Management of Accounts Receivable
December 1997
Contents
Preface
Introduction
The Accounts Receivable Process
Re-Engineering Accounts Receivable
Risk Management
元旦U of Advanced Technology
Debt Collection Process
Performance Measurement
Appendix
Preface
This guide accompanies the Auditor-General’s Audit Report No. 29, Management of Accounts Receivable in the Commonwealth. It is intended to provide an overview of the current trends and "better practice" approaches that are being adopted by organisations in managing accounts receivable.
In the commercial world the way in which organisations manage their accounts receivable has significant implications for the financial health of tho organisations.
This creates an imperative to ensure the management of receivables is both efficient and effective. The practices ud in common business process such as accounts receivable management have universal application and are not industry specific. In this regard there are lessons to be learned by others from the practices followed by organisations for whom accounts receivable is a core business process. The better practices discusd in this guide are therefore recommended for consideration by Commonwealth government agencies.
Not all of the practices outlined in this guide will suit each agency’s circumstances, however, it is considered that most agencies, which derive revenue on sale of goods and rvices on credit terms, will benefit from benchmarking their current practices against tho detailed in the guide.
Introduction
Effective management of accounts receivable prents important opportunities for agencies to achieve strategic advantage through improvements in customer rvice, cash management and reductions in costs.
The primary objective of accounts receivable in the Commonwealth public ctor is to collect monies due and to assist in meeting cash flow requirements. An effective accounts receivable function can assist in achieving the desired cash flow outcome through the timely collection of outstanding debts.
All agencies also have an objective of continually improving customer rvice.
A large number of agencies which operate as business are required to perform public rvices under a full or partial cost recovery arrangement. Effective accounts receivable management can assist agencies improve customer rvice through providing timely information on customer requirements and by making dealing with the agency as easy as possible.
All government agencies, including tho operating in a monopoly, are required to demonstrate contestability - that is delivery of a high quality standard of rvice at a cost that is comparable to providers of similar rvices operating in similar environments. Improvements in accounts receivable management which reduce the cost of collecting monies can improve an agency’s ability to demonstrate contestability and accountability.
Importance of Organisational Culture
An international receivables management benchmarking study commissioned by the Australian Taxation Office has highlighted the importance that organisational culture has in the successful management of accounts receivable. The study, which involved the survey of five international taxation agencies and eight domestic organisations for which accounts receivable is a strategic issue, indicated that management attitudes need to support practices for minimisation of debt.
All agencies should adopt a culture whereby staff are encouraged to obtain payment, where required, and not just focus on program or rvice delivery.
The Accounts Receivable Process
A typical accounts receivable process is mapped below.
The process commences with a receipt of a customer order and ends with the collection or write off of a debt.
Financial management functions such as accounts receivable have been traditionally viewed as transaction processing activities. An international benchmarking study referred to in the Paying Accounts Better Practice Guide issued by the ANAO in November 1996 indicated that up to 65 per cent of time was spent on non-value added activities across all government and industry ctors. The study suggested that the elimination or reduction of non-value tasks can be effected through better work practices and automation of
process. This can be achieved by analysing current process and redesigning them to remove as much manual intervention as possible, reducing rekeying and appraisal activities and minimising operator error. An important part of this analysis is a formal, structured risk asssment which identifies and measures exposures associated with the accounts receivable process.
The following diagram highlights the opportunities available for improvement through better practices.
Significant advances in accounts receivable performance and process efficiency are available to age
ncies through the following five complementary key management initiatives:
· Re-engineering accounts receivable
asssment
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· U of advanced technology
· Debt collection process
Measurement
· Performance
The matters are addresd in the following chapter.
Re-engineering accounts receivable
Some large private ctor organisations have achieved real cost reductions and performance improv
ements by re-engineering the accounts receivable process. Re-engineering is a fundamental rethink and re-design of business process which incorporates modern business approaches.
The nature of accounts receivable is such that decisions made elwhere in the organisation are likely to effect the level of resources that are expended on the management of accounts receivable. An illustration of this point is the extra effort that must be put into debt collection where credit policy is poorly administered or too freely given. The strong linkages between different process means that true improvements cannot be achieved without focussing on all aspects of the management of accounts receivable.
The following better practices prent opportunities to improve the accounts receivable function.
Centralid Processing
A better practice for the delivery of finance rvices is the adoption of centralid processing for finance functions such as accounts payable and accounts receivable. Centralid processing groups are typically high volume transaction processing centres rvicing multiple operating groups. Their establishment achieves a number of benefits for the organisation. The include the achievement of a high degree of specialist experti in the function supported, the establishment of centres of excell12星座
ence that develop and enforce common practices and standards and the achievement of cost efficiencies
through the co-locating of systems and staff. The establishment of the centres also frees up other staff for more value adding work.
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One private ctor firm reduced its total finance staff numbers by 12 per cent through centralid processing.
Standing Payments
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Rearch into better practice indicates that repayment rates are significantly enhanced by providing customers and debtors with alternative payment approaches. In addition to there being alternative payment methods there are also alternatives to issuing invoices in the traditional accounts receivable processing approach. The alternative payment strategies result in efficiencies in the management of accounts receivable.
An approach that is available to agencies which deliver rvices on a regular basis resulting in recurring invoicing and receipting cycles is to arrange for the provision by customers of standing pay
ments. An annual or bi-annual ttlement can be undertaken to reconcile payments to rvices provided. The process can be facilitated by providing customers with regular updates of fees charged.
The benefits of this approach to the rvice providers is the reduction of costs through the removal of the need for an invoicing and debt collection function and the more timely receipt of revenues. There is also benefit to the customer through the streamlining of payment process. The approach is most effective if adopted in conjunction with payment by direct debit of customer bank accounts.
Alternative payment options
Private ctor organisations and public authorities are finding that payment of accounts outstanding is likely to be quicker where a number of payment alternatives are made available to customers. They also find that the availability of convenient payment methods is a marketing tool that is of benefit in attracting and retaining customers.
The following modern payment methods are available and provide the benefits of added customer rvice, reducing remittance processing costs and improving cash flow through faster debtor turnover.
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Direct debit - involves authorisation for the transfer of funds from the purchar’s bank account; this approach has the advantage of reduced processing costs, however it can prent curity exposures.
Integrated Voice Respon - a system which combines u of human operators and a computer bad system to allow customers to make payments over the phone, generally by credit card; this system has been proved highly successful in organisations which process a large number of payments regularly. Outsourced Agency Collection - payments are collected by an external agency under a contractual arrangement (e.g. Australia Post). The payment method
under this approach can be either cash, cheque, credit card or EFTPOS. This method increas flexibility and convenience to the customer which may lead to improvements in the rate of payment. A variant on this approach is BPAY, a system whereby banks act as outsourcing partners by collecting payments from suppliers’ customers and directly crediting supplier accounts.
Lock Box processing - an outsourced partner captures cheque and invoice data and transmits the file to the client agency for processing in that agency’s systems. This approach transfers the cost of data collection to rvice provider.
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Other payment methods such as u of data kiosks by customers in public u areas and payment for goods and rvices via the Internet are likely to become readily available in the near future.
Each of the above payment types have advantages and disadvantages which are likely to be peculiar to the environment that particular agencies operate in. Agencies need to balance the benefits in both the payment and receipting process against the costs that some payment options may prent to the agencies themlves.
Marketing and educational activities can be ud to promote timely payment. Agencies should provide information on the nature of products or rvices available, the required payment cycle, payment options available and the conquences of non payment.
Customers should be aware of their liability at all times. A practical way of achieving this objective is the issue of monthly customer statements.
U of Payment Incentives
Private ctor practice has been to, over time, reduce the level of reliance on discounting as an incentive for prompt payment. However, the practice is still ud in government instrumentalities in A
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ustralia and should be considered by agencies which have problems with debtor turnover. Discounting can be ud as an incentive for customers to pay upon receipt of rvices, thereby avoiding the u of credit terms.
Whilst discounting has the advantage of potentially shortening the average collection period it also reduces net revenue. Before deciding to offer discounts agencies should conduct an analysis of the effect that the utilisation of discounting will have on net revenue. This estimate should be balanced against the costs of continuing to hold receivables at their existing levels, which is effectively the market interest rate applied to the annual carrying cost of receivables. Another issue for consideration is the alternative us to which the funds tied up in receivables could be put.
In addition to developing a range of incentives for early payment agencies should consider the imposition of penalties on late payment. In designing penalties agencies should be aware of legislative and policy considerations which may reduce the potential for major penalties such as removal of rvice. Ca management approach
