Accounts receivables are created as a result of businesses pathing ways with their goods and services with promise from their customers that they will pay up within agreed time.
These figures can easily get out of hand if not managed properly. In this article on internal control tips for managing accounts receivable, I will be sharing internal control best practices around accounts receivables.
The internal control tips discussed below will not only help you keep your accounts receivable records straight but beefs up your fraud prevention strategies.
Fifteen (15) internal control tips for managing accounts receivables
- Pre-qualification of customers: a lot of people find this internal control tip strange as they think that customers should be acquired at all cost. Well, in as much as companies jostle for customers, doing so without firstly seeking insight into the customers antecedents is a huge mistake. This tip is not needed if your business is purely a cash and carry kind of business or a business that only give out a very small proportion of its goods on credit.
- Segregation of duties: at the heart of any form of internal control is segregation of duties. It will be disastrous if a business should allow a single individual to complete more than half of an accounting cycle for instance. No employee should perform more than one sensitive related tasks – it’s too risky.
- Journal entries to invoice reconciliation: mistakes do happen when the wrong number is entered into the system for example. Performing proper independent reconciliation of journal entries to sales invoice periodically is a very good accounts receivable control
- Use of control accounts: in whatever you do as a control person, do not ignore looking at the receivables control account from time to time. A lot gets captured in there. As the name implies, it is an account for controlling things so why ignore it?
- Regular reconciliation: this ties into the point on the need to reconcile accounts receivables to the sales invoice. Here, a general reconciliation is performed for complete assurance that everything looks good.
- Recalculation of invoice balances: often times, mistakes or fraud are hidden in plain sight. Recalculation of balances gives assurance. Care should be taken here as fraudsters have some cool tricks up their sleeves. I have seen a case where some cells in an excel sheet contains images thereby making it impossible for the sum function to capture them. It took extra due diligence for me to figure that out – a fast way of doing this is to apply the relevant format to all cells in area of concern before revalidating.
- Balance confirmation from supposed customers: it is best practice to from time to time confirm accounts receivable balances from customers. In my career as an internal auditor, this seemingly simple task of confirming receivable balances with the debtors has revealed a lot of inconsistencies (some errors some fraud)
- Use of credit control technique: credit control function is a very key part of any business. It must not be a full-fledged department. Just make sure that some people are tasked with the responsibility of keeping an eye on the credit limit of customers and also performing some basic credit score checking.
- Sales authorization (purchase order and sales order review): the very least that a business should do in her quest to manage her accounts receivable is to ensure that credit sales are authorized. Not doing so would mean that anybody can give out goods and services on credit. What if they are being given to connected parties without any form of check?
- Speedy issue of invoice to customers: a major disturbing characteristic of business that struggle with their cashflow is the fact that they spend unnecessary time doing irrelevant things after goods and services have exchanged hands without even bother to send their invoice. This may sound funny but it does happen. I have actually had to call a business after 8 days of receiving full service to ask for an invoice for the service that was rendered to me.
- Management review of aging reports: statistics has shown that the clues to almost all what turns out to be a massive fraud were there for anyone who cared to have seen them but management were often too busy to review what is in plain white and black. Part of the functions of management is to control things, management should always invest a little more time into reviewing reports and exceptions in automated logs.
- Use of pre-numbered invoices: this is a classic fraud prevention tip that must be in place regardless of how you generate the invoices.
- Chronologically filing unpaid invoices: the benefit here is that the chance of spotting any anomaly at an early stage is high. This applies to both manually and electronic filing systems.
- Use of invoice discounting: there is a difference between invoice discounting and debt factoring. Invoice discounting simply means using your receivables to raise finance from a third party while still retaining some levels of control over the outstanding receivable balances.
- Mechanism to flag large overdue amount: it is a very big mistake not to have a mechanism in place that will alert those charged with reviewing overdue balances. This must not be some fancy and sophisticated. A simple excel spreadsheet can be used to monitor accounts receivable for overdue amounts – hot tips; typing ‘=Today()’ into an excel cell and then perform some standard math operator is sufficient to do the magic here.
I hope you enjoyed reading the above internal control tips for managing accounts receivables. Please feel free to contact me if you need further assistance in beefing up your internal control architecture as whole.