The cost to the buyer of collecting the receivables. Since the receivables
have been sold to the buyer, the buyer will have to collect them. Usually, the seller
mails a letter to customers informing them of the assignment of the receivables to the
buyer and how to pay (payee name, address).
• Aprofit element.
In addition, the buyer may not purchase all of the receivables offered.

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The buyer may eliminate receivables owed by high-risk customers, either individual
customers or a class of customers, such as foreign accounts.
The advantage to the seller is that it receives the funds in a matter of days
instead of waiting 30 or more days. However, this can be an expensive way to obtain
financing.
Factoring receivable:
Factoring of receivables is very similar to the sale technique described
above. The major difference is that factoring is a continuous, ongoing purchase of
receivables, compared to a transaction for a finite portfolio of receivables.
The factor serves as the seller’s receivables management function,
performing credit, collection, and payment processing functions. However, the factor
will purchase receivables from only customers whose creditworthiness has been
vetted and approved. If the seller sells to customers not accepted to the factor, the
seller has to perform the receivables management function itself.
Collateralizing Receivable:
Collateralizing receivables involves pledging the asset as collateral for a
loan. The simplest form is pledging them as a condition for obtaining a term loan.
The company continues to administer them as always, except there will be covenants
specifying standards of aging, concentration, and so on to be met, and reporting
requirements from the lender.
Often the lender will exclude receivables over 90 days past due and
expected dilution from the collateral valuation and reduce the amount financed.
Another form of collateralization is securitization, where the receivables
asset is used to secure commercial paper or other financing instrument issued to third-
party investors. Securitization is an ongoing financing instrument with acceptable
receivables purchased by the financing entity on a continuous basis. The seller
manages the asset as always, but with additional procedural and reporting duties and
covenants.
The cost of all of these financing techniques is inversely related to the
quality of the receivables asset. The discount or interest rate used will be based on the

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factors described in the “Sale of Receivables” section. Evaluation of the cost involves
two key elements:
1. The cost of the funds obtained through receivables financing compared
to the cost of funds obtained through other financing techniques
2. The cost of managing the receivables asset and complying with the
financing entity’s requirements compared to the cost of managing the asset without
receivables financing arrangements
Financing receivables is often used when other financing sources are
unavailable or exhausted. It is difficult to justify incurring significant costs to receive
the cash from receivables 30 to 50 days earlier. Remember, when receivables are
financed, it is usually most or all of the asset.
In conclusion, the financing of receivables can be an important source of
funds, but it can be expensive and should be evaluated carefully.
CHAPTER 3
COMPANY PROFILE

• Company overview:
AAA Pharmaceutical Co., Ltd is the authorized distribution of Johnson
& Johnson in Viet Nam from June 15, 1997. AAA Pharma headquarter is located at
18 Luy Ban Bich street, Tan Thoi Hoa Ward, Tan Phu District, Ho Chi Minh City.
Their business is to distribute a wide range of branded high-quality consumer
products such as Johnson’s Baby Care, Johnson’s Skin & Hair Care, Oral Healthy
Care, Women’s Health… In additional, they also distribute some specific
pharmaceutical products for internal hospital uses only and some types of medical
devices.
Johnson & Johnson is a global American pharmaceutical, medical
devices and consumer packaged goods manufacturer. It was founded by Robert Wood
Johnson, James Wood Johnson and Edward Mead Johnson in 1886 with 14 other
members on a revolutionary idea: “Doctors and nurses should use sterile sutures,
dressings and bandages to treat peoples’ wounds.” Since then, they have brought the

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world new ideas and products that have transformed human health and well-being.
Every invention, every product, every breakthrough has been powered by generations
of employees who are inspired to make a difference. They credit their strength and
endurance to a consistent approach to managing their business, and to the character of
their people. They are guided in everything they do by Their Credo, a management
document authored more than 60 years ago by Robert Wood Johnson, former
chairman from 1932 to 1963, and by four strategic principles. (See in Appendix)
The corporation's headquarters is located in New Jersey, United States.
The corporation includes some 250 subsidiary companies with operations in over 57
countries. Its products are sold in over 175 countries. Johnson & Johnson's brands
include numerous household names of medications and first aid supplies. Among its
well-known consumer products are the Band-Aid Brand lines of bandages, Tylenol
medications, Johnson's baby products, Neutrogena skin and beauty products, Clean &
Clear facial wash and Acuvue contact lenses.
Johnson & Johnson's commitment to innovative health care products has
resulted in consistent financial performance. It has 75 consecutive years of sales
increases and 45 consecutive years of dividend increases. Its common stock is a
component of the Dow Jones Industrial Average and the company is listed among the
Fortune 500.
• Company milestones:
AAA Pharma Co., Ltd was established under Business License No.
041476 dated June 5th 1997 by Department of Planning and Investment of Ho Chi
Minh City and Establishment Permit No. 1155/ GP-UB dated May 26th 1997 by the
People’s Committee of Ho Chi Minh City, which the original trading name was AAA
Trading Company limited. AAA Trading Co., Ltd started operations on June 1997,
which had a legal entity, private seal and independent bank account.
The business scope which Board of Directors stated at the beginning was
to import and to distribute Health Care products of Johnson & Johnson in Vietnam,
but the company had to sell other products in order to avoid profit loss for beginning

