Best Practice Financial Processes: Accounts Receivable 2PwC175cAccount Receivable - Best Practice ObjectivesAccounts Receivable ObjectivesOrganisationPeopleProcessesControlsMeasuresInformation SystemsØTo ensure customer payments are received efficiently and effectively for goods/services delivered, within the agreed terms and conditionsØTo manage credit risk efficiently without creating unnecessary delays in the sales cycleØTo maintain a complete and accurate statement of outstanding debtorsØTo provide complete forecast information to assist the management of short-term cash requirementsØCentralised processingØEconomies of scaleØCustomer focusØEstablish credit levelsØIssue sales orderØIssue invoiceØMonitor creditØCollect cashØProcedures manualØAuthorisationØValidation/matchingØCredit controlØCost per invoiceØCredit notes percentageØCost per payment receivedØDays debt outstandingØIntegrated with sales systemØAutomatic matchingØElectronic receiptsØCustomer relationsØLegal framework awarenessØCredit management 3PwC175cAccounts Receivable - Best Practice FeaturesProcess FeaturesØFormal credit checks applied to all new customers within 24 hours using credit bureau ØMonitor credit status/terms on regular basis ØCustomer account managers provided with up to date credit statusØTreasury policy set on late and prompt paymentsØAuthority levels clearly definedØCredit policies defined and agreedØTerms and conditions agreed with customersØConsolidated periodic invoicing for high frequency shipmentsØBank remittance notices issued with sales invoices to facilitate reconciliationØSelf billing invoices by high volume customersØConsider outsourcing regular invoice/payment eg utilitiesØRegular review of invoice queries and credit notesØReconciliation of AR balances to GL control accounts on a regular basisØCredit insurance arrangements evaluated periodically ØCustomer account managers responsible for sales and cash collectionØConstant monitoring of debtor days, daily collection, ageing of debtØCustomer contact records maintainedØOutsource cash collection where appropriateØDetermine and report on credit targetsØMonitor overdue debts and take action within agreed policyEstablish credit levelsIssue sales orderIssue invoiceMonitor credit/ collect cashØSales orders prepared using pricing database with pricing profiles for products and customers ØNo order processed without valid customer PO referenceØDelivery note acts as invoice for low-frequency shippings 4PwC175cAccounts Receivable - Best Practice FeaturesEstablish credit levelsIssue sales orderIssue invoiceMonitor credit/ collect cashSystem FeaturesØConsolidated credit position for group of customersØSystem provides on-line customer payment history and termsØUse of workflow software to monitor process and help resolve queriesØStandard credit control reportsØCommon SOP and AR customer databaseØInvoices automatically generated from SOP and shipment dataØSelf billing invoices automatically matched to customer ordersØMulti currency invoicesØAutomatic commitment and accrualsØAutomatic reconciliation facilities between integrated SOP AR and GL systemsØSOP linked to debtors ledger to ensure customer credit limits not exceededØSales documents sent via EDI for all major customersØIntegrated order & billing systems available on line & hard copyØPayments received electronically where possibleØAutomatic matching of payments to invoicesØOn-line diary facility to monitor callsØAutomatic flagging and reporting of high risk accountsØAutomatic dunning letters issued within agreed trading termsØIntegrated systems to facilitate customer query handlingØForecast cash receipts available for treasury purposes 5PwC175cAccounts Receivable - TrendsFromToØSeparate AR moduleØPayment by chequeØComplex/variable trading termsØManual matchingØPerformed by Finance departmentØIntegrated systemsØElectronic paymentØCommon trading terms for all customersØAutomatic matchingØShared or outsourced services 6PwC175cAccounts Receivable - Measures/Cost Drivers90 percentileMedian10 percentileNumber of customer payment received per accounts receivable FTE per annum40,3005,500700 or lessAccounts receivable cost per sales invoice processed10 percentileMedian90 percentile<£1£3£18Median1 day90 percentile4 days10 percentile<1 dayDays to process invoice/credit note (ie, time between receipt of invoice/credit note and entry into the accounting system)Cost driversØNumber of AR receiptsØLevel of multiple receiptsØUse of direct debiting/standing ordersØUse of electric funds transferØLevel of credit risk associated with customer baseØVariety in payment termsØDegree of foreign currency receiptsØLevel of credit notes 7PwC175cBilling - Measures/Cost Drivers90 percentileMedian10 percentileNumber of sales invoices generated per billing FTE per annum 90,00011,1001,600Billing cost per sales invoice and credit note processed10 percentileMedian90 percentile<£1£2£22Median2 days90 percentile15 days10 percentile<1 dayDays from despatch of goods to preparation of sales invoiceCost driversØNumber of invoicesØNumber of customersØUse of EDIØComplexity of service/goods suppliedØVariety in terms and conditionsØComplexity of discountsØDegree of foreign currency invoicingØNumber of complaintsØAccuracy/level of credit notes 8PwC175cAccounts Receivable - Level 0 Context DiagramBillsAdhoc invoices & standing dataReminders &StatementsGLPostingsGeneral LedgerCustomersBankManual InvoicesBilling SystemStandingDataPayments(cash, cheque)Direct DebitInstructionsStatementsPayment details(Bank Giro credits)Customer Services SystemAlso electronic AP/AR data from bank for auto cash management 9PwC175cAccounts Receivable - Level 1 OverviewCustomerStandingData , Bills& Credit NotesAR StaffAR systemBilling systemCustomerdetailsAR data import proceduresInterface RulesAR StaffBilling systemAR systemCustomer DataLogged on ARSystemInvoice/credit noteentry rules,Bills and credit notes loading proceduresAR StaffAR SystemBills & credit notesManual invoice request Customermaintenanceprocedures, Customer relationshiprulesImport standing data, bills & credit notesAR 1.1Maintain customer dataAR 1.2Process bills, invoices & credit notesAR 1.3DatavalidationreportCustomer reportManage receivablesAR 1.4Process receipts and direct debitsAR 1.5Process period endAR 1.7Credit control policies and procedures,Call logging procedures,Provision creation rules,Legal proceedings rulesAR staffAR systemCredit controlOpen invoiceson AR systemPrint invoices despatchedGL updatesOutstandingdebtorsCheque and receipts processing rules,Automatic allocation rules,Manual allocation rules,On account payment rulesCash/cheque/bank receiptsList of DD customers amounts dueAR staffAR systemBank statementTransaction dataReview procedures,Archiving rules,Period data proceduresAR staffAR systemPayment on accountlogged on AR systemMatched DDreceipts logged on AR systemRequest to bankProcess amendmentsAR 1.6New periodopenedon AR systemPeriod endGL postingsMatchedreceiptsarchivedPeriod reportsproducedAmendment ofvalidation rules,Amendment inputproceduresAdjustmentsAmendmentsGL updatesAudit reportDebtor reportDunningletter/statementAmendment request, notify departmentProvision journals 10PwC175cAccounts Receivable Notes Maintain customer dataBest Practice FeaturesØSend bill to one address only. Where a customer is provided with goods or services at a number of locations, the consolidation in the billing process not only reduces the number of bills to be verified or created but also decreases the potential need to reconcile a number of receivables on individual accounts. ØCentralise the customer set-up process in order to ensure consistency.Internal control requirementsØIn order to minimise the risk of duplication of the data and the unauthorised set-up of customers, the process should be centrally controlled and operated. ØBefore any customer is deleted from the system, evidence should be produced that the customer has been inactive for the appropriate period of time and no outstanding balances are present. Approval for deletion is obtained by management authority signature.ØThe changes to customers report is regularly checked and monitored.ØSystem notification of duplicate business and birth registration numbers. 11PwC175cAccounts Receivable Notes Maintain customer dataCost DriversØNumber of customersØNumber of new customersØNumber of customer changesØNumber of required customer standing data fields ØPossibility of sharing standing databaseØOverlap between databasesØSearch criteria and standardisation to avoid duplication/redundancyKey Performance IndicatorsØNumber of changes and additions carried out in a year per FTEØNumber of customers in op. database without transactions for 1 yearØPercentage of changes and additions of total customer base 12PwC175cAccounts Receivable Notes Manage ReceivablesBest Practice FeaturesØAged debit balances should be reviewed by management on a regular basis and explanations sought as to why debts have failed to be recovered.ØOverdue debit balances occur as a result a number of factors of sub-optimal performances within the sales department or within the credit control process or AR - info not recorded from bank quickly enough and therefore not processed quickly enough or timing of invoice issue. The root causes need to be addressed and rectified by altering the creditability status of the customer.ØAutomatic flagging and reporting of high risk accounts.ØMateriality and time limits.Internal control requirementsØIt is essential that debit balances are reviewed regularly and matched with payments promptly in order to avoid the risk of fraud and minimise the chances of bad debt.ØComputer diary of actions taken. ØStops placed on overdue customers.ØAged debtor report sent to legal department and functional managers. 13PwC175cAccounts Receivable Notes Manage receivables (Cont…)Cost DriversØNumber of overdue open items.ØNumber of steps in the dunning procedure.ØQuality and timing of the matching process of receipts.ØAvailability of dunning enforcement measures.ØTolerance criteria.ØPayment terms and conditions policy.Key Performance indicatorsØDays outstanding as a percentage of average payment term.ØValue of overdue invoices as a percentage of outstanding balances.ØBad Debt Provision as a perØcentage of outstanding balances.ØProcess cost/customer payment received.ØNumber of dunning letters as % of total invoices.ØWrite off value as % of (sundry) sales revenue. 14PwC175cAccounts Receivable Notes Process receipts and direct debitsBest practice featuresØUse of an electronic interface between bank, cashiers and AR treasuryØAutomatic matching of receipts by value and invoice number Internal control requirementsØInterface control total with bank and cashiers, dailyØRegular supervisory review of open and unmatched itemsØDocumentation of all overdue open items and unmatched receipts 15PwC175cAccounts Receivable Notes Process receipts and direct debitsCost DriversØNo. of Receipts for more than one transactionØPercentage of downpaymentsØQuality of payment informationØNumber of unmatched paymentsØNumber of foreign currency receipts and exchange rate differencesØTolerance payment differencesØNumber of criteria for automatic matchingKey Performance IndicatorsØMonthly and cumulative tolerance difference amountsØPercentage of receipts cleared automatically in monthØNumber of manually matched receipts per FTE ØNumber of unmatched receipts older than 1 month 16PwC175cAccounts Receivable Notes Process amendmentsBest Practice FeaturesØSingle contact point for all queries. Although the query processing can be distributed there are obvious inefficiencies in directing enquiries to a number of contact points.ØHave access to sufficient data to be able to handle the majority of queries on-line. In this context, the use of image processing allows invoices to be called up on screen quickly and, if necessary, automatically copied to the enquirer through the medium of autofax.Internal control requirementsØIn order to operate an effective helpdesk, staff will require to have access to most parts of the accounts receivable system. This should be on a ‘read only’ basis in order to minimise the potential for fraud taking place.ØTargets set for time to answer queries. 17PwC175cAccounts Receivable Notes Process amendmentsCost DriversØNumber and variety of queries received.ØAvailability and flexibility of standard screens.ØComplexity of database for tailor-made queries.ØResponse times of enquiry systems.ØUser-friendliness of enquiry systems.Key Performance IndicatorsØAverage time taken to process queries.ØPercentage of queries answered within targeted time. 18PwC175cAccounts Receivable Notes Process period endBest Practice FeaturesØAutomatic process requiring minimum or no manual intervention. This is a standard feature of modern Accounts Receivable packages and the only possible problem area could be with the nature of the interface with the general ledger package.Internal control requirementsØThe basic requirement is to ensure that the data transmitted to the general ledger is complete and on time.ØThere is a requirement to ensure that the information recorded in the general ledger agrees with the output from accounts receivable.ØA reconciliation should be carried out between debtor balances on GL compared with AR.Ø Check VAT exception report to pick up any late VAT postings.Cost DriversØVolume of monthly period end reports.ØQuality of day to day controls.Key Performance IndicatorsØPercentage of period end closures within target.ØAverage number of days to produce monthly information. 。