Annual Accounts Receivable Audits

When accounts receivables have a major influence on your cash flow it pays to tune up, oranalyze your entire AR system at least once a year. From sales and billing, to collections and write offs, analyzing your entire accounts receivable system should be approached with an objective mind. A yearly audit is an opportunity to identify deficiencies, bottle necks and obsolete technology that is a hidden cost on your accounts receivables.

An annual audit is a time to permanently fix problems holding up your cash flow. Staff are usually well aware of problem areas and may already have ideas on a solution to fix the problems. Some delays involve other departments where procedures clash with billing. There are also the traditional sales-AR disagreements when extending large lines of credit.

Of course, there are differences between consumer and commercial (B2B) receivables. Commercial receivables usually involve larger lines of credit with incorporated companies that have limited liability. Consumer credit, on the other hand, is usually smaller amounts of unsecured debt, and large loans are with secured debt.

Dissecting and analyzing your receivables is best done in sections, starting with:

Everything starts with sales and always keep this AR saying in mind, garbage in ? garbage out. Are new credit customers being screened properly? Are you using credit agreements that protect your position in case the account goes sideways? Do you have different credit agreement versions with indemnity or personal guarantee clauses? These can come in handy when a new customer hasn?t been in business very long with companies where credit screening has revealed elevated risk. If you are carrying large balance receivables, proper agreements reduce the risk of a potential bad debt.

Credit screening procedures should be reviewed. Are you getting enough accurate information to make an educated decision? How fast is your turnaround time from the customer applying for credit and getting approved or rejected? Sales needs a timely response.

Any delays in billing are a delay in getting paid. Billing should be consistent and mechanical in nature. Any disputes a customer may have about their bill should be addressed immediately. Do your statements-invoices include information on how a customer can pay besides issuing a cheque? Are you still using snail mail or email?

Any improvements to speed up or ensure consistent billing cycles will also speed up payment. Are cheques being deposited on a daily basis, which reduces the chances of an NSF? If the volume of cheques is low, then check out your bank?s remote deposit caption option so no physical trip to the bank is required.

Are delinquent customers being followed up for payment? Are overdue dunner notices being sent on a consistent basis. Are staff actually picking up the phone to pursue payments? Are there any time milestones to cut a customer?s credit?

Do you have a staff member who is responsible to oversee follow-up on delinquent customers? The worst situation is when no one is in charge and staff only follow up when they have spare time.

Every account receivable department should get a yearly tune up. Markets change and new technology is being introduced that can increase productivity while lowering costs. If you are not sure how to improve things then consider bringing in a credit consultant.