Question

o   Examine the five (5) steps to managing accounts receivable. Speculate on the step that is most vulnerable to fraud. Suggest at least two (2) actions that a company can take in order to protect this step from fraud.

o   Imagine that your company has tasked you with developing a plan for factoring accounts receivables. Create one (1) scenario that demonstrates the key benefits and / or detriments to your company from factoring accounts receivable.

Answer 1

1) What are Account Receivables or Receivables?

Account Receivables is the money or payment that is yet to be received by the Company within the time period or credit period provided.

When a company sells a product, the payment does not always happen immediately. Sometimes a time limit is provided by the company to the buyer within which the buyer can make the payment to the Company.

Five Steps to Manage Account Receivables are:

1) Establishing a sound credit policy - Company cannot provide credit period on every sale transaction or to every customer as a company needs running flow of cash to meet its working capital requirements. Hence, establishing a sound credit policy regarding how much credit period would be allowed, to clients meeting which criteria of sale etc is the first step to ensure uniformity in company's credit policy.

2) preparation of Invoice - mentioning clearly that it is a credit sale, how much credit period has been provided, what would be the interest charged (i.e. Rate) in case of late payment etc

3) Keeping record of payments received - Sometimes, out of total amount only a part payment is received from the buyer,therefore, the company needs to keep a track of amount that has been received and the amount that is still due from the respective parties.

4) Reconciling the Accounts with parties - Sometimes the buyer has made the payment which does not get reflected in the seller's account due to various reasons like amount being recorded in incorrect party's name or amount being received late by the company on account of public holiday therefore, it is advisable that reconciliation of Accounts receivable must be done with the other party to ensure that the accounts at both sides reflect same amount (Receivable for Seller and Payable for Buyer)

5) Constantly Monitoring for Late Payment and for possiblilit of Non-Payment so that interest can be levied on late payment and provisions can be created for Non Payment.

----------------------------------------------------------------------------------------------------------------

Step that is most vulnerable to fraud :-

Determining who to give credit to is the step that is most susceptible to fraud as in the case of buyer turning hostile, the money can never be recovered.

One way to counter this is to do a thorough due diligence of the client to whom we are planning to offer a credit period by examining their credit history, their history with the payments made, their creditworthiness, if they have a clean record of making payments on time then this can be considered in allowing them credit and HOW MUCH credit to be allowed should also be determined by looking at their ability to pay back.

--------------------------------------------------------------------------------------------------------------

Key Benefits of Factoring Account Receivables -

Factoring Account Receivables means when a company sells its Account Receivables for a little lesser amount and receives the money on the spot from the selling.

1) It helps company who are in crunch of cash to immediately receive money by selling account receivables rather than by keeping it and receive it somewhere in future

2) It also helps company against bad debts as the Company has sold off the receivables and received money against it so the risk of receivables turning bad has been transferred.

3) It releases blocked money which the companies can invest elsewhere in the business.

Detriments

1) The factoring companies also needs some kind of guarantee in the lines of personal guaranty as there is always a risk of fraud and bad debt associated.

2) Third Party making contact with your customer. Many companies are not comfortable with a third party factoring company making contact with their customers.

3) Although the money is quick but it is not instantly available. Hence, companies wanting to factor their receivables need to plan in advance.

-----------------------------------------------------------------------------------------------------------------

Hope this clears all your doubt. Please give a thumbs up if you like the answer.