“Year of the consolidation of the Grau Sea”

CONTINENTAL UNIVERSITY

Cover
RESEARCH WORK

ACCOUNTS RECEIVABLE MANAGEMENT –

COLLECTION MANAGEMENT

COURSE:

FINANCE

PRESENTED BY:
- NURIA MAYTA SOLARI - U2014213049
- CAREN JULISSA MENESES PARDO - U2014213308
- YULISA TICLLACURI SEDANO - U2013229610
- GERARDO FRANCIS NORDMAN TOLENTINO - U2012203523
- KATERINE CORILLOCLALA ACOSTA - U2014207132

TEACHER:

Ruben Calero Romero

CLASSROOM:

C303

HUANCAYO – PERU
2016
 EXECUTIVE SUMMARY

The present research work entitled “Accounts receivable management – Collection

management” has been developed on the basis of documentary, statistical and
descriptive information obtained from different texts related to the subject of study
and also based on information from the model company.
Proper management of accounts receivable becomes a necessity for companies,
since maintaining appropriate levels of liquid funds to meet financial needs will
depend on it.
Therefore, good administration of working capital involves efficient management of
accounts receivable, as these are a valuable instrument as long as they are
maintained at adequate levels that maximize liquidity and profitability (reduction of
financial expenses) by reducing bad debts.
Accounts receivable constitute the credit that the company grants to its clients
through an account opened in the ordinary course of business, as a result of the
delivery of articles or services.
In order to retain current customers and attract new ones, most companies resort to
offering credit. Credit sales, which result in accounts receivable, typically include
credit terms that stipulate payment within a specified number of days. Although it is
known that not all accounts receivable are collected within the credit period, it is true
that most of them are converted into cash in much less than a year; consequently,
accounts receivable are considered part of the company's current assets, so much
attention is paid to their efficient management.
The objective pursued with respect to the administration of accounts receivable
should not only be to collect them promptly, but attention should also be paid to the
cost-benefit alternatives that arise in the different fields of their administration. These
fields include determining credit policies, credit analysis, credit conditions and
collection policies.

THE STUDENT
 CHAPTER I
THEORETICAL FRAMEWORK

1.1. ACCOUNTS RECEIVABLE MANAGEMENT – COLLECTION

MANAGEMENT
1.1.1. ACCOUNTS RECEIVABLE:
1. Concept:
Accounts receivable are the part of current assets originating from
credit sales. This concept includes accounts receivable originating
from commercial operations; however, there are accounts
receivable that do not come from the current operations of a
business and are commonly known as non-commercial accounts.
The latter are generated by transactions carried out in the following
ways:
- Between the company and its employees or shareholders
- Affiliated companies
- Refundable deposits
- Claims for loss or damage
- Advances given for the purchase of goods
- Government charges for tax refunds
- In general, any right to collect not arising from a credit sale of
goods or services.

2. Importance:
For all credit management purposes, three important and basic
elements must be considered, which are:
a) Obtaining maximum profit in operations.
b) Collectibility of credit sales, minimizing the risk of accounts
receivable as much as possible, in order to protect against possible
losses.
c) Optimization of profits for the firm's shareholders.

The classification of accounts receivable is established from the

following points of view:
 Source: http://www.repositorioacademico.usmp.edu.pe/
1.1.2. The Role of Collections Management
Collection is an important service that allows for the maintenance of
clients as well as opening up the possibility of “re-lending”; it is a
strategic and key process to generate the habit and a culture of
payment in clients. Collections can also be seen as a business area
whose objective is to generate profitability by converting losses into
income.
Collection is an integral part of the credit cycle; it should not be
understood as the final step, since it is during this process that the
institution receives valuable feedback on the general policies and
specific activities of each subprocess: promotion, evaluation, approval
and disbursement/monitoring.

In this sense, debt collection management is a fairly interactive process

with clients, which starts with the analysis of the client's situation,
timely and frequent contact with the client, offering in the negotiation
process timely alternative solutions for each case and recording the
actions executed to carry out continuous monitoring and control of
compliance with the negotiated agreements. Some typical actions in
debt collection management are described below, along with a flow
chart showing the process followed by debt collection management:
a) Case Analysis: Who is the Client? What is your situation? What
were the conditions for granting the loan? Why did you default?
Here we can consider internal and external sources of information
such as risk centers, debtor lists, etc.
b) Customer Contact: What information does the customer record?
Where is the client located? What actions have already been
executed?
c) Diagnosis: What is the problem behind the current delinquency?
What kind of client do we have?
d) Alternative generation: What are the possible solutions? The
objective of this action is to sell the benefit to create a culture of
payment in the client.
e) Obtaining payment commitments: Are we negotiating well? The
MFI must clearly identify when, where, how and how much the
client will pay, and remember, for example, that a client who is in a
situation of over-indebtedness or reduced income will establish a
hierarchy in the payment of debts. Can we get the client to prioritize
paying this loan?
f) Compliance with payment commitments: Did the client comply
with the payment commitment on the indicated date? Does it prove
that you want to pay? The objective is to show consistency
throughout the entire collection process. It is not enough for the
client to have a positive attitude towards payment; debt collection
managers must follow up on payment commitments.
g) Action Log: Are actions being coordinated? It is important to
consider or put yourself in the place of the person who will continue
the collection management.

1.1.3. CLASSIFICATION OF ACCOUNTS RECEIVABLE:

Accounts receivable should be classified as current assets and
presented in the STATEMENT OF FINANCIAL POSITION.
 Depending on their origin, accounts receivable can be classified as
follows:
− Trade accounts receivable. These are classified in the
customer account and originate in the normal course of selling
a product or service.
− Miscellaneous accounts receivable. They are owed by other
debtors and come from sources other than sales. These arise
from transactions other than those for which the entity was
established, such as loans to employees or shareholders.

1.1.4. PURPOSE OF ACCOUNTS RECEIVABLE:

It consists of recording all operations originating from customer debts,
through invoices, bills, promissory notes or other documents receivable
from commercial operations of sales of goods or services. Therefore,
the company must properly record all movements related to these
documents, since they constitute part of its assets, and above all it
must control that these do not lose their formality to become money.

1.1.5. ACCOUNTS RECEIVABLE POLICIES:

Coopers and Lybrand (2002) consider “policies as criteria that the
administration has and that are the basis for establishing control”,
policies are understood as the general criteria that aim to guide the
actions that will be carried out to achieve specific objectives.

Therefore, accounts receivable policies are the guidelines established

by the organization aimed at controlling aspects related to credit
granted to customers in the sale of goods or in the provision of a
service, in order to guarantee collection of the same at the established
time. There are several policies that must be used for the effective
management of accounts receivable, such as: credit policies,
administration policies and collection policies.

A company's collection policies are the procedures it follows to collect

its accounts receivable when they are due.
The effectiveness of the company's collection policies can be partially
assessed by examining the level of estimated uncollectible accounts.
This level depends not only on the collection policies but also on the
credit policy on which its approval is based.

1.1.6. CREDIT AND COLLECTION POLICIES

Policies are set according to the company's objective. The credit and
collection area of a company is a key piece within an organization.
Before a sale, the credit department must decide to whom, up to what
amount and for what term to sell, and after the sale, the collection
department ensures that payment terms are met and, if not, takes
measures to ensure payment as soon as possible.

Collection acceleration means reducing the delay between the time

customers pay their bills and the time checks are cashed and the
proceeds are available for use.

Accounts receivable management with working capital administration is

 key in organizations as it has an impact on their profitability, liquidity
and risk measures.
We will also see the management of accounts receivable as one of the
most important tools available to the financial manager to optimize
working capital and consequently maximize the value of the company.

1.1.7. ACCOUNTS RECEIVABLE MANAGEMENT:

Accounts receivable management begins with the decision whether or
not to grant credit. In determining an optimal credit policy to fit the
needs of the firm, managers must consider several controllable
variables that they can use to alter the level of accounts receivable,
including credit and collection procedures. Credit procedures refer to
the criteria a company uses to select credit applicants, to determine
which of its customers to grant credit to and in what amount.

If management knows the costs and benefits of granting credit, it can

then apply two very common accounts receivable policies, which are:
− Credit sale for “n” number of days. This policy grants the
client “n” days maximum to pay their obligations. Each
company is free to establish the credit term that best suits it.
− Early payment discount. This policy grants a percentage
discount on the total amount of the sale to the customer who
pays his/her obligations within a period of fewer days. In
summary, we can say that accounts receivable consist of the
credit that a company grants to its customers in the sale of
goods or services. These current assets constitute important
investments for most companies, in addition to representing
considerable proportions of the total assets of companies in
various industrial branches, especially those involved in
wholesale trade.

1.1.8. THE THREE STAGES OF COLLECTION AND THEIR

TECHNIQUES
a) Reminder stage. The first step in collections is to remind the
customer that the due date of their account has passed without
payment. Usually, there are several days between the due date
and the reminder date. The first reminder should be moderate
and impersonal. It may be a duplicate statement or invoice,
labels, stickers, letters, printed cards or statements divided into
periods and reminders.

b) Pursuit stage. If the reminder fails to produce payment of the

account, the collection activity moves to the pursuit stage. This
procedure usually seeks a program of successive actions to be
applied at regular intervals depending on whether the account
does not respond to collection efforts.

c) Drastic stage. If reminders and insistence fail to collect on an

overdue and unpaid account, the relevant (collections) manager
must resort to drastic action. There are only two options left:
collecting through bills of exchange, or through an agency or a
lawyer.
1.1.9. BASIC ASPECTS OF THE PROCEDURE
It is a type of plan that indicates a series of interrelated tasks that must
be carried out according to a chronological sequence, with the purpose
of achieving previously established objectives.

"They are plans that indicate the chronological sequence of actions

in the administrative process in a more efficient manner to obtain
better results in each specific function of the company" (Reyes
Ponce).

Determining procedures involves establishing the work standards to

which the different members of the organization must adhere in order
to comply with the assigned policies or functions.
a) It saves the executive time, since it avoids having to develop a
procedure every time it is necessary.
b) Allows for more effective delegation of authority.
c) It constitutes a research technique to identify faults.
d) It promotes greater efficiency.
e) It promotes greater productivity.

Goals:
a. Simplify work methods, eliminate unnecessary operations and
paperwork in order to reduce costs, fluidity, and increase
efficiency in activities. However, there are secondary or
accessory objectives.
b. Delete operations, changing them between themselves or
deleting them.
c. Change the order of operations to achieve greater efficiency.
d. Eliminate unnecessary transport or reduce it to a minimum to
save time.
e. Centralize inspections while maintaining internal control.

1.1.10. ACCOUNTS RECEIVABLE MANAGEMENT FACTORS

External factors:
 The socio-economic situation and financial stability that the country
is experiencing at the time in which these policies must be
implemented, modified or replaced.
 Market situation; which translates into the possibility of knowing the
situation.
 Quality and market management, competitor behavior, supplier
conditions, customer situation.

Internal factors:
a) Objectives pursued; which allow us to penetrate the market, place
new products, attract new customers, maintain a level of production
and employment, etc.
b) Profitability; the higher the profitability, the higher the allowable
collection percentage.
c) Degree of efficiency, and sufficient working capital to finance
installment sales
d) Financial situation of the company; due to the convenience of not
maintaining a high percentage of investment in accounts
receivable, if it is taken into account that the company's capital is
not sufficient.

Variables that must be considered and evaluated in the management

of accounts receivable.
The possibility of making credit policies more flexible is limited by three
main variables:
 The market.
 The capacity
 Cash flows credit conditions.

Credit conditions help the company to obtain more clients, but great
care must be taken since discounts can be offered that could
sometimes be harmful to the company.
Changes in any aspect of a company's credit conditions can impact its
overall profitability.

Credit Policies:
According to Gitman (2003), "they are a series of guidelines that are
followed in order to determine whether credit is granted to a client and
for how long it should be granted." It is necessary for the company to
have adequate sources of credit information and to use analysis
methods, since all these aspects are essential to achieve efficient
management of accounts receivable.

Likewise, Ettinger (2000) states that they are "the support that the
manager of a company uses to evaluate the record of the credits
granted." A manager who grants credit too liberally causes excessive
losses to the organization. Based on the above, the importance of
establishing credit policies in all companies is evident, since they
represent the guidelines that will govern the conditions under which
credits will be granted to clients, thereby achieving more efficient
control over those who punctually comply with their obligations.
Consequently, due to the relevance of this aspect, it will be considered
in this research as a key element for its development.

These relate to determining credit selection, credit standards or

procedures, and credit conditions. In order to maintain adequate
control of accounts receivable in a company, it is necessary to
implement credit and collection policies that optimize invested working
capital.
Therefore, any organization that sells services or products in the
market, whether domestic or international, should have a credit policy.
While internal controls on a process like sales and accounts receivable
typically exist, whether formally or not, developing a solid credit policy
can help organizations better understand how they work, how they
collect, and what issues might exist that prevent them from having
better cash flow.
This credit policy of every organization must be a guiding document to
ensure that all activities that together constitute the collection cycle,
and which range from receiving the customer's order to the bank
 deposit of the collection, are carried out in the most efficient manner in
order to reduce the collection cycle period to the lowest possible and
also support the company's cash flow objectives.

1.1.11. ACCOUNTS RECEIVABLE MANAGEMENT IN PERU

Collection agencies have found an effective strategy to get those who
are reluctant to pay their debts to become current with their obligations.
The method is applied at the stage of judicial collection and consists of
presenting a precautionary measure on a percentage, which the law
allows, of the salary of these so-called compulsive debtors, explained
José Manuel Núñez, president of the National Association of Collection
Companies of Peru.

Purchase of non-performing loans:

For the past couple of years, banks have been selling their bad debt
portfolios more frequently. José Manuel Núñez, president of Anecop,
indicated that consumer credit and mortgage guarantee portfolios are
the most offered. In the first case, these are loans with an age between
180 days and two years. Investment funds that subcontract debt
collection companies participate in this business.

The investment is huge but very profitable. Credit portfolios are

purchased at 15% or 20% of their value, leaving 75% or 80% to be
recovered, plus interest.
 The keys are:
 Sectors. In Peru, debt collection agencies provide their services
mainly to financial, telecommunications and retail companies.
 Association. Anecop brings together eight companies that handle
70% of the country's debt collection outsourcing.
 Exportation. The companies that make up Anecop are preparing to
export their debt collection services to Spain, Chile, Argentina,
Colombia and other countries in the region.
 Costs. They have lower costs than their regional peers. An
international meeting of debt collection companies will be held in
Lima on October 1.

1.1.12. Accounts Receivable Investment:

There is a cost associated with managing accounts receivable. The
higher the company's average accounts receivable, the more
expensive it is to manage and vice versa. If the company makes its
credit standards more flexible, the average level of accounts receivable
should increase, while if there are restrictions in the standards, they
should decrease.

Thus, more flexible credit standards result in higher management costs

and restrictions in standards result in lower management costs.

Changes in the level of accounts receivable related to modifications in

credit standards come from two factors mainly, in the variations with
respect to sales and another with respect to collections that are closely
linked, since it is expected that sales will increase as the company
makes its credit standards more flexible resulting in an average greater
number of accounts receivable, but if on the contrary the credit
conditions become less flexible, credit is given to few individuals,
carrying out an exhaustive study of their payment capacity, therefore
the average of accounts receivable decreases due to the effect of the
decrease in the number of sales.

In conclusion, changes in sales and collections operate simultaneously

to produce high costs of managing accounts receivable when credit
standards become more flexible and are reduced when credit
standards become more rigorous.
Estimate of uncollectible accounts.

Another variable that is affected by changes in credit standards is the

estimate of uncollectible accounts. The probability or risk of acquiring a
bad debt collection account increases as credit standards become
more flexible and vice versa, this also given the study that is made of
the clients and their ability to pay in the short and long term.

1.1.13. Turnover:
As noted in previous paragraphs, as credit standards become more
flexible, sales are expected to increase and restrictions are expected to
decrease. The effects of these changes then have a direct impact on
the company's costs and income and therefore on its expected profit.
Continuing with the study that is being carried out on the effective and
efficient administration of accounts receivable and applying the tools
that have already been described, an outline will be made of the
premises that companies apply to grant credit to their clients.

Once the company has set its credit standards, procedures must be
established to evaluate credit applicants. Often the company must
determine not only the client's merits for credit, but also calculate the
amount for which the client can respond.

Once this has been done, the company can establish a line of credit,
stipulating the maximum amount that the customer can owe the
company at any one time. Lines of credit are established to eliminate
the need to check a major customer's credit every time a credit
purchase is made.
 CHAPTER II
APPLICABILITY OF THE TOPIC
CASE: LA GRADE SA STORES
It is an industrial company that began its activities in November 2005, with a capital
of S/1000.00; initially its main business was manufacturing furniture for bedrooms,
living rooms, dining rooms, etc.
General information:
 RUC: 20486379066
 Company name: GRUPO GRANDE SAC
 Website: http://www.grupograndesac.com
 Company Type: Closed Corporation
 Condition: Active
 Start Date of Activities: 17 / December / 2005
 Commercial Activity: Sale. May. of Other Products.
 ISIC: 51906
 Legal Address: Jr. Calixto No. 199
 Urbanization: Fenced
 District / City: Huancayo
 Province: Huancayo
 Department: Junin, Peru

Since its inception, the company has constantly acquired fixed assets such as
machinery, equipment and moulds, financed with loans from shareholders and
through financial leasing contracts with financial institutions.
The company is organized according to the following structure: Shareholders: The
shareholders of the company are three natural persons who decide the progress of
the company through the boards of directors, with the main objective of obtaining
optimal results.
Accounting and Cost Department: It is responsible for recording the company's
economic and financial activities, based on which it must issue the Financial
Statements and reports required by the senior bodies, based on which they will
make the most important decisions in the running of the company.
Production Department: Responsible for production activities, from the requirement
of raw materials, production and proper quality control, warehouse management and
ensuring the maintenance and optimal function of the machines.
49% of the machinery has an average age of 10 years and 51% has an average age
of 4 years. Since its inception until today, the company has constantly invested in
fixed assets:
As of December 31, 2010, it had fixed assets of S/1,729,288.
As of December 31, 2013, it had fixed assets of S/4,686,332
As of December 31, 2015, it had fixed assets of S/5,645,188.
Business lines.-
Physical units sold in 2015 and 2014
Sales Levels:
Year Local Sales Foreign Sales Total Sales
S/ % s/ % s/
2011 2,679,788.0 95 153,549.0 5 2,833,337.00
0 0
2012 2,708,815.0 98 49,955.00 2 2,758,770.00
0
2013 3,195,381.0 92 281,658.0 8 3,477,039.00
0 0
2014 3,543,837.0 92 312,731.0 8 3,856,568.00
0 0
2015 3,815,449.0 81 884,933.0 19 4,700,382.00
0 0

Local Sales Policies:

• Cash 20%
• Credit 80%
• Letters 80% 45 days
• Invoices 20% 30 days
Exterior: Lima
• Cash payment method.

Sales 4,700,459.87 : 100.00%

Discounts, sales and bonuses -78.33
Cost of Sales -3,755,320.91 -79.89%
Gross Profit 945,060.63
Administrative expenses -757,727.33 -16.12%

Operation result 187,333.30 3.99%

Other income and

expenses
Financial Expenses -150,385.24 -3.20%
Financial income 2,562.81 0.05%
Miscellaneous income 11,106.11 0.24%

Exceptional income - 0.00%

Exceptional Expenses -2,544.19 -0.05%
Exchange rate 146,963.45 3.13%
difference
Result before taxes 195,036.24 4.15%
Income tax -58,510.87
 Exercise Result 136,525.37 2.90%

Accumulated losses have been increasing until 2008, because the company
since its foundation has constantly acquired machines and molds through
loans from partners, affecting the interests and depreciation to the results,
also, having acquired machines through leasing, the accelerated
depreciation to make use of the tax benefit has affected the results, another
reason is that sales were not sufficient to absorb the expenses, which have
begun to reverse since 2009.
Debts to shareholders are long-term, there is no specific payment date. The
profit from exchange rate differences is due especially to the purchase of raw
materials in dollars on credit for 30, 60 and 90 days. The low exchange rate
in 2010 has given rise to this profit, with the financing in dollars having the
same effect.
In 2010, the company recovered from the financial crisis it suffered in 2008
and 2006, reversing these from 2009, when, after two years of losses, it
achieved a profit of around S/29,008.00.
It is recommended:
LONG TERM PLAN.-
In order to address the country's good macroeconomic situation and
business opportunities, the company has decided to take measures for
proper management of its working capital and cash.
The company also does not use bank lines of sales financing in order to
increase its collections and reduce the risk of default.
The plan to improve accounts receivable management is as follows:
a) Carry out a selection of clients based on their historical payment capacity
and their solvency level to calculate the credit limits (lines) for each client.
b) Propose a new credit policy based on market characteristics and
guaranteeing technical risk allocation.
c) Negotiate lines of credit with banks such as bill discounting, electronic
invoice financing (EIF), and supplier factoring in order to increase cash
levels, reduce accounts receivable levels, and reduce default risks.
d) Review the commercial policy every six months to gradually reduce the
percentage of credit sales and prioritize cash sales with an aggressive
percentage for cash payment.
With the plan proposed above, the finance management hopes to improve
management ratios from 2010 onwards:
CURRENT SITUATION RATIOS AFTER
RATIOS MEASURES I
2006 2010 2011 2012 2013 2014 2015
MANAGEMENT

You heard about Accounts 65 103 86 110 90 90 90

Receivable

Inventory Days 140 132 161 123 131 131 131

Days of Accounts Payable 73 101 81 120 105 97 88

CASH CONVERSION 133 134 165 113 116 124 133

CYCLE

Based on the financial projections based on the actions stated above, the company
expects that from 2010 onwards the levels of accounts receivable will reflect a
financial situation with lower risk to the company's profitability.
The company is aware that it must take full advantage of the various platforms
offered by the virtual banking of the different banks and thus increase cash levels,
as a way of increasing the value of the company.
 CONCLUSIONS

1. Collections is a customer service that financial companies must consider

before launching a new credit program. Its importance lies in its role as part
of the entire credit cycle, as well as an important source of feedback for the
previous collection processes where, in many cases, delinquency problems
originate.
2. The best practices here are not intended to be a comprehensive list of all
strategies that can be used to address and reduce delinquency, but in the
authors' experience they are the most effective. Institutions must also be
aware of consumer protection issues from a debt collection management
perspective, as well as the appropriate cost structure to ensure proper
distribution of funds. What should be understood above all is that the best
collection strategy is the management of current clients, management that is
carried out before there is a problem of delinquency and ends only after the
loss of credit is recognized.
3. Most financial companies in our country lack an efficient credit policy, since
when evaluating potential clients they only take into account prestige and
seniority in the market, but do not conduct a rigorous study and follow-up of
the behavior of potential clients in fulfilling their obligations with other
contractors.
4. Likewise, financial companies in our country do not have a consistent
collection policy, since the deadline established for payment to clients is 45
days according to the contract. This is partly in theory, but in practice it does
not occur and the company does not have a contingency plan to cover the
expenses incurred due to the delay in approving invoices. This problem is
reflected in the bureaucratic procedures for approving valuations that oil
companies have at the different stages of the review and approval process
for services performed.
 LITERATURE

Coopers & Librand (2002). New concepts of internal control report: COSO. Spain.
Diaz Santos Editions, S.A.
By Juano Solis, M. (2001). Finance and Tax Law, Catholic University of Peru
Editions. − Ettinger, R. (2000). Credits and collections. Mexico. Continental.
Gitman, L. (2003). Principles of financial management. Mexico. Pearson education.
Levy, L. (2009). Financial planning in the modern company. Mexico. ISEF Fiscales
Editorial.
Northern Rock, 1995, Corporate Finance, Nautec Editions, Chile.
Reyes, A. (2002). Business Administration. Mexico. Limousine.