Theoretical Framework
This study engaged from Berle and Means theory which is known as the Agency
Theory. An agency relationship is defined as a scenario where one individual, known as
the principal, engages another person, referred to as the agent, to act on their behalf or
provide services. In this relationship, the agent is granted authority to make decisions
on behalf of the principal. . They argued that these agents could potentially exploit the
company’s assets for personal gain, potentially engendering a clash of interests
between principals and agents (Gwala & Mashau, 2023). The central concern revolves
around whether these agents act in the best interests of the owners or prioritize their
own interests (Panda & Leepsa, 2017).
Within the context of finance, agency theory addresses issues such as conflicts
of interest and incentive problems that may arise between principals and agents. It
suggests a normative relationship between these parties, particularly focusing on
conflicts between shareholders (principals) and managers (agents) within firms. The
theory posits that conflicts arise due to misalignment of interests and non-rational
behaviors of agents (Jensen, 2004), leading to agency costs or problems.
Applied to accounts receivable management, agency theory pertains to the role
of the credit control manager, who acts as the agent of shareholders. The decisions
made by the credit control manager regarding receivables
significantly impact the wealth of shareholders. For instance, failure to effectively collect
from creditworthy customers can lead to reduced revenues and losses due to
decreased sales.
From a point of view, management aims to maximize shareholder wealth by
ensuring the efficient management of accounts receivable. This involves implementing
policies and procedures to encourage timely payments, minimize delinquencies, and
reduce bad debt losses. However, the interests of management may not always align
with those of the agent, as customers may prioritize their own liquidity needs over timely
settlement of debts.
This misalignment of interests can lead to agency conflicts, where customers
may delay payments or default on their obligations, thus adversely affecting the financial
health of the water supply company. Such conflicts underscore the importance of
implementing mechanisms to mitigate agency risks and align the incentives of both
parties towards the common goal of effective receivable management.
The Tabaco City Water District serves as the primary water provider for the entire town
of Tabaco. This research is supported by Agency Theory, where shareholders authorize
the management team to make decisions concerning credit policies, billing practices,
and collections procedures. This approach aims to address conflicts of interest by
aligning the incentives of managers with the goals of shareholders. In the realm of
accounts receivable management, this serve compensation packages for the
management team, incorporating performance-based incentives linked to key metrics
like accounts receivable turnover just like in the research study. By adopting Agency
Theory, the management can foster transparent communication channels between
shareholders and management, promoting accountability and clarity in decisions
pertaining to accounts receivable.