Bookkeeping – Accounts Receivable Management (Lesson 37)

Several years ago I was engaged by a client to update their accounting department. This included implementing a new process, procedures and reporting formats. One of my staff enjoyed the culture at the business so much I hired her at her request as an employee for my client. Anyway, the client did government contract work. She was an older woman and quite concerned about her job security. She asked me one day what was the most important duty as the bookkeeper. I told her that there was one duty that is prized by management over any other function of bookkeeping. Do this and you’ll never lose your job. ‘What is it’, she asked.

COLLECT THE MONEY!

In my mind accounts receivable management is the highest priority duty of a bookkeeper. Cash is the lifeblood of small business. Most small businesses are thinly capitalized and depend solely on collecting cash to remain solvent. Collection of money is a process, if done daily the bookkeeper can maximize the efficiency of collecting money for the business. There are daily routines, weekly requirements, follow-ups and monthly procedures to manage accounts receivable. The following sections explain each period process, their corresponding reports and methods to address customer issues.  

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Daily Review and Confirmations

Each day the bookkeeper should print a detail accounts receivable list as the basis for the day. Next, pull up on the monitor the detail list for the prior day. Compare the two lists and identify the most recently generated invoices. With each new invoice in the system reprint them and mail them that day to the customers. One of the most common defenses of customer’s purchasing department is the ‘I don’t have a copy of the invoice in my records’ response. Better yet, print a PDF copy and e-mail the invoice to the person or persons responsible for authorizing payment of the invoice. Remember the most important function of collection is ‘The Squeaky Wheel gets the Grease’ saying. Ask for receipt confirmation. In addition, ask if any further documentation is required and verify they received the product or service in accordance with the contract or customary arrangement.

THE PRIMARY STEP IN COLLECTION IS VERIFYING CUSTOMER RECEIPT OF THE INVOICE.  THE SECONDARY STEP IS CONFIRMING PHYSICAL RECEIPT OF PRODUCT AND IDENTIFICATION OF ANY DISCREPANCIES.

 

 

Almost all accounting software packages allow notes to be added to the invoice, add your notes such as:

1. Date e-mailed and regular mailing of invoice to accounts payable department.
2. Received confirmation of receipt from so-and-so on such date.
3. For any discrepancies add a note like: ‘issue was raised by Jim in customer’s receiving department that a cover was missing; informed sales rep ‘A’ via e-mail and phone call to fix discrepancy and report back once done’.

If any issues remain open, ask for status update each day and update your notes. This accomplishes two important things: 1) when management asks why something isn’t paid you have the information as to who is at fault, and 2) this lets the sales representatives know that they must complete their jobs or answer to a higher authority.

In addition to confirming prior day sales the bookkeeper updates invoices for amounts received. One of the best tools are notes made to your daily master list printed. Use the prior notes for follow-up purposes and make calls back to those customers that state they would know the expected disbursement (payment) date soon. The overall daily function is to confirm and communicate with customers. Often bookkeepers create relationships with their contacts in the offices of the customers. Management advocates this because the decision makers over at the customer’s office give priority to the well-developed and mutually beneficial relationships. Become a part of this relationship.

Weekly Requirements

What is really interesting is over time the bookkeeper recognizes patterns with customer cash flows. Learn these patterns and use them to your advantage. One of the bookkeepers for a former client was so adept at this pattern for the regular customers that she would purposely call several days before the customer’s cash inflow date and request additional invoices get paid in addition to the regular batch. Often the customers were receptive and fulfilled her request.

No matter what is going on the office, communicate weekly with all customers and approach conversation from the angle based on a group situation as follows:

1. For recent invoices ask for expected disbursement dates and timing issues. Don’t forget to update your notes.
2. For current invoices that are nearing disbursement ask for confirmation of actual disbursement amount and expected date; again update your notes.
3. For those invoices heading into week two of age, send customer statements to customer contacts and ask their accountant/bookkeeper to verify any discrepancies.
4. For those customers that fail to communicate or ignore your phone calls and e-mails send a ‘Please contact us’ letter. This is simply, ‘Hey you are not responding to our requests for communication; is our contact information incorrect?’
5. For those invoices that have now aged 30 days, resend the invoice via mail but use yellow paper. A customer note is added requesting a phone call.  State an update is desired or other steps will be taken.
6. For any invoice older than 45 days, send the invoice using red paper to get the point across. In addition contact the sales representative and ask him to communicate the seriousness of the situation with his counterpart at the customer’s business. This often works as the purchasing agent at the customer’s office will ask what is going on with getting the supplier paid.

One last weekly requirement is full verification that every invoice on the entire list is indeed open and active. Every invoice has had some form of communication with the customer.

Follow Ups

In the interim between daily and weekly contacts, the bookkeeper may have to conduct follow-ups based on communications with the customers. Follow-ups may deal with timing issues, absenteeism with the disbursement agent for the customer or a simple confirmation of receipt. Always conduct the follow-ups and add notes to the invoice.

Monthly Procedures

There are several steps involved in the month end procedures for accounts receivable. The steps include:

1. Detail review of all open invoices and status of collections
2. Review of all collected invoices and reconciliation to bank deposits
3. Cut-off of invoice numbers
4. Reconciliation to accounts receivable balance
5. Discussion with management about uncollectible amounts
6. Printing of customer statements and mailing of statements
7. Send certified letters for collection purposes
8. Print final reports

The following sub-sections explain each step in more detail.

Step I – Detail Review

This is exactly the same as cited in the daily process except here you make sure all notes are updated. Every invoice’s status should be updated to the end of the month. Since these end of the month procedures are performed two to three days after the end of the month, any monies collected since the end of the month are noted to the open invoice at the end of the month. This is important because management asks these questions and by having it in the notes, it impresses decision makers.

Step II – Review and Deposit Reconciliation

One of the reports in accounting software is the cash receipts list. The bookkeeper should export this report to Excel for the accounting period and insert the respective invoice numbers attached to those receipts related to invoices collected. Often the accounting software will print this for you. The goal is to confirm invoices paid during the period and actual deposit to the bank account.

Other ways to achieve this is 1) print customer receipts journal statement with the invoice number notated in one of the columns, 2) print the accounts receivable ledger with only credits (receipts or allowances) and notate the respective invoices to deposits, or 3) print a sales register and manually note the deposit dates.

Another part of this step is addressing allowances (covered in Lesson 39) and other credits given to customers.

Step III – Cut-Off Dates and Numbers

It is extremely important to make sure of your cut-off date. Whenever the last day falls on a Friday invariably sales reps want Saturday included in the prior month. This is of course a management decision. I personally have always frowned upon allowing one extra day for an accounting cycle as it forced the accountant to back date a document (invoice). But this does happen so pay close attention to this dating requirement.

In addition to the cut-off date the invoice sequential number needs a definitive stopping point for the respective time period. This is easier with computer generated documents; but more difficult with the hard invoices.

Make sure you have set the last number for hand tickets in your system and collect all tickets up to that point in the numbering sequence. Any unused are marked ‘VOID’ and entered into the accounting program as void. It is at this point that it is a good idea to reconcile the sales register as explained in Lesson 36. Now you are ready to reconcile the receivables.

Step IV – Reconciliation of Accounts Receivable

This is one of the critical points in every month that must have accuracy. As a function of getting the books correct reconciliation of each ledger provides greater confidence in value and performance for the business. Reconciliation is comparing two different sources and adjusting for discrepancies between the sources. For receivables the two sources to start reconciliation are:

1. The trial balance value, AND
2. The control account summary report.

The first value is pulled from the trial balance and the second value is found in the accounts receivable summary report. The summary report will look similar to this format:

                                  Ace Concrete Inc.
                   Accounts Receivable Summation Report
                                  November 30, 2015
Cust. Name    Invoice #       Invoice Amount     Running Balance
Abner                 7161                 $918.67                     $918.67
Bacon                 7164              $2,982.71                  $3,901.38
Filet                    7159              $2,191.00                  $6,092.38
Ham                   7162               $4,819.00                $10,911.38
Mutton               7166                  $743.15                $11,654.53
Pork                    7163              $9,202.00                $20,856.53
Pork                    7167                 $147.00                $21,003.53
Steak                   7169              $1,008.00                $22,011.53
Veal                    7158               $4,590.72                $26,602.25

When the bookkeeper pulls (this term refers to the old fashion physical pull of a ledger book from the shelf) the trial balance value it should match. Often it doesn’t. Why?

There are several different possibilities and they include:

• Credits granted by management but not assigned to the control identifier.
• A wayward entry misclassified by keying into the accounts receivable account.
• The summation report was limited to debit values only and did not include credit values for discounts and allowances.
• Uncollectible accounts were not properly written off.

Look for these possibilities one by one. The most likely culprit is not coding a credit to the control identifier. Remember accounts receivable is a control account. Every entry into this ledger requires a control ID. Any entry without this identifier is a value that changes the total balance without affecting reports that utilize control identifiers to organize the report. Here are a few helpful hints:

If the trial balance value is greater than the summary balance, then:

1. Most likely a misclassified debit (debits increase A/R balances) was entered into the account. Review the account ledger line by line for debits; all debits should have an invoice or hand ticket identifier assigned along with a control ID.
2. Some form of surcharge, penalty fee or interest was accrued to the account without a control ID. The key is that every debit must have as a minimum a control ID.

IN ACCOUNTS RECEIVABLE, EVERY DEBIT ENTRY INCREASES THE ACCOUNTS RECEIVABLE BALANCE. SINCE A/R IS A CONTROL ACCOUNT, EVERY DEBIT ENTRY MUST HAVE A CONTROL IDENTIFIER.

 

 

When you find a debit entry without an identifier, open the entry and add a customer ID and then save the entry. For those misclassified entries, open the entry and chance the account receiving the debit to the proper account.

When the trial balance value is less than the summary balance, then:

1. Odds are that credits were issues but not assigned to a customer. This happens about 80% of the time with coding. Bookkeepers need to realize that often sales reps issue the credits and do not code the customer in the credit issue. The A/R balance decreases but not the customer balances. Just like the debit issues above, open the unassigned credit and assign a customer ID.
2. Uncollectible amounts issued by management is exactly like a credit to a customer. Often the uncollectible value is not assigned to a customer and an invoice.

Once both the trial balance value and customer summary value are reconciled, it is time to reconcile each customer. This involves making sure credits and payments are issued to the correct invoice. 

Step V – Discussion with Management About Uncollectible Accounts

This step involves finally giving up on the normal collection activities of a customer. Often identification is easy as a notice is received in the mail from a federal trustee letting you know that this customer is now bankrupt. At this point there is no legal course of action available unless there is a guarantor for the account which is rare.

Now, it is time to write-off the account as uncollectible. To do this the right way, management must endorse the write-off. Print a history file for the customer including payments made and the sales rep too. Once authorized you simply enter a debit to ‘Bad Debt’ in an expense account and credit A/R with the proper control ID.

Here is a list of the more common reasons customers can’t or won’t pay:

1. Bankruptcy
2. Contract disagreement with the company
3. Customer is insolvent – seek legal action to pursue collection
4. Customer died or ceases to exist as a legal entity
5. Customer refuses to pay an invoice because he didn’t buy the item (I’ve seen this, turns out the sales rep coded the wrong customer to the invoice).

To prevent situations like number 5, send out customer statements.

Step VI – Customer Statements

Now that the account is fully reconciled and all collection issues have been addressed it is time to send out customer statements.

Most modern accounting software allows you to send statements via e-mail by printing a PDF of the statement. I encourage bookkeepers to write a warm thank you note to those customers that pay regularly and timely. This goes a long way towards cash flow in the future. For other customers ask them to please verify and confirm the statement is correct and to respond with affirmation within three days. As I started out explaining in the daily duties; communication is the absolute best tool to get paid.

For those customers with balances greater than 60 days, include a warning that credit will not be extended after 10 more days and any future purchases will be suspended until balances fall within the contractual agreement. Follow up with a certified letter.

Step VII – Certified Letters

No other form of communication startles an owner than a certified letter. Trust me, it makes an impression on the customer that you are serious about the nonpayment on the account. All you want from them to stop further action is a reasonable explanation of how this account is going to get resolved.

It doesn’t work all the time, but it does work a high percentage of the time. Keep the tone professional but remind the customer that the owners of the company are businessmen and understand the difficult times. Your goal is to work with them to prevent legal actions which cost money for both parties.

Step VIII – Printing of Reports

This is the more enjoyable duty as a bookkeeper because if you follow the above daily, weekly, follow-ups and all the steps in the monthly process; then the reports will be accurate. Here is my suggested set that acts as an attachment to the financial statements.

1. Master Summary Balance by Customer Report
2. Accounts Receivable Aging Report in 30 Day Increments
3. Copy with notes of any invoice older than 60 days
4. Invoice Register (See Lesson 36) for the month reported
5. Invoice Payments Register for the month reported

Summary – Accounts Receivable Management

Collecting the money is easier than you realize once you utilize a pattern of communication with customers. Do this and the money will flow, management will always be satisfied with your services.

The key is communicate daily for all new activity by confirming receipt of the invoice and the existence of acceptance of the product or service. Each week send out customer statements and update your notes related to outstanding issues. At the end of the month reconcile the accounts receivable balance and take action on aged invoices including certified letters and termination of credit. Act on Knowledge.

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