Thu, Jun 30, 2022

Getting to the Core of Accounts Receivable

Accounts receivable (AR) refers to the proceeds or payments that a company will receive from its customers who have purchased its goods and/or services on credit. These payments are considered receivables as they have not been realized, meaning the company has extended a credit line to its customers. Typically, the credit period for these receivables is short, ranging from a few days to months, or sometimes up to one year.

From an accounting standpoint, a sale is only realized when its invoice is generated; however, the company extends to its customers a designated time in which to pay. Account receivables are treated as assets on the balance sheet, and more specifically, current assets since they are usually convertible into cash in less than one year. Until that time, the amount owed to the business is considered AR.

On some occasions, customers will pay what they owe to the company prior to the payment period’s expiration. If the customer does not pay within that period, the company can charge a late fee and/or interest or pass on the account to a collections department or agency.

Once payment is made, the cash segment on the balance sheet increases by the amount paid while AR decreases by that same amount. The amount of AR depends on the line of credit the company has extended to the customer. A customer that is a frequent or long-standing buyer may be granted more favorable credit terms by the company than a new or infrequent customer.

AR – An Intricate Process

Issuing invoices and billing customers promptly after selling a product or service is essential for maintaining a steady cash flow. Inefficiencies in this process can have a severe negative impact on the finances and operational agility of a business. An invoice ideally should be sent as soon after the sale as possible to facilitate payment. Automation enhances the AR process, serving to reduce operational costs while improving efficiency and creating a more reliable process for getting paid than would otherwise be the case with manual processes.

The following are the key benefits of adding automation to the AR process:

  1. Improving operational efficiency
  2. Streamlining invoice creation and faster payment
  3. Reducing costs
  4. Enhancing customer experience
  5. Improving employee retention

While AR seems like a straightforward concept, the potential for error, problems and unforeseen complications is commonplace and can be considered a significant risk management issue for a business. And just because a business has automated its AR process, does not mean it will be exempt from risk-related issues.

On the surface, assessing an AR process may be comparable to looking at a fresh, crisp apple. It appears to be fine on the outside, but on the inside, it could be rotting at the core. Its problems could mean anything from lack of sufficient technology, people, processes or understanding of the AR process. These problems require getting to the core of these issues.

Accounts Receivable – Vital to Business

The accounts receivable process is critical to businesses of all industries and sizes. Managing AR can make or break a business and determine its success. This is where KnowledgeLeader comes in.

KnowledgeLeader’s tools not only point out myriad AR considerations but address how to spot problems early on in the AR process and how to mitigate and deal with them in a timely fashion. We provide thorough, in-depth and insightful discussion, articles, real-life examples and up-to-date accounts receivable best practices tools.

The following are examples of AR-related issues addressed on KnowledgeLeader, along with specific tools available.

Accounts Receivable Internal Controls Questionnaire

Sample accounts receivable questionnaires enable businesses to perform a control self-assessment of their accounts receivable function. Sample questions include: Have any new systems been implemented, or have existing systems been modified? If so, do these changes result in process changes that significantly affect the controls within this area? Do written policies and procedures exist for accounts receivable? Are cash receipts applied against specific customer receivable invoices rather than to general accounts? Are sales, billing, receivable and general ledger accounting systems integrated?

Order-to-Bill Audit Work Program

This sample work program highlights risks to consider and general steps to take when conducting an order-to-bill audit. Sample steps include verifying that plant and corporate-generated invoices are accurate, identifying any significant risk within the procurement and AP process, performing and documenting a walk-through of the order-to-bill process, compiling a list of risks and the related controls within the process in a risk and control matrix, and evaluating internal controls for the order-to-bill process to determine any weaknesses.

Cash Policy Tool

This tool contains sample policies that highlight standards and procedures for identifying and using cash and cash equivalents. The samples are designed to preserve principal, meet liquidity needs and deliver a suitable return related to market conditions. Sample procedures include centralizing the cash receipt function, depositing intact cash receipts to the bank daily, recording all cash receipts to the appropriate subledger and general ledger on the date of receipt, clearing unapplied cash daily by each plant, and limiting payments to checks rather than actual currency.

Cash Receipts and Collections Leading Practices

This checklist helps to determine the extent to which various best business practices are being followed in the areas of accounts receivable collections and cash applications. Completing this checklist helps an organization determine areas for improvement within these processes. Sample practices assessed include:

  • Creating a single point of contact for all incoming customer calls regarding payments
  • Implementing lockboxes for receipt of all cash and consolidating lockboxes to manage processing and maintenance fees
  • Outsourcing cash remittance processing to banks whose remittance processing information can be easily uploaded to the company’s billing and collections system.

Cash and Cash Equivalents Policy

Uniform policies are provided for cash and cash equivalents for companies in order to preserve principal, meet liquidity needs, and deliver a suitable return in relation to these policies and market conditions. In the sample, all sites are required to complete the bank account opening form whenever new banks or other related investment accounts are needed. The form will highlight the accounts currently open, determine why the new account(s) are needed and estimate costs when opening needed accounts. Bank accounts can only be opened by officers of the company (as authorized by the board of directors).

Process Accounts Receivable, Credit and Collections Key Performance Indicators (KPIs)

An effective business process is built on a set of well-defined and clearly-stated business objectives. These key objectives articulate the ideal performance results that a company expects from that process. To monitor a business process so that it stays focused on reaching the key objectives, the company chooses appropriate performance measures. Careful selection of the performance measures takes a company a long way toward improving a business process. The benchmarking tool contains key performance measures an organization should consider when processing AR, credit and collections.

These are just a small subset of the vast wealth of information available on KnowledgeLeader. We are continuously evolving and updating to include new discussion points and AR challenges suited to an ever-changing economy, business cycles, regulatory issues and technology, opening doors to new potential risks and suggested solutions to manage them.

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