RECEIVABLES REPORT IN ASIA
INTRODUCTION
“There is no such thing as free lunch”, so the saying goes. In today’s modern and capitalistic world, most things come with a price. People’s needs for clothes, food, education, leisure and so forth can be provided by business organizations which make production and sales their reasons for existence. Business transactions between producers and consumers basically involve the transfer of goods, products or services from the company to the client through purchase. In between the transfer activity, the company gets compensation for the product or service rendered. Payment can come in the form of cash or accounts receivable. Accounts receivable (AR) is the total amount of money owed by a person to another person, a service company, or a business organization for the goods, products or services that the person got from them. This method is used in business transactions to avoid inconvenience of handling cash for product or service delivery. Accounts receivable is basically done through a preparation of an invoice and then distributing it to the debtor or the customer ( 2006).
According to the (2007) an effective business is not about making sales, rather making profit from payments made for services and products rendered. It is required that every business organization should be strict in getting money for all services or goods provided to the customer. Owed money from consumers or accounts receivable impacts the company’s profitability. This can be explained by the following simple example: “suppose a company has ,000,000 yearly sales and pre-tax net income amounting to 0,000. The Return to Sales is 10 percent which can be derived by dividing the amount of the yearly sales by the amount of pre-tax net income (in this case ,000). Now, if the company sells a new customer ,000 worth of products and the customer does not pay the bill, the company is forced to write off ,000 from the yearly sales as a bad debt. This example means that the company would either need ,000 worth of new sales or ten new customers to purchase ,000 worth of products each to cover the ,000 loss.” Thus, it is crucial that business organizations ensure the successful collection of accounts receivable to secure business profitability.
CULTURE OF CREDIT IN ASIA
The numerous countries in the Asian region have varying cultures and attitudes towards consumer credit. For example, South Korean consumers are highly inclined to take on large amounts of credits for housing and lifestyle purchases. Their appetite for debt is sometimes out of control resulting to write offs or credit crises. Meanwhile, borrowing money to finance important purchases such as housing, consumer products and cars is greatly accepted and allowed in Japan. However, the Japanese culture does not tolerate debts and credits for daily subsistence expenses, or spending more than what is earned (, 2005). Furthermore, a survey on Malaysian lifestyles and expenditures in 1993 to 1994 showed that households at higher income levels spent a lesser portion of their income on basics like food and more on other things such as furniture, recreation and transport. A higher proportion of their expenditure was on luxuries than on basic needs. In Hong Kong, generally, those with higher levels of educational attainment are more likely to have been to a Western restaurant, read a book, listened to classical music, and have been to a shopping mall; whereas those with a lower level of education and engaged in routine manual work are more likely to watch football at home, bet on horse races, watch TV and engage in minimal physical activities (, 2000, ). The Asian culture is also characterized by some form of corruption in the public, civil, and private spheres. Civil servants in Indonesia, China, the Philippines, Thailand and Myanmar routinely ask for small payments to do their jobs of handing over forms, process them, provide statistics and undertake the minutiae of bureaucracy. Cutting senior officials and their families in on a deal to ensure approval and kickbacks to ensure that supply tenders are won are some forms of severe corruption in Asia. It is said that about a third of all government procurement budgets in Indonesia, the Philippines, Vietnam, Cambodia, Thailand, India, Pakistan, Bangladesh and Nepal are thought to be lost through misappropriation, fraud and other forms of corruption. The legal and social sanctions that apply relative to corruption scenarios vary but there is not a single culture in Asia that sees corruption as a good thing or even as acceptable. Thus, things in Asia are not hopeless when it comes to corruption; those with a genuine desire to fight it do have something to work with ( and , 2003, ).
Accounts receivable in Asia are commonly paid through Letters of Credits, Documents against Acceptance, telegraphic transfers of money, and bank drafts. Letters of credit or also termed documentary credit is the most popular system of payment for money owed to a person or organization. This system is an arrangement whereby the account party instructs an issuing bank to pay the beneficiary. The beneficiary is paid either directly, or through another bank located in beneficiary’s area upon the presentation of stipulated documents. The advantages of letters of credit lay in its security, liquidity, and proximity. This method increases the creditworthiness of the confirming bank and reduces the beneficiary’s exposure to non payment or insolvency on the part of the account party. It also provides security against bankruptcy since the beneficiary can pursue payment from the account party whether it has already paid the issuing bank in full or partially. Security for the account party comes when it is allowed to reimburse the issuing bank and obtain the documents to get delivery of the products. Secondly, letters of credit provide liquidity for the account party and beneficiary in the shipment process. Finally, entities involved in letters of credit transactions often deal with counter-parties located in their jurisdiction. The account party deals with the issuing bank while the beneficiary deals with the confirming bank, and the banks deal with the account party or the beneficiary. This gives convenience if any problem arises. Letters of credit are also disadvantageous. The documentary process is time-consuming with the movement of paper documents; expensive since banks invest in the operation of the documentary credit system in consideration of the risks and liabilities that they incur in the process; and this method is prone to fraud since some ill-willed sellers may ship ineffective goods or not ship at all and fake all documents to get payment. Fraud can be minimized through digitization which can provide easy control and verification mechanisms for the documents (, 2003, ). Among the Asian nations, Bangladesh poses the greatest difficulty in this type of payment due to its current political situation which hampers the timely arrival of payment. The country is suffering strikes and other means of aggressive political confrontations, lack of reverence for corporate governance, and restricted foreign investment and trade which make the tedious process of documentary credit system more time-consuming or totally restrict the transfer of money within banks (, 1999, ).
Another form of payment method is Documentary Collection. It is an old method consisting of an arrangement whereby a bank acts on the request or instruction of an exporter to collect payment from an importer by presenting a draft or drafts and relevant shipping documents to the importer. Documentary collection transaction can be facilitated on a Documents on Payment (D/P) or Documents on Acceptance (D/A) basis. In the D/P basis, the collecting bank releases documents in exchange for payment and remits the money to the exporter’s bank, which in turn makes it available to the exporter. In the D/A basis, the collecting bank releases documents upon acceptance of the draft by the importer. The accepted draft is returned to the exporter. At the maturity date, the bill is returned to the bank abroad for the importer’s payment, and the money is remitted to the exporter or, if the exporter had discounted the bill, the discounting agency (, 2003, ). Indians usually adopt the documentary collection method and documents are sent through DHL. There is a necessity to secure the DHL tracking number for verification of the arrival of the documents in India’s bank as well as for the Indian bank to follow up. Without the tracking number and follow up from the Indian bank, the documents may be lost and payment may be delayed. The bank has to ensure control and follow-up mechanisms in order to execute smoother flow of transactions.
The third payment method is bank draft. It involves an instruction or request by one party to another to provide payment to a person or an organization that the draft favors. A sight draft is paid at the same time that it is presented to the drawee while a time draft is payable at a specified date in the future. Either way, this method is designed to render credit to a consumer on his intention to pay at a later date (, 2004). Bank draft is advantageous because it renders a receipt at the time and place of issue, is traceable, and does not involve any charge when deposited in a similar currency. However, banks sometimes require a fee for draft requests. Sometimes the fee is higher in value than the purchased goods. The consumer should be cognizant of the fees associated with the payment method before utilizing it (, 2006). The use of bank drafts by Asian consumers for paying credits is effective only if they are willing to pay the bills. Since most Asian countries differ in their credit culture, their willingness to pay is not dependent on the payment method used, rather on their attitudes towards credit that their culture dictates.
Telegraphic transfer is the method most Asians use in paying accounts receivable within thirty, forty-five or sixty days after generation of invoice. However, there is an intense need to provide advance warning to ensure collection of payment through this method. Numerous reminders and notices have to be sent to encourage people to pay their bills. This is mainly due to the fact that many people do not pay attention to credits and are only after the purchase. According to and (1999) people result to reckless buying and problem debts because they want to have an economic identity through expenses for necessities or luxuries at the same time (). Generally, Vietnam and Korea both have inconsistent perfect credit rating; India is stable; Indonesia is manifesting good credit rating but something can still be done to improve it; Sri Lanka has average rating and is showing improvement; and Bangladesh has the most problematic rating but can get better in the future.
CONCLUSION
From the above discussions on Asian consumers’ lifestyles, consumption culture, and credit attitudes, it can be deduced that the different Asian nations have varying attitudes towards credit and payment methods to go with it. How Asians view credit is dictated by their culture. Thus, banks and lending institutions in the region have to grasp the Asian consumer culture in order to understand any delinquency in payment. Any payment methods would not be effective if these consumers are not willing to pay. The most rational way of dealing with Asian consumers with regards to accounts receivable is to establish an open relationship with them. Asians are very people-oriented. They value relationships and information. Hence, business organizations can achieve a good credit and payment relationship with them through constant communication on the importance of paying debts as well as the impact of bad debts on a business’ profitability so that they would know the risk that they pose when they run away from debts.
REFERENCES
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