At about the same time, chief executives and financial officers of clients and other companies publicly conceded that accounts receivable were degrading to the point of becoming one of the weakest aspects of their business, whereas receivables had earlier been an acknowledged strong point.

While soundly run businesses routinely establish and enforce systems to monitor and collect on accounts due, problem receivables go hand-in- hand with a weak economy. Now, more than at any time in the past 16 years, businesses must learn to take control of receivables and improve the processes by which they manage their collections.

From what I have heard from CPAs, the collection of receivables due from clients receives a great deal of attention, but when it comes to clients, the profession regards its primary obligation in this area as a historical one relating to evaluating troubled accounts. Indeed, some professionals believe that deductions and unpaid invoices of clients ought to be dealt with only after the fact, and then, for example, in terms of how to value the resulting losses in the financial statements or how to suggest the availabity of additional reserves. As a result, many CPAs appear to be content to leave proactive measures to their managing partners or the credit and collection function at clients.

While the proper role of the accountant in credit and collections may be debated within the profession, it is clear that many firms and companies are in a receivables crunch. It is also clear that accountants can help themselves and their clients by understanding effective receivable management procedures.

The Condition of Today's

Receivables

It is far too common to find clients of accounting firms delaying payment for 60, 90, or even 120 days past due dates. And some clients have been know to stall making payment until it is time to begin providing services a year later.

It is not abnormal for manufacturers and importants of many consumer products to experience deductions and non-payments amounting to eight per cent and more of net invoice amounts. The most successful of those companies, backed by full-time credit and collection staffs and computerized monitoring programs, often are able to collect no more than 75% of deducted or otherwise unpaid amounts. This means that companies with the most efficient distribution and collection systems still are unable to collect approximately two per cent of total invoice amounts. And, with the most optimistic retail analysts suggesting that the 1990s will pose great tests and challenges, you and your clients can count on a further erosion of receivables consistent with a recessionary environment.

Preliminary Measures to Control

Receivables

Some preliminary steps CPAs can take or advise clients to take to reduce the number and dollar volume of contested billings or unilateral store deductions are no more complicated than adopting simple, internal management controls.

Document all transactions in writing. To understand why this is necessary, consider that oral agreements cost you and your clients money. How many times have you debated with a client over what service was or was not included in the fee? On the client side, oftentimes the primary focus of customer dealing is the sales department. Companies are often reluctant to take any step that interferes with the selling relationship. However, many retail/vendor transactions take place with no written record in conversation between customers and the sales force. A buyer may insist that a sales representative change colors, modelse or styles for which purchase order numbers have already been issued; if the company ships without written confirmation, the store may claim it doesn't have to pay for the goods.

Recommendation: Make it clear to the client/customer that a substitution or change to a level of agreed upon service or an accepted order cannot be made until a written confirmation of the change is exchanged or received. If you follow this principle you won't have to debate whether junior's tax return is included in the fee. If you clients do not adopt and enforce this simple policy, they will leave themselves open to chargebacks and penalties for shipping the wrong merchandise and for violations of other policies, as well as for administrative, traffic and handling fees. If you clients allow no exceptions to this policy, they will train their customers to accept that they must mail or fax confirmation of order changes if they want to receive the merchandise they need.

Conduct a thorough analysis of payment practices. A review and analysis of client/customer paying habits during the most recent 18- month to two-year period should indicate those clients/customers of which greater control of receivables should be exercised. In the area of late payment, your analysis may lead you to suggest a program of communication with habitually late accounts beginning on the first day after the payment terms expire in order to alert the client/customer that payment is expected when due. Or you may find that some customers consistently object to or require explanations of one or two particular types of transactions for all of their deductions: your client may be protected from such deductions through better documentation or improvements in their fulfillment and shipping procedures with respect to those particular types of transactions. You may also find that your client's distribution center is the cause of many deductions, especially when deductions of the same type are incurred from a number of different customers. For example, if you client experiences an increase in or abnormal amount of chargebacks for under-shipments or wrong styles or colors from several retailers in several regions, you are more likely to find the culprit in the client's warehouse than among its sales representatives or store customers. On further inquiry, you may find-- as we do occasionally with our clients--color-blind pickers, or packers who do not count accurately. By charting and examining your client's deductions, you will be able to develop an accurate picture of conditions that can be corrected by internal action and those that must be addressed to the sales department.

Recommend adoption and adbherence to a policy on post audits. This recommendation applies more to clients in the merchandising field than to the providing of personal services. Many retailers engage consultants who conduct reviews of all transactions dating back three, four and even five years in order to "establish" and force payment for alleged infractions of store policy. Many of these allegations are often difficult, if not impossible, to prove or disprove. Vendors who accept questionable deductions resulting from a post audit may do so for fear of losing future orders. For these reasons, one of the best available strategies for vendors in dealing with post audits is to print on the order form the following conditon of sale--"POST AUDITS NOT PERMITTED 6 MOTHS or 12 or 18 months PAST DATE OF SHIPMENT"--or a similar conditon limiting the time of acceptable post audit adjustments.

By narrowing the period for such adjustment, your clients can protect themselves in two ways. First, they limit the dollars against which post audit deductions may be taken. Even more importantly, they confine the post audit to a recent period in which they are more likely to be able to produce documentation to challenge the store's allegