Accounting and Finance Virtual Internship Series – Part 4 Account Receivable Management

As we saw in the last post, Revenue is one of the critical performance metrics in a business. The sales team, together with other teams in the organization usually put in so much efforts to ensure there is an increase in Revenue or Topline. All other things being equal, an increase in Revenue should result in more profits. However, the profit that is made can easily be lost if there is no effective mechanism to collect all cash from sales. Profit is just an illusion; cash is the ultimate reality. Cash is King.

As you already know, not all sales transactions are usually on cash basis. Some are on credit or deferred payment terms.

When Credit sales are made, the Accounting entry is to credit Revenue ledger account and debit the customer account (Account Receivable ledger account). It is usually expected that customers will make payments on the agreed payment due date stated on the invoices. However, this is not always the case. There are usually delays and sometimes, some of these invoices end up not being paid. Some companies have become insolvent leading to bankruptcy due to inability to collect receivables due from their customers

It is to ensure that these moneys / cash from credit sales are collected and enhance the cash flow in the business that prompt company’s Management team to have an Account receivable management unit within the Accounting and Finance department.

If you have the opportunity of working in an Account Receivable Management unit, you may be involved in all or some of the below responsibilities that are usually performed by the unit;

Billing and sending out of invoices to customers: It is expected that before invoices are generated from the business’ ERP system, that all conditions for revenue recognition are fulfilled. The lines on the invoice proposal should match those on the customers purchase order (or service agreement or confirmed job completion card), the delivery note or proof of delivery. Similarly, all cost related to the revenue to be invoiced should have also been posted or captured in the relevant ledger accounts; Costs relating to cost of materials, delivery cost and all labour cost for service execution should have been posted.

Please also ensure that when invoices are sent to the customers that these are acknowledged by the relevant customer contact. You may also need to send such invoices to the customers’ dedicated email address that has been designated for receiving invoices.

You could also follow up with customers on outstanding invoices. It is advisable that a week or few days after an invoice is sent to the customer, a follow-up call or email should be sent to the customer to ensure the invoice is posted on their system. If there are any discrepancies, these can easily be resolved. Follow-up should not be after the invoice due date. This is to ensure there are no delays in the payment of the invoices as a result of the invoiced being packed due to errors or discrepancies. Most businesses / companies now have a unit that can easily provide information on status of outstanding invoices as to whether they have been posted on their system or not and the expected date of payment.

You could also be responsible for sending statement of accounts to customers on a monthly basis as a follow up measure. This can easily be automated on the business’ ERP.

The team usually carry out reconciliations with customers and resolve issues that might lead to invoices not being settled at all or settled promptly. Reconciliations also involve collaboration with other teams within the organization to resolve customers issues. Common issues why invoices may be pending include invoices not matching with the signed job cards or evidences of delivery, invoices missing customer purchase order reference, invoices not being addressed to the correct customer, delivery address on invoice not correct, proof of delivery missing, service not yet satisfactorily completed, incomplete delivery or goods returned. In such instances, the Account receivable management team members coordinate with other departments such as sales, operations and supply chain to fix the issues so that the customers can make payment.

You could also be assisting management to develop policies around Account Receivable Management; Policies on credit limits, use of bank guarantees and letters of credits, acceptable advance payments, processes for dispute resolutions, use of debt collection agency, legal proceedings to recover overdue receivables and the modality for putting customers’ accounts on hold.

You may also be preparing the weekly or monthly trade account receivable report that should have the outstanding invoices details such as name of customer, invoice amount in transaction currency , invoice number, invoice date, invoice due date, number of days overdue, payment received and outstanding balance. This reported can easily be downloaded from the Accounting ERP and exported as Excel spreadsheet. The excel download can be then be analyzed further into customers with highest total receivable or overdue balance. The report could also be segregated further using the aging analysis of the outstanding invoices.

You may be responsible for maintaining the accounts receivable files / records that should include a copy of all customers’ invoices, customers’ POs, proof of deliveries, payments received and communications with the customers, management approval for cash discounts or invoices write-offs.

The unit members could also be supporting the financial reporting team with month-end closure / reconciliations to ensure that amount reported as account receivables balance in the monthly management account shows a true position

During annual audits, you could also be substantiating with the Auditors the balance on Account receivables ledgers and providing support for any write-off or bad debt provision. A proper Account receivable file will come in handy at this time

The management team could also be relying on members of the account receivable team to provide report on daily cash position or liquidity and advise on short term investment opportunities of excess liquidity.

You could also be reviewing payment terms before sales contracts are finalized. Reviewing bank guarantees and letters of credits and submitting all necessary documents to the banks to ensure payments through letters of credits and bank guarantees are received.   

Account receivable team is also responsible for matching receipts from customers with the related invoices. Where the invoice details are not available, the receipt should be posted to the customer account. Clearing of the paid invoices can then be done subsequently.

As Liquidity is highly important, you may also be involved with discussions with banks on discounting invoices due from customers. In this case, the supplier gets paid a lesser amount earlier than the invoice due date while the financial institution then collects the account receivable from the customer on the due date. This is a supplier finance solution that is being offered by most commercial banks in Nigeria.

As there is risk that not all invoices issued to customers may be paid, there is need to develop a model for making provisions for doubtful debt. Previously, this was done using management policy on doubtful debt provisioning or invoices are written-off when customers do make payments of the invoices after repeated follow-ups. However, IFRS 9 has introduced the Expected Credit loss model that makes use of the historical data to develop provisioning matrices.

The simplified approach simply applies the relevant loss rates to trade receivable balances outstanding using the trade receivable aged analysis. The process basically involves grouping the outstanding receivables based on their shared similar credit characteristics such as geographical region, product type, customer rating etc., then using historical figures, determine the loss rate for each sub-aging groups (for example not yet due, 0-30 days overdue, 31-60 days overdue, 61-90 days overdue, 91-180 days overdue, 181-360 days overdue and above 360 days overdue). Using the historical loss rate which has been obtained from historical data, expected credit loss can then be calculated for each aging bracket. IFRS 9 does not provide specific guidance on how to calculate loss rates of each sub-group. However, there is a generally accepted pattern which our illustration in a follow up post will show. It simply involves a division of the total amount that will not be recovered by the sum of the total receivable in the group for which the loss rate is being calculated and the sum of the total receivable for aging groups after that group.

Account Receivable management is an important aspect of working capital management. The other two important aspects being payable and inventory management. 

To succeed in account receivable management unit, one need to be a good communicator, team player and have the technical skills to provide necessary supports during reconciliations and audits.

An Effective Receivable management system will reduce bad debt, result in better cashflow and higher liquidity which can be used for investments and expansion opportunities and help to improve relationship with customers; one of key business stakeholders.