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period. Thus they traded in handicraft, chemical cosmetics, textile, clothing, office
stationery industry and trading services at first merchandising activities.
Once the company recognized that revenues from these kinds of products
would decrease in the near future because of strong competition of substitutes,
moreover; the operation situation was strong enough to distribute Johnson & Johnson
Health Care products as they stated at the beginning. Then the company changed
gradually from unstable sources of these other products to target Johnson & Johnson
products. Based on Vietnam law, distributors of medical products, like Johnson &
Johnson health care product, have to pharmaceutical companies. So from July 2004,
AAA trading company limited changed their name to AAA Pharmaceutical Company
limited with their new logo:

Tax code: 030.1000.691

Email: aaa@pharma.com
AAA Pharma was founded with VND 1.2 Billion charter capital in 1997.
As Dec 2005, AAA charter capital mounted to VND 15 Billion.
AAA Pharma Headquarter in Ho Chi Minh City plays the key function in
operating all the main activities. And this is also the center of training and upgrading
the staff quality for all of our nationwide branches. They have the most extensive
infrastructure network in Vietnam with branches in Hanoi, Da Nang, Can Tho, Nha
Trang, Hai Phong, Dong Nai, Nghe An and representative office in Hue. In response

DISTRIBUTION NETWORK
1998 : Ha Noi Office

2006 : Hai Phong Office

2006 : Da Nang Office

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2006 : Dong Nai Office

1997 : HCM Headquarter

2004 : Can Tho Office

to their rapid growth, an expansion plan for the next coming years is to open more
branches in some key provinces such as Thanh Hoa, Kon Tum, Vung Tau, etc…
Figure 6: Distribution network
• Company organization:
a. Company structure:
i. Board of directors:
Head of the company’s managers is the Board of Directors. Chairman of
Board of Directors is an operation manager, representative legal entity. He takes all
responsibilities for results of merchandising business and fulfils obligations to
Vietnam’s government. There are two vice directors and an assistant in operating the
business. They can be as representative chairman in solving some problems, making
contracts under their authorities.
ii. Accounting-Finance department: (see figure xx in Appendix)
The accounting department includes ERP, cashier and many accountants.
Head is chief accountant that take responsibilities in
- Recording all transactions incurred and doing financial reports about
business performance and business situation.
- Balancing capital sources, monitoring and allocating profit for the
business.
- Using both financial accounting and estimated data to aid management in
running day-to-day operations and in planning future operations.
- Gathering and reporting all information that is relevant and timely to the
decision-making needs of management, and other involved appropriate authorities.
- Implementing financial banking system, monitoring tax payment.
- Supporting to make plan for importing goods, contracting with banking
and preparing all relevant import documents. Monitoring imported tax, valued added
tax to Vietnam’s tax authorities.
- Receiving and storing all documents related to accounting activities.
iii. Admin department: (see figure xx in Appendix)
- Organize and implement work related to administration.

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 - Implement and solve administrative formalities (internal and external).
- Solve problems related to administration happened. Ensure admin
activities are to support other departments.
- Examine all business contracts, ordering and buying POP used in
operation.
- Monitor documents in and out, materials, and files; deliver them to right
place. Take responsibility in maintaining and storing documents, files is to ensure that
all information is safe and security.
- Organize to monitor and use all tangible assets, equipments in company
such as car, truck, official equipments, and communication equipments…
- Create comfortable working environment followed by board of directors.
- Gather and report organization and administrative things to board of
directors.
iv. Marketing department:
- Take all responsibilities in building and improving company’s image.
- Find out alternative solutions to support sales department to increase sale
volume.
- Propose and implement promotional programs to end user and
wholesalers.
• DGT (Demand Generation team):

- They are sales promoters. They market J&J products in

hospitals, pharmacies …in order to create the demand. In addition, they also report
their activities and results monthly to their CD Sup.
- They frequently make a proposal, plan to sales departments.
v. Sales department:
3.3.1.5.1. Customer Develop Director (CD Director):
Head of sales department is CD director. His main role is to monitor whole
sales system in order to fulfill sales targets by planning, organizing, controlling and
evaluating them.
- Together with board of directors, they make sales strategies.

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 - Specific sales plans and tactics to implement their strategies.
- Set up sales target; analyze and forecast to order and monitor credit
customers.
- Deploy sales plan to CD Sup.
3.3.1.5.2. Customer Develop Supervisor (CD Sup):
- Receive sales plan, target form CD Director, then set up and deploy sales
targets for CD Rep in their areas.
- Make a plan to control and assess effectiveness of CD Rep.
- Motivate juniors and monitor credit customers.
- Juniors of CD Sup are CD Rep, CD Rep Supermarket, and DGT.
3.3.1.5.3. Customer Develop Representative (CD Rep):
- CD Rep is middle point between CD Sup and agency.
- Each CD Rep manages each agency and takes responsibility in
monitoring and assessing taskforce to implement sales target that CD Sup requires.
3.3.1.5.4. Customer Develop Representative
supermarket (CD Rep Supermarket):
- CD Rep is middle point between CD Rep Supermarket and Supermarket.
- Responsibilities of CD Rep Supermarket are the same to one of CD Rep.
- Also manage promoters at supermarket.
3.3.1.5.5. Promoter:
- They are youngest and account for most of staffs in the company (40%).
They are students that are studying and working as part-time job. They have good
communication skill and well-informed about company’s products thorough training
programs.
- Support promotional program from J&J to taskforce and DGT.
- Weekly reports about sale volume of supermarkets, shops and outlets that
they manage to their CD Rep.
3.3.1.5.6. Taskforce:
- They play role in selling, marketing, distributing from the company to
wholesalers and retailers. And they have to seek new customers.

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 - Direct contact to customers, satisfies customers’ demand, and explains all
information that customers need.
- Periodic reports about sale operation to their CD Rep.
- Support promotional program from J&J.
vi. Inventory:
This department consists of chief inventory, warehouse-keeper, labors in
sticking line, inbound, outbound and delivery team…They take responsibilities for
- Managing all activities in inventory followed specific functions and
missions delegated to get best results.
- Supervising imported products from ports and air to inventory.
Receiving, storing and delivering goods, arranging workforce in inventory, ensuring
goods in and out to follow business’s plan.
- Arranging and storing goods is followed right standard of product.
- Following to deliver goods to branches.
- Be responsible for the quantity and quality of goods in warehouse.
Conserve and arrange goods to ensure that they are easy to find, look, take and check.
- Implementing all the labor regulations and internal rules in the warehouse.
- Building up and continuously improving the warehouse’s operations in
order to get more professional and effective.
- Coordinate to other departments to insure an effective working process.
b. Company workforce:
At AAA Pharma, they consider human resources as their utmost important
key for success. AAA Pharma invests in the development of workforce through a
combination of classroom learning and online training that offers high quality course
curriculum that facilitates continuous learning. These training resources for our
valued employees are designed to enhance the mastery of vital competencies for
career development.
There were a few of staffs that operated separately at first, now AAA
Pharma is proud of younger staffs that are active, sincerity, honest…. There are 700
staffs (full time-520, part time-180, 70% female)

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 All staffs recruited have to follow recruitment process, and get consistent
training, advanced training and updated learning to adapt environment working,
company’s culture.
Special training program: career day and management trainee.
- In order to build up workforce, AAA Pharma organizes often career day
in Ho Chi Minh City and these provinces that company has its branch. This is not
only an opportunity that students have a job to get income but also opportunity that
orient students’ career and work in real through part time job.
- In response to their rapid growth, AAA Pharma set up Management
trainee program for supporting the middle managers. The first program is done in Ho
Chi Minh City with the first upgraded students at International University. This takes
one year to train, then based on their results and abilities; they are allocated in specific
department.
• Merchandizing operation:
1. Products:
AAA Pharmaceutical Co., Ltd is the authorized distributor of health care
J&J products in Vietnam. They divide products into three groups:
- J&J group: including products used in baby care such as body wash,
shampoo contained anti-infective ingredients that not make allergic to baby’s body,
skin and eyes; powder classic, powder prickly heat, powder double protect blossom
and Cologne blossom, …these are main goods in AAA Pharma, they are accounted
for 65% of sales volume.
- Beauty group: including products used in skin care, oral care, such as
CLEAN & CLEAR Facial wash, CLEAN & CLEAR Acne Clearing Cleanser,
CLEAN & CLEAR Balancing Moisturizer, CLEAN & CLEAR Deep Action
Cleanser…These are potential goods in AAA Pharma, but they are new kinds in
Vietnam, so they just are accounted for 18% of sale volume.
- Consumer Health Care group: including products used in women’s
health care fields such as tampon, feminine hygiene solution under Carefree and

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Modess. Like Beauty group, these are potential goods, but they just are accounted for
17% of sale volume because of entrance in Vietnam.
2. Distribution network:
AAA Pharma distributes goods thorough 2 channels:
- General Trade channel: is a channel that AAA Pharma uses to
distribute their goods to whole national retailer: shops, outlets, retailers, pharmacy….
This is main channel, and accounted for 76% whole distributed goods. Because 70-
75% Vietnamese lives in countryside and they are not familiar with shopping in
supermarket. So AAA Pharma considers General Trade as main channel for a long
time.
- Modern Trade channel: is a channel that AAA Pharma uses to
distribute their goods to whole national supermarkets and bookshops such as Metro,
Big C, Co-op Mark, Maximax, Citimax, Vinatex…This is a potential channel because
sale volume of each supermarket is greater than one of retailer and always stable.
Now, this channel is accounted for 24% whole distributed goods and so increase more
in large city Nha Trang, Ho Chi Minh, Ha Noi, Hai Phong, Can Tho, Da Nang.
• Orientations from now to 2010:
3.5.1. Infrastructures:
Company’s development plan from today until 2010:
- Focus on invest in infrastructure of office and storage at Dong Nai
branch. .This will be main office to develop market of company in future.
- Implement and finish project that move main office of the company to
Cat Lai – Binh Duong (5ha) in 2015.On the other hand, office at HCM city will
become branch at HCM cit
- Improve continuously office and warehouse at HCM city to meet current
development demand of the company.
3.5.2. Developing Strategies:
Human resource: Board of Director always improves effective in human
resource management. It is core element in every plan, restructure and operation of

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company. Developing strongly human resource program is to bring high efficient.
Invest much in training specialize knowledge and integrity for employees.
In 2008, the company is implementing and applies Quality Control
Management ISO 9001:2000.
The objectives that board of Directors plan in applying and implementing
International Quality Control Management:

Figure 7: Company’s Vision

3.5.3. Merchandizing activities:
Products:
- The company‘s objective is that focus on traditional product J&J
(account for 65%), on the other hand, develop products in Beauty and CHC
- In 2008, the company will distribute one more product – Listerine. This
is a familiar product with consumer that had market and market shares. So, the
Company believes that this product will contribute in development of the company.
Distribution channel:
- In response to our rapid growth, an expansion plan for the next coming
years is to open more branches in some key provinces such as Thanh Hoa, Kon Tum,
Vung Tau, ect …
- The objective is that hold market of GT channel because this is
competitive advantage of AAA Pharma compare with competitors about: physical

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system, manpower and relations. Besides, the company focus on develop of MT
channel (this channel have stable revenue and development ability)
- Today until 2010, the company will build 1 new distribution channel, this
is distribution channel that distribute all pharmaceutical products – OTC channel.
Physical system and human resource that serve for this channel are being prepared.

CHAPTER 4
EMPIRICAL STUDY

The operating cycle of AAA Pharma: consists of the following basic

transactions: (1) purchases of merchandise, (2) sales of merchandise, often on account
(3) collection of the account receivable from customers. As the word cycle suggests,
this sequence of transactions repeats continuously. Some of the cash collected from
the customers is used to purchase more merchandise, and the cycle begins new. This
continuous sequence of merchandising transactions is illustrated below:

a. Methodology:
By recognizing the importance of accounts receivable management, I want
to analyze and improve accounts receivable management in specific case, AAA
Pharma Co., Ltd.

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 Firstly, I analyze receivable policy for each type of customers in
distribution network.
Secondly, I estimate how these receivable policies affect on cash flow by:
• Aging report.
• Receivable turnover ratio.
Thirdly, I evaluate each receivable policy by:
• How are order taken?
• Credit processing.
• Credit decision.
• Collection efforts
After having the view in general, I make an interview with:
• Sales Director.
• Account receivable manager in ERP and accounting department.
• CD rep.
• Chief financial officer.
b. EMPIRICAL STUDY
As I mention above, AAA Pharma distributes goods thorough 2 channels:
- General Trade channel: is a channel that AAA Pharma uses to distribute
their goods to whole national retailer: shops, outlets, retailers, pharmacy…. This is
main channel, and accounted for 76% whole distributed goods.
- Modern Trade channel: is a channel that AAA Pharma uses to distribute
their goods to whole national supermarkets and bookshops such as Metro, Big C, Co-
op Mark, Maximax, Citimax, Vinatex… Now, this channel is accounted for 24%
whole distributed goods.
4.2.1. Receivable policy in AAA Pharma:
In Modern Trade channel: including Supermarket such as Coop, Big C,
Fivimart, Van Lang, Maxi, Vinatex, Binh Dan… and Hypermarket such as Metro.
This is a potential channel because sale volume of each supermarket is greater than
one of retailer and always stable. So they have to get the contract signed, they give

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more benefits or accept some of requirements in contract. For example, advertising
support, incentive rebate, additional bonus, opening support, renovation support,
damaged goods allowance, barcode charge, transportation and installation support,
and quality assurance support.
Hypermarket Supermarket
Credit line No limit No limit
Discount on 3% pretax price on 4% pretax price
Payment term 45 days from invoice date15 days from invoice date
Payment method bank transfer bank transfer
On-time payment incentive 3% on invoice paid by 45 2% on invoice paid by 15
days days
3% on invoice paid by 7
days
4% on invoice paid on
delivery
Overdue payment penalty 0.75%/month on overdue 0.75%/month on overdue
invoice value if overdue invoice value if overdue
exceeds 45 days from exceeds 45 days from
invoice date. invoice date.

Table 4: Receivable policy in Modern Trade channel

In General Trade channel: because of focus of Trade marketing, they
divide GT channel into 2 types of trade. (See figure xx in Appendix)
Firstly, Trade Systems are Distribution Accounts that focus on Revenue
base. It is like AAA Pharma but at smaller size. In Ho Chi Minh network, for
example, they divide Sales Organization into many branches based on administrative
division, which means Districts. In every district, they choose one large Distribution
Accounts to manage whole this area.
Secondly, Trade Sales are DNAs (Developed new accounts) that focus on
purpose base. It is so flexible to develop new accounts and enlarge their size, volume
for entering trade systems; or to cover the market for higher market share. Trade Sales
is including direct sales and retailers.
Total 6 Cities - Val% - Baby Segment DEC05 DEC06 DEC07 MAR08

Johnson's Baby 66,6 68,9 67,8 70,2

Pigeon 17,0 19,5 18,6 16,3

Pureen 16,3 11,4 11,0 11,1

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 Pureen Kids NA NA 2,6 2,3

Table 5: Market share in baby segment

Total 6 Cities - Val% - Total Shower Gel DEC05 DEC06 DEC07 MAR08

Johnson's Baby 11,9 13,3 12,0 10,9

Lux 12,1 10,2 10,4 10,1

Dove 11,4 10,1 9,1 8,8

Enchanteur 7,4 7,3 6,9 8,6

X-Men 6,3 5,6 6,7 5,7

Double Rich 3,8 4,3 4,9 4,7

Lifebuoy 1,6 2,1 4,5 4,6

Romano 4,0 3,5 3,7 3,2

Pigeon 3,0 3,7 3,3 NA

Palmolive 4,3 2,9 3,2 3,1

Table 6: Market share in Shower Gel

The receivable policy in Trade Systems is similar to Supermarket, except
they have credit line based on their area and sales strategy of company and discount
on 5% pretax price.
To trade Sales, they have specific for each type:
Retailer Market
Credit line Limit Limit
Discount No discount on 2% pretax price
Payment term 1 days from invoice date 1 days from invoice date
Payment method Cash on delivery Cash on delivery
Collectors Sales men Sales men

4.2.2. Estimate how these receivable policies affect on cash

flow:
Items that affect Cash flow from Accounts Receivables:
• Competition.
• Written corporate policy that include:
- Terms of sales.
- Collection techniques incorporated.

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 - Support by upper management of its credit department versus sales
department.
• Corporate customer philosophy referring to how a customer is treated.
• Size and kill/experience level of the individuals in the credit and
collections areas.
• Lack of computer systems that are conducive to improving cash flow
efforts
• Sales support of cash flow as well as cooperation with the credit area
and their integrity plus incentive to cooperate.
• Actual top management support of cash flow, not just a written policy
and procedures manual.
Receivable Turnover ratio:

2005 2006 2007

82.946.213.00 107.137.184.13 135.344.029.28
Net Sales 9 7 6
5.662.719.98 8.912.647.72 17.968.700.85
Average receivable 9 4 5
14,64776877 12,02080318 7,532210057
Receivable turnover
Table 7: Receivable turnover in 2005, 2006, and 2007
As you know that, the payment term is 45 days for Metro, 15 days for
Supermarkets and wholesalers, and 1 day for retailer. In their distribution,
Supermarket and wholesalers are accounted for 58% volume sold; Metro is accounted
for 14% and Retailers for 28%.
Receivable turnover in 2005, 14.6 times is less than payment term for
Metro, Supermarket and wholesalers. This receivable turnover decreased (14.6-12.02)
nearly 3 times in 2006, and (14.6-7.53) 7 times in 2007.
Day Sale Outstanding:

2005 2006 2007

7.124.871.41 10.700.424.03 25.236.977.67
Account receivable 6 2 8
227.249.89 293.526.53 370.805.56
Average daily sales 9 2 0

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 31,35258347 36,45470808 68,05986863
DSO
Table 8: DSO in 2005, 2006, and 2007
You see that DSO is increasing from 2005 to 2007. DSO in 2007 is double
DSO in 2005. It means that many invoices were past due.
From this point, we may think that receivable management is not good.
Now we turn to see Bad debt at 12/31/2006 and at 12/31/2007(see full
table xx in Appendix)
2005 2006
53.671.54 11.196.85
Bad debts 2 7
Account 7.124.871.41 10.700.424.03
receivable 6 2
% Bad debt 0,75% 0,10%
Table 9: Percentage bad debts of Account Receivable

2005 2006
53.671.54 11.196.85
Bad debts 2 7
82.946.213.00 107.137.184.13
Net Sales 9 7
% Bad debt 0,06% 0,01%
Table 10: Percentage bad debts of Net Sales

2004 2005 2006 2007

14.678.53 53.671.54 11.196.85
Bad debts 8 2 7 0
Table 11: Bad debt in 2004, 2005, 2006, and 2007 based on invoice day
Bad debts percentage of Account Receivable and Net Sales was
decreasing. And these bad debts are in accepted limit.
4.2.3. Evaluate each receivable policy:
a. How are order taken? (Receivable Antecedents)
To Metro, Supermarket, and wholesales they receive order via fax. To
retailers, they receive form sales men. In 2005 and 2006, they had
taken an order for 2 days, 3-4 days if so far. They use Rhub to make a
tax invoice. Rhub is software used to manage good inventory, make an

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 invoice based on what information you had input already: price, tax
rate, discount, customer’s address, payment term…
b. Credit processing:
From Credit application to credit –Approved Customers, they take 8
days to 15 days making decision. The CD Sup receives Credit
application, assesses Credit application, then make a proposal to Sales
Director. Sales Director review and assess this proposal, then discuss
to CFO and Marketing Director to giving Credit line if approved.
It has been approved by Sales Director, CFO and Marketing Director.
c. Credit decision:
The main Credit decision makes on Credit line. It is calculated by a
special formula of CD Sup including target sales, market share at this
area. To wholesaler, after calculating, they assign target sales to
customers within 4 weeks, and then they divide by 4. It is an amount
the customers have to take a deposit with the company or letter of
credit from banks. The triple of the amount is credit limit that is the
largest of volume customers can make an order.
d. Collection efforts
The system provides a list of customers that are past due as of day; call
a past due notice to them, followed by form letters, followed by a call
and more form letter; end by either collecting or placing for collection.

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 CHAPTER 5
DISCUSSION
i. If it was easy, everyone would do it (well):
Management of the receivables asset is a demanding task. The vast
majority of companies expect that over 99.9% of all billings will be collected.
Collecting ninety five percent of revenue is not good enough.
Companies will tolerate bad debt expense of several tenths of a percent of revenue,
but not much more. Which other departments are expected to perform at 99 plus
percent effectiveness?
It is generally expected that a high percentage of invoices will be paid on
time and over 90% within 15 days of the due date. Management expects that the asset
will be managed to promote sales and that all customers will be served promptly,
courteously, and professionally. Astoundingly, most firms also expect this all to be
accomplished for a cost equal to about two to three tenths of a percent of
revenue. Quite a bargain!
Management of the receivables asset is a complex task. It addresses the
ramifications of practices and processes usually outside the span of control of the
responsible manager. It requires balancing of opposing priorities. It is affected by the
state of the domestic and global economy, interest rates, foreign exchange rates,
banking regulations and practices, business law, and other factors. Excellence in
receivables management is a combination of art as well as science; it involves
business process, technology tools, staff skills, motivation, company culture, changing
behavior of customers and coworkers, the right organization structure and metrics,
incentives, and flexibility to deal with changing external influences.
ii. Influences outside the control of the responsible manager:

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 The receivables asset is sometimes called the garbage can of the company.
This is because the receivables asset reflects the quality of the entire revenue cycle
operation. If an error is made in taking an order, fulfilling it, invoicing it, applying the
customer payment, or if the customer is dissatisfied with the product or service, it will
manifest itself as a past due or short payment in the receivables ledger. The quality of
the receivables asset is an excellent barometer of customer service. It is feedback the
customer willingly and quickly gives. It is tempting to call it a free quality control
measurement system, except it is not free. The firm does not have to pay customers
for the feedback, but it does incur costs in remediating the problems.

iii. Conflicting priorities:

Excellence in receivables management requires trade-offs between
conflicting goals. The trade-offs are best balanced in accordance with the company’s
overriding strategic objectives. To optimize the trade-off, the relative ranking of these
strategic objectives must be understood:
• Sales growth
• Profitability
• Cash generation
• Market share

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 • Risk tolerance
The conflicting objectives are to:
• Loosen credit acceptance criteria and controls to boost sales versus
tightening credit controls to minimize the investment in receivables and the exposure
to bad debt loss.
• Achieve strong receivables management results and provide excellent
financial service to your customers versus minimizing the cost of the function.
iv. Credit policy:
The global marketplace runs on credit. Goods and services are routinely
delivered with the expectation that payment will be made according to the agreed
payment terms. Credit risk has two dimensions. The first is the risk that payment will
never be made. This loss is known as bad debt. The second risk is that payment will
be made late; that is, beyond agreed payment terms. This loss is known as
delinquency. It is considered a loss on the basis that a company will have to borrow
money and pay interest to replace the funds not received on time. Naturally, bad debt
loss is the more devastating of the two losses and the risk that receives the most
management attention. The critical task to managing credit risk is to balance the need
for credit sales, and the profit earned on those sales, against the perceived risk of
extending credit to a customer. There is no easy answer or magic formula for
balancing these factors. The proper balance varies by individual company and is
based on a firm’s profit margins, strategic goals, and whether a product can be
repossessed and resold. There are many techniques and tools to investigate, evaluate,
and monitor credit risk; however, balancing that risk against the other company
priorities is unique to each firm, requires judgment, and is never easy.
v. Bookkeeping for Accounts Receivable:
Companies have two methods available to them for measuring the net
value of account receivables, which is computed by subtracting the balance of an
allowance account from the accounts receivable account. The first method is the
allowance method, which establishes a contra asset account as the offset to accounts
receivable in the balance sheet. The amount of the allowance can be computed in two

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ways; through the analysis based on sales method and analysis based on accounts
receivable method. The reason a contra asset receivable account is necessary is to
adhere to the matching principle of accounting, which mandates that accrual basis
companies match all revenues and expenses with the period in which they are earned
and incurred, respectively. The second method, the direct write off method, is
simpler than the allowance method in that allows for one simple entry to reduce
accounts receivable to its net realizable value.
For tax reporting purposes, the direct write-off method must be used;
however, for financial reporting purposes, it is necessary to use the allowance method
because it matches a period's revenue with associated expenses-a fundamental
concept of accounting known as the matching principle.
vi. Organization structure:
The “right” organizational structure is one that will:
• Deploy the proper skills to each of the functions within receivables
management to maximize effectiveness
• Staff the positions with the appropriate level of knowledge and
experience to be cost efficient

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 CHAPTER 6
CONCLUSION AND RECOMMENDATION
1. Internal control in receivable management:
The principle of the internal control can be used to establish controls to
safeguard receivables. For example, the four functions of credit approval, sales,
accounting, and collections should be separated. The individual responsible for sales
should be separate from the individuals accounting for the receivables and approving
credit. By doing so, the accounting and credit approval functions serve as independent
checks on sales. The employee who handles the accounting for receivable should not
be involved with collecting receivables. Separating these functions reduces the
possibility of errors and misuse of funds.
2. Bookkeeping for Accounts Receivable:
AAA Pharma still uses direct write-off method for uncollectible Accounts.
Although this method is simple, its use can reduce the usefulness of both the income
statement and balance sheet, as we mention above.

So now is the time to change into Allowance method and analysis based
on receivable method.

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 Monthly estimates of credit losses: At the end of each month,
management should again estimate the probable amount of uncollectible accounts and
adjust the Allowance for Doubtful to this new estimate. Based on past experience, the
uncollectible accounts expense is estimated at percentage of receivable by Rhub
software. The computer software is quickly and easily prepares monthly aging
schedules of account receivable.
With this method, it is useful to management in review the status of
individual accounts receivable and in evaluating the overall effectiveness of credit and
collection policies. The longer an account is past due, the greater the likelihood that it
will not be collected in full. Base on past experience, the credit manager estimates the
percentage of credit losses likely to occur in each the age group of account receivable.
This percentage, when applied to the total amount in the age group, gives the
estimated uncollectible portion for that group. By adding together the estimated
uncollectible portions for all age groups, the required balance in Allowance for
Doubtful Accounts is determined (see in table 1).
It is related to taw government; the company has prepared for at least 2
years to change in this method.

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 REFERENCE

1. Johnson & Johnson homepage at http://www.jnj.com/connect/

2. John G. Salek,(2004) Wiley Best Practices, Accounts Receivable Management
Best Practices
3. Weygrandt, Kieso, Kimmel.(2003), John Wiley & Sons, Financial Accounting
4. Warren Reeve Fess, (2005), Thomason 21e, Accounting
5. Williams Haka Bettner Carcello, (2008), Mc Graw-Hill, Financial Accounting
6. Michelle Dunn , (2006), Entrepreneur Magazine’s, Credit and Collections
handbook
7. Pay Attention to Internal Collections- Darin Ball, January 16 2008.
www.collectionadvisor.com
8. Seven Habits - and Rewards - of Highly Efficient Collections Operations -
Lois Brown, January 17 2008
9. Optimizing Receivables - Yu-Soon Koh, January 28 2008
Source: CreditandCollectionsWorld.com

10. Best Practice in Consumer Collections - Astrid Rial, January 21 2008

Page 50 of 54
 APPENDICES

Invoice Delivery pay

Customer name Invoice A/R Aging
day day ment
79.546.936
PHUÙAN THÒNH 8867 13/10/200514/10/2005COD 477.489 443
PHUÙAN THÒNH 10579 11/11/200512/11/2005COD 828.289 414
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 3782 28/01/200529/01/2006COD 14.101.542 336
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 3805 29/01/200529/01/2006COD 1.778.159 336
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 3806 29/01/200529/01/2006COD 3.251.526 336
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 4055 16/02/200516/02/2005COD 21.101.006 683
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 4056 16/02/200516/02/2005COD 406.441 683
DNTN NGUYEÃ
N PHUÙ 19226 21/09/200411/07/2006COD 6.810.315 173
ANH LUAÂ
N (KIEÂ
N GIANG) 12084 23/04/200423/04/2004COD 310.108 982
TRÖÔNG THÒMYÕNGUYEÂ
N 1951 08/12/200409/12/2004COD 7.558.115 752
THANH HÖÔNG 3581 21/01/200522/02/2005COD 11.727.092 677
NHAØPHAÂ
N PHOÁ
I HOAØ
NG ÑAÊ
NG 16933 29/04/200617/06/2006COD 9.153.975 197
NHAØPHAÂ
N PHOÁ
I HOAØ
NG ÑAÊ
NG 18554 16/06/200617/06/2006COD 1.310.687 197
DNTN THAØ
NH ÑÖÙ
C/ TRAÀ
N THÒTHÔM71040 28/07/200628/07/2006COD 732.195 156

Table 11: Bad debts at12/31/2006

Page 51 of 54
 payme
Invoice Delivery nt
Customer name Invoice A/R Aging
day day metho
d
72.426.514
PHUÙAN THÒ
NH 8867 13/10/2005 14/10/2005 COD 477.489 808
PHUÙAN THÒ
NH 10579 11/11/2005 12/11/2005 COD 828.289 779
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 3782 28/01/2005 29/01/2006 COD 14.101.542 701
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 3805 29/01/2005 29/01/2006 COD 1.778.159 701
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 3806 29/01/2005 29/01/2006 COD 3.251.526 701
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 4055 16/02/2005 16/02/2005 COD 21.101.006 1.048
TM-DV COÂ
NG NGHEÄTRÍ VIEÄ
T 4056 16/02/2005 16/02/2005 COD 406.441 1.048
TRÖÔNG THÒMYÕNGUYEÂ
N 1951 08/12/2004 09/12/2004 COD 7.558.115 1.117
THANH HÖÔNG 3581 21/01/2005 22/02/2005 COD 11.727.092 1.042
NHAØPHAÂ
N PHOÁ
I HOAØ
NG ÑAÊ
NG 16933 29/04/2006 17/06/2006 COD 9.153.975 562
NHAØPHAÂ
N PHOÁ
I HOAØ
NG ÑAÊ
NG 18554 16/06/2006 17/06/2006 COD 1.310.687 562
DNTN THAØ
NH ÑÖÙ
C/ TRAÀ
N THÒTHÔM 71040 28/07/2006 28/07/2006 COD 732.195 521

Table 12: Bad debts at12/31/2007

Figure 8: Chart of accounting department

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Figure 9: Managing distribution network

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