Management of Receivables, Financial Distress, and Profitability in Bangladesh

Abstract

If a firm's profitability is affected by inefficient working capital practices, it is logical to assume that an adjustment of working capital will improve profitability. In particular, small and medium-sized businesses in the least developed countries (LDCs) and the new economies of Europe suffer from long delays relating to the payment of dues which threaten their survival. When the policies and practices are reasonably efficient, tweaking practices is not expected to be very beneficial. We should observe benefits from adjusting working capital practices for those companies that are clearly outside the norm in the industry. A major part of working capital management is receivables management and collection. In this study, we examine the data on receivables from Bangladesh from 2000 to 2017 to see if companies with inefficient working capital levels benefit from adjusting toward the norm, which is a new way of examining the benefits of adjustment. Specific actions and reactions will depend on the situation. Any adjustments that management make to fine-tune working capital management are unlikely to produce much value unless the underlying circumstances are taken into account. A new firm with a compelling case of quality and competitive strength may be more successful in managing a successful low average collection period (ACP) operating structure, and keeping the ACP low is strongly advised.

Profitability and Expanding Collection Period in Bangladesh

“…Firms on the left side of the curve's peak can, theoretically, improve performance by moving toward the peak, and firms on the right side of the peak can improve by moving left toward where the peak is. However, Ahkam et al (2021) provided evidence that such movements do not improve performance. When a firm with very low ACP fails to improve profitability by relaxing receivable collections, that points to a difficult credit collection environment.…”

“…The problem seems to have become more acute in recent years. The average collection period (ACP), a measure of receivables management efficiency, has increased by 100 days or more for many firms in Bangladesh (Ahkam et al, 2021). This appears to be common in developing countries and it impinges on cash flows, precipitating a need for more short-term financing.…”

The Effect of Internal Control on the Receivables Management

“…One indicator that can be used in measuring the success of receivables management is its cash conversion cycle. Moreover, Ahkam et al, 2021 also said that success in receivables management is the low average collection period (ACP). Other opinions were also expressed by Zha Giedt ( 2018), Which conveys that to detect the optimum of a receivables management, the scope tested is not limited to receivable balances but must look at revenues that have not been realized at this time or in the long term.…”