Credit Controls and Accounts Receivable Management“Any fool can lend , but it takes a lot of skill to get it back”
IntroductionPlease give:• Your name• Your job & Company name• Your commercial experience• What specific expectations do you have?
Learning Objectives• The objectives of credit and accounts receivable management• How credit and account receivable management fit into corporate finance and treasury operations• How companies develop credit policies• How companies calculate the costs and benefits of credit policies• The forms of credit extension
Learning Objectives Cont…• The commonly used terms of sale, including credit terms• How companies make customer credit decisions• How companies measure and monitor accounts receivable• How companies finance accounts receivable• How the cash application process works• Auditing the Receivables Cycle.
Learning Objectives Cont…• Learn how to calculate the following:• Annualized cost of trade credit• Days’ sales outstanding (DSO)• An aging schedule
Receivables Cycle What are receivables?•Receivables are sales made on credit basis.Why do we need receivables? Cash Receivables OperatingUnderstanding Receivables Cycle•As a part of the operating cycle•Time lag b/w sales and Inventoryreceivables creates need for working capital
The Customer to Cash ProcessCustomer Credit Risk Collections Credit Debit Management Management AdjustmentsPO to Shipment Payment Forecasting & to invoice Processing Reporting Reconciliation Deductions & Cash Billing & Dispute Invoicing Management
Credit Policy and CollectionsOrder Order Sale CashPlaced Received Received Accounts Collection < Inventory > < Receivable > < Float > Time ==> Accounts Disbursement < Payable > < Float > Invoice Payment Cash Received Sent Paid
Credit Terms or Payment Terms• It is the length of time a buyer has to repay the amount of debt owed on an obligation. This includes: 1- The maximum time allowed for repayment. 2- Discount for cash or early payment 3- And the amount or rate of late payment penalty
Collection Methods• Centralized / Decentralized collection system• Post – dated check• Pay Orders / Bank drafts• Bills of Exchange• Lock – box System• Drop – box System• Factoring• Collection staff/ agents• Debt collector• Del Credere agent• Concentration banking
Audit Program for Receivables and Revenue Substantive Procedures Substantive Tests Audit ObjectivesObtain aged listing of receivables Clerical accuracyand reconcile to G/LObtain analyses of N/R andrelated interestInspect notes on hand and Existence, occurrence, and rightsconfirm those not on handConfirm receivables with debtors Existence, occurrence, and rights Valuation
Flowchart of the Confirmation Process A Develop Audit Objectives Prepare and Mail the RequestsChoose Appropriate Confirmation Form Send 2nd requests for positive confirmations Determine the timing and extent Perform alternative procedures For non-respondents Identify the information to be confirmed Resolve exceptions Document the procedures andSelect the accounts for confirmation results A
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