An important role for the account receivable department
The account receivable department is responsible for the sales ledger and all things debtor related, which is a very important area in all businesses. The primary functions of the account receivable department is to post the sales invoices to the accounting records, maintain the sales ledger and chase up the debtors to ensure all debts are collected in full and in a timely manner and to eliminate bad debts as far as possible, all of which are a full time role.
Getting the cash in is an important role for the account receivable department.
As well as dealing with the posting of sales invoices and maintaining the sales ledger, the account receivable department is also responsible for providing regular management information reports to the management accountant. The management reports prepared by the account receivable department are used to prepare the monthly management accounts. So, what types of management reports do the account receivable department actually provide?
The report that account receivable department will prepare regardless of the type of business, the size of business, or the industry in which the business operates is the aged debtors report. The aged debtors report is considered the most important report the account receivable department will prepare and it is clear to see why.
As its name suggests the aged debtors report is nothing more than a schedule of aged debts and this will include the debtors’ name, the debtors’ credit limit, the balance outstanding and the age of the debtors, i.e. the number of days the debt has been outstanding. The aged debtors report is a simple but very important schedule. Debtors are customers who owe the business money, and the business is losing out by not having the money owed by the debtors in its bank account. Debtors cost the business money therefore it is vital that debtors are kept as low as possible, which is the responsibility of the account receivable department.
The aged debtors report allows the account receivable department to closely monitor debtors and take appropriate action. For example, by looking at the age of the debtors the account receivable department can choose to chase up all debtors once they reach 60 days old, or 75 days old etc. The age debtors are allowed to reach before action is taken will vary from business to business. The aged debtors report is the best management tool for credit and bad debt control.
The aged debtors list also lets the account receivable department know if a customer is within its agreed credit limit before the sale is made. It can be dangerous to sell products to customers who already have high levels of outstanding debt with the business and the aged debtors report will allow the account receivable department to put a stop on any such debtor accounts.
The aged debtors report provides the information needed to compile a list of the largest customers, and the amount of turnover generated from each one. This information can be used to;
1)Devise a strategy to generate more sales from customers at the bottom of the list
2)Devise a strategy to ensure the top customers are treated well and looked after
3)Devise a strategy to increase turnover overall
The top customer information can be presented in a number of different ways including tables, graphs, bar charts and pie charts. Top customer information can be analysed even further and customers can be tabulated by region or country, the type of products bought etc. Smaller businesses are likely to want the core information only whereas larger businesses are likely to want more detailed information.
The aged debtors report provides the financial information required to enable the account receivable department to produce a schedule of debtors’ ratios that will be included in the monthly management accounts. The most common ratios are the accounts receivable turnover ratio and average debtor days.
The accounts receivable turnover ratio calculates the number of times debtors are turned over during the year and it is calculated as;
Turnover divided by debtors
The accounts receivable turnover ratio is a good indication of the timing of cash flows from credit sales. The higher the number the better as this means the account receivable department has been efficient at doing their job.
The average debtor day ratio calculates the average age of debtors and is calculated as;
(Average debtors divided by sales) multiplied by 365
The aged debtors report shows the age of each individual debt, which is great for credit control purposes but too much information for inclusion in the management accounts. The business’ management are concerned with an overall view and the average debtor day ratio provides this. The lower the number the better as this means the account receivable department has been efficient in getting the debtors cash in on a timely basis.
The account receivable department is an important part of every business and it is important to have employees that are experienced, knowledgeable and capable of doing a good job. The account receivable department are primarily responsible for controlling the sales ledger and getting cash in to the business, but the account receivable department is also responsible for preparing a variety of different reports. Most of the reports produced are needed in the day to day function of the account receivable department but some of them are also included in the monthly management accounts.