Management of Receivables, The Case of the Czech Republic

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1 Maagemet of Receivables, The Case of the Czech Republic EVA KOLAROVA, MILANA OTRUSINOVA Departmet of Fiace ad Accoutig Tomas Bata Uiversity i Zli Faculty of Maagemet ad Ecoomics Nam. T. G. Masaryka 5555, Zli CZECH REPUBLIC ekolarova@fame.utb.cz, otrusiova@fame.utb.cz Abstract: - Receivables, as a importat part of workig capital are associated with a high risk of o-paymet. The most effective protectio agaist usettled receivables is timely security. The aim of the paper is to aalyse the level of maagemet of receivables for orgaizatios i the Czech Republic, icludig a compariso of the curret state with the state prior to the crisis. The focus of the article is to preset the results of empirical research, where the primary aim was to aalyse the curret state of overdue outstadig receivables i the accouts of the whole spectrum of busiesses ad istitutios i the Czech Republic. A hypothesis regardig the depedece of a higher level of the maagemet of receivables o firm size was subsequetly verified. The coclusios of the survey showed that about three quarters of busiesses etities i the Czech Republic curretly record a usettled receivable i their accouts ad the tested hypothesis was cofirmed as well. We ca say that larger firms reduce the level of busiess risk by the effective maagemet of receivables before the momet of their actual rise. Key-Words: - receivables, maagemet of receivables, eforcemet, usettled receivables 1 Itroductio The paper deals with a relatively commo problem of almost all compaies worldwide. Receivables as a importat part of workig capital are associated with a high risk of o-paymet. The aim of the paper is to aalyse the level of maagemet of receivables ad stress some possible solutios that would reduce the level of busiess risk ad are ecessary for the efficiet maagemet of receivables. Oe of the objectives of the maagemet of receivables is to cotribute to a icrease i market value of eterprises ad their competitiveess through active iteractio i the provisio of liquidity of receivables ad thus the solvecy of eterprises. The basis of the maagemet of receivables is the idetificatio ad accurate maagemet of iformatio o curret ad future customers, esurig the prevetio of receivables by egotiatig cotractual pealties, default iterests or security i the form of bills or the purchase of receivables. Adjustig items may be created to questioable receivables or they may be secured through factorig ad forfeitig. [6, 12]. The focus of the article is to preset the results of empirical research where the pricipal aim was to aalyse the curret situatio i terms of the maagemet of receivables of various compaies ad istitutios i the Czech Republic ad subsequetly verify the hypothesis that, i geeral, larger firms have a higher level of the maagemet of receivables. 2 Problem Formulatio I the Czech Republic the tred of the maagemet, the latest tred accordig to Europea documets of the Europea Commuity has bee icreasigly developig. Its primary objective is to icrease busiess performace. Accordig to Daiels (2004), the performace maagemet is a broad cocept. Sulak (2005) defies performace as the ability to assess ivestmets made i busiess the best possible way. Therefore, from the defiitio is clear that usettled receivables reduce such performace. By reducig busiess risks, the value of the relatioship betwee a supplier ad a customer ca be icreased. This relatioship should result i mutually advatageous cooperatio. Customersupplier chai maagemet ca loosely be defied as a attempt to build such relatioships with suppliers, distributors ad customers that would help us provide customers with the highest possible ISBN:

2 value at miimal cost [6, 10]. The orietatio to cliet must represet a permaet directio i the maagemet of all compaies. Maagemet must provide a good uderstadig of the cliet, good coectio with the most appropriate commuicatio methods betwee the cliet ad the compay [2]. To esure solvecy i the short term, permaet workig capital maagemet is essetial so that liquid assets are always available i the amout required by liabilities payable. This places high demads o the structure maagemet of curret assets. Receivables are a trasitio of the cycle of curret assets ad their maagemet is to esure compay s liquidity ad cash flow. [5, 8]. Receivables are associated with a high risk of o-paymet. I every busiess egagemet there ca arise the situatio where oe of the parters ca fid i primary or secodary isolvecy [9]. If a customer fails to pay withi the appoited time, the decisio-makig o the various optios of the maagemet of receivables takes place ofte resultig i court eforcemet. Ufortuately, the whole process sometimes lasts several years ad ofte eds i failure. [1]. Each of the variats of solvig ucollectible receivables is also demadig o costs that shall be ivested at the very commecemet of the eforcemet of ucollectible receivables. 2.1 A prevetive measure for securig receivables ad possibilities of securig receivables The maagemet of receivables is a set of rules ad practices that miimize the risk of usettled receivables. The purpose of the maagemet of receivables does ot ivolve a situatio whe a compay has o receivables, but a situatio whe the costs associated with the maagemet of receivables process are as low as possible [15]. The maagemet of receivables is carried out i three phases: preparatio, to maturity, ad past due. The first phase is very importat i particular to determie the rules of a specific supplier - customer relatioship. The basis of successful maagemet of receivables is to work with each receivable at the time of its creatio, or before the momet it actually arises, ad try to prevet problems that may occur durig its o-paymet. The most effective protectio agaist usettled receivables is their prevetive security. A prevetive measure for the creatio of receivables cosists i cocludig a cotract. For eforcemet is importat, what is the cotet of the cotract, what are the terms ad coditios. I additio to the basic provisios that the cotract must cotai, we should ot forget to secure receivables. Possibilities may iclude a pealty, the amout of pealty iterest, pledge, isurace, security, retetio of title. For ew customers it is advisable to obtai a referece to determie the creditworthiess of the customer. I the ext stage, it is appropriate to iclude the customer ito segmets accordig to the importace ad risk. Idividual segmets are determied coditios for the paymet, maturity, discout, prepaymet, the optio of supplier credit, bill paymet, timetable for repaymet, credit lie, etc. Aother optio of prevetive protectio lies i, e.g., the protectio by documetary letter of credit, documetary collectio, ad bills, securig the coveyace of title, lie, cotract pealty, bak guaratee or receivables isurace. Oe of the securig istrumets is also a uiversally recogized right of lie, which is regulated by both the Civil ad the Commercial Code [11]. Receivables from abroad may be isured, as iteratioal busiess brigs about a lot of risks. Chages may occur as a result of political developmet, ad this may lead to isolvecy, iability of the buyer to trasfer moey to the Czech Republic due to his serious ecoomic difficulties, as a result of isolvecy. I the Czech Republic, there are compaies that specialize i isurig paymets. By makig the isurace cotract, the compay gais access to the iformatio about customers. Accoutig etities must covert receivables ad payables i foreig currecies as of the momet of their measuremet to Czech crows i accordace with the curret exchage rate of the Czech Natioal Bak or a fixed exchage rate. Foreig currecy exchage losses ad gais should be recogized i the icome statemet [13]. 2.2 The Methods Used To obtai the iformatio ecessary for complex processig of the issue some of the basic methods of scietific research were used, especially the methods of iductio ad deductio, aalysis ad subsequet sythesis. The methods usually complemet each other ad, i cosequece, overlap. The paper presets results of research coducted i the sprig of Methods of qualitative ad quatitative research were used, with the primary aim to examie the curret state records of usettled receivables i the accouts of the surveyed orgaizatios from the Czech Republic. Qualitative ad quatitative research is always based o samples. As the basic tool used for a data collectio ISBN:

3 method was chose a questioaire survey, with a total of 450 people addressed i form of a radom sample whe all types of profit ad o-profit orgaizatios were approached. The statistical aalysis icluded 128 completed questioaires, thus the respose rate was 28.5%. For the questioaire survey were chose methods of correspodece as well as face-to-face cotact, usig the cooperatio of studets. The questioaire resposes prevailed closed aswers with the possibility of ope aswers. Statistical methods were used for data aalysis ad iterpretatio of fidigs, icludig quatitative research, where the basic types of depedecies were demostrated ad basic hypotheses tested, icludig the ull hypothesis verificatio. Hypotheses were tested by the hypothesis testig for variace, the regressio ad correlatio aalysis was the used to verify the test. The mai task of the regressio aalysis is to capture, by the regressio fuctio based o the kowledge of empirical pairs of x i ad y i values, the course of depedece betwee two variables which will eable us to carry out assessmet of values of depedet variable y selected o the basis of idepedet variable x [4]. The liear regressio fuctio was selected describig the depedece. This problem is oe of the most importat tasks throughout the regressio aalysis sice the success of performed regressio estimates depeds o the accuracy of the choice of the regressio fuctio. compay (see Fig.1), the predomiat activity i terms of orgaizatio size. Fig. 1 Compay type (Source: ow research) The decisive criterio for compay size was the umber of employees (see Fig. 2). The mai field of activity was productio activities, services ad busiess. The target group structure was evely distributed, represetig all types of compaies from the Czech Republic. Compaies workig i the field of services predomiated. 28% of respodets of busiess etities were compaies employig betwee 26 ad 50 employees, which i terms of size are small ad medium-sized eterprises. 3 Problem Solutio The preset research is liked to a previous project (carried out i ) aimed at comparig ad aalysig the developmet of usettled receivables i Czech firms at the begiig of the ecoomic crisis [7] ad at preset. Structured questioaires were used as a basic tool. Usig the questioaire survey, issues were examied relatig to receivables, records ad security of receivables, icludig the eforcemet of ucollectible receivables Research Aalysis of Actual practice i the Czech Republic I terms of the specializatio of the target group for the research, both profit ad o-profit orgaizatios were take ito accout where mai activities cosist of activities focusig o trade, productio ad services. The structure of respodets was divided accordig to the type of Fig. 2 Number of employees (Source: ow research) The target group structure was evely distributed, represetig all types of compaies from the Czech Republic. Compaies workig i the field of services predomiated. 28% of respodets were compaies employig betwee 26 ad 50 employees, which i terms of size are small ad medium-sized eterprises. This was also cofirmed by the fact that 42% of respodets were from ISBN:

4 limited liability compaies. 82% of respodets were registered as VAT payers, 61% were audited compaies ad 52% of respodets have suppliercustomer relatios with foreig coutries. The structured questioaire was focused o: record ad age of usettled receivables measures for securig receivables sources of obtaiig iformatio about customers provisio of foreig receivables the applicatio of forfeitig ad factorig adjustig items eforcemet judicial settlemet The evaluatio of the etire target group testig resulted i fidigs: the aswer to the questio of whether respodets record ucollectible receivables i their accouts is 61 % yes ad oly 39% o. Age of usettled receivables to 90 days is 24%, 52 % more tha 90 days ad 35 % more tha 360 days (see Table 1). Should we compare the results of the survey with selected outcomes of similar iquiries at the begiig of crisis [7] ad at preset, we see that the situatio i the records of ucollectible receivables i the accouts of Czech compaies has ot chaged much. The total umber of firms that record a overdue receivable fell from 71% to 61%, but busiess etities curretly ivolve approximately 76% of respodets. I particular, overdue receivables for more tha oe year represet a major burde for compaies ad sigificatly affect cash flow. Age of a overdue receivable More tha 90 days More tha 360 days Survey from % 23 % Survey from % 35 % Table 1 Age of a overdue receivable (Source: ow aalysis) The iitial focus of the research was o the etire spectrum of compaies i the CR. Fig 1 illustrates that the three most represeted groups of respodets were joit-stock compaies, limited liability compaies ad self-employed persos. After evaluatig the results, it was ecessary to complete the iterpretatio with other depedecies ad cotiue to focus oly o a group of busiess etities who keep accouts, ad thus joit-stock compaies (JSC) ad limited liability compaies (LLC). Self-employed persos were also excluded from further processig due to the fact that most of them do ot keep accouts (all small etrepreeurs i questio kept oly tax records) ad therefore the records of their receivables are very isufficiet. They mostly trade i cash ad receivables represet a very small percetage; oly 14% of the ivestigated sample of respodets idicated that they record a overdue receivable. The aim of further research was to fid depedecies betwee the firm size ad the efficiet maagemet of receivables. For the purposes of iterpretatio of results ad verificatio of hypotheses, research was the focused especially o the two most commo types of compaies i the CR, i.e., JSC ad LLC. These respodets were divided by size ito small ad large busiesses accordig to the umber of employees (see Fig 3). Fig. 3 Number small ad large firms ow research) (Source: The basic assumptio was that the ivestigated file has a ormal distributio. Hypotheses were defied to be tested by basic hypothesis testig for variace. Formulatio of hypotheses was as follows: H ₀ - a higher level of maagemet of receivables is idepedet of firm size H ₁ - a higher level of maagemet of receivables depeds o firm size A ormal distributio of data was foud ad we ca cofirm that the occurrece of more tha 80% of primary data is greater tha 5 ad the idepedece of values ca be tested. Joit-stock compaies were divided ito three groups by umber of employees: compaies with up to 50 employees, compaies with 50 to 500 employees, compaies with more tha 500 employees. I case of joit-stock compaies, the calculated value of test criterio χ ² is 32.4; the umber of degrees of freedom is 5. The sigificace level α = We reject the hypothesis of idepedece at this level of sigificace because χ ² > χ ² ₀. ₉₅ (5). The test showed that for joitstock compaies the record of receivables depeds o compay size. ISBN:

5 Limited liability compaies were divided ito two groups accordig to the umber of employees (compaies with up to 50 employees ad compaies with 50 to 500 employees), sice limited liability compaies with a higher umber of employees were ot represeted i the sample. I case of limited liability compaies, the calculated value of test criterio χ² is The umber of degrees of freedom is 10. The sigificace level α = We reject the hypothesis of idepedece at this level of sigificace because χ² > χ² ₀.₉₅ (10). The test showed that for limited liability compaies the record of receivables depeds o compay size. To demostrate the results of previous ivestigatios the regressio ad correlatio aalysis were used, which have prove a causal relatioship betwee the firm size ad the maagemet of receivables. The tests icluded resposes to the questio whether respodets use ay of the methods of prevetive measures for securig receivables. They could provide more methods. A liear regressio fuctio was selected reflectig the depedece. The survey resulted i fidigs listed i the Table Firm size - x Up to 50 employees i LLC Up to 50 employees i JSC More tha 50 employees i LLC More tha 50 employees i JSC Number of positive resposes - y Table 2 Basic data for regressio ad correlatio aalysis (Source: ow aalysis) Usig the regressio coefficiet (1) slope of a straight lie was calculated, which idicates the average chage i the depedet variable y for uit chage i the idepedet variable x, where represets the umber of questios. xi yi xi yi i= 1 i= 1 i= 1 bxy = 2 2 (1) yi yi i= 1 i= 1 The value of regressio coefficiet (1) was Regressio lie slope equatio is: Y = x It determies the liear regressio, where X is the idepedet variable ad Y is the depedet variable. Usig the equatio of slope of a straight lie we will create a lie graph of liear depedece. Fig. 3 Depedece of firm size o the maagemet of receivables (Source: ow research) From the observatio of pairs x ad y, we calculate the correlatio coefficiet, which is used to measure the tightess of depedece. rxy = umber of questios x idepedet variable y depedet variable The correlatio coefficiet (2) was r xy ad the result idicates a strog direct liear depedecy betwee the firm size ad the maagemet of receivables for both types of compaies, i.e., JSC ad LLC, as prove by two methods, the hypotheses testig for variace ad the regressio ad correlatio aalysis. 4 Coclusio The role of the maagemet of receivables is to egotiate with busiess parters such a maagemet of receivables istrumet that will suit both parties ad esure the lowest busiess risk. The research has demostrated that i the Czech Republic, the situatio i the area of isolvecy especially i the busiess eviromet is ufavorable. We may woder: Why is it so? The coclusios of the survey showed that a total of 61% of all istitutios ad orgaizatios ad more tha three quarters of busiess etities i the Czech Republic curretly record a usettled receivable i their accouts. The tested hypothesis of the depedece o the size of maagemet of receivables o firm size has bee cofirmed, i geeral, larger firms have a higher level of maagemet of receivables. It ca be stated (2) ISBN:

6 that larger firms reduce the level of busiess risk by the efficiet maagemet of receivables prior to their actual rise. These coclusios should be further compared with a similar survey i the area of oprofit sector, ad certaily with the situatio i other EU coutries or i compaies worldwide. Thus, this will be the subsequet focus of the research iitiated i this area. However, let us ow ask why compaies do ot use all kow ad effective istrumets of the maagemet of receivables? Accordig to the survey, a prepaymet is used most ofte out of the followig selected maagemet of receivables istrumets, as a prevetive measure for securig receivables. The survey showed that it is used by 37% of compaies surveyed. Bill is used i the Czech Republic as a meas of securig trade receivables i a small umber of cases oly. As demostrated by the research, it is used by oly 3% of the ivestigated orgaizatios. Factorig cosists i the purchase of short-term receivables prior to maturity. Approximately 5% of the compaies surveyed are egaged i factorig. Forfeitig compaies buy receivables due to be paid withi, at least, 90 days, but also withi more tha four years. Oly 1.5% of respodets reported usig forfeitig. I coclusio we may state that receivables belog to the most sigificat compoet of curret assets, ifluece the liquidity of the compay by their eforceability, speed of collectio, paymet disciplie of customers, the level of trade agreemets. The proper maagemet of receivables ca cotribute to a higher market value of the compay, through liquidity maagemet whe the solvecy of the compay i terms of both maagemet ad exteral etities is the mai factor ifluecig compay s fiacial positio, performace ad competitiveess. Ackowledgemets: This paper is oe of the outputs of the project from the Europea Social Foud OP VK No. CZ.1.07/2.2.00/ ad was carried out with the fiacial support from the foud D/0212/2012/KH from the Zli Regio. Refereces: [1] D. Bariova ad I. Vozakova, Pohledavky - prave - daove - ucete. 3. vydai. Praha: GRADA Publlishig, a. s., [2] C. Comstati ad C. Ato, Implicatios of Relatioship Marketig o the Fiacial Accoutig Services Providers: Proceedigs of the 12th WSEAS Iteratioal Coferece o Mathematics ad Computers i Biology, Busiess ad Acoustics. Trasilvaia Uiversity of Brasov, Romaia, April 11-13, pp [3] A. Daiels, Performace Maagemet: Chagig Behavior that Drives Orgaizatioal Effectiveess. 4th editio [4] R. Hidls, S. Hroova ad Seger, J., Statistika pro ekoomy, EDITION, Kamil Marik professioal Publishig. Praha [5] E. Kisligerova, Maazerske fiace. Praha: C.H Beck, [6] J. Kuesova-Skalova, Pohledavky komplexi uceti a daovy pohled. 4. vyd., Ostrava: Sagit, [7] M. Otrusiova ad E. Kolarova, Receivables ad their Role i the Fiacial Maagemet of Compaies. I A chage I Maagemet ACIM 2011, XIII Accoutig ad Auditig Cogress. Porto, Portugal, May 2011, [8] D. Pavelkova ad A. Kapkova, Vykoost podiku z pohledu fiaciho maazera. 1. vydai. Praha: Lide akladatelstvi, s.r.o., 2005 [9] M. Pasekova, D. Bariova, M. Radakova, ad J.Strouhal, Some Issues of bakruptcy Processio: Case of the Czech Republic, Iteratioal Joural of Matematical Models ad Methods i Applied Scieces, Issue 2, Volume 5, 2011, pp [10] J. Pilatova ad J. Richter, Pohledavky: a jejich resei v podikove praxi. Olomouc: ANAG, [11] I. Schelleova, et al. Exekuce. 1. vyd. Ostrava- Privoz: KEY Publishig, [12] V. Smejkal ad Rais K, Rizei rizik. Praha: Grada Publishig, [13] J. Strouhal, L. Mullerova, Cardova, Z., ad M. Pasekova, Natioal ad Iteratioal Fiacial Reportig Rules: Testig the Comparability of Czech Reportig from the SMEs Perspective. WSEAS Trasactios o Busiess ad Ecoomics. Vol. 6, No 12, pp [14] M. Sulak, Merei vykoosti firem. Praha: Vysoka skola fiaci a spravi, [15] I. Vozakova, Efektivi rizei pohledavek. Praha: Grada Publishig, ISBN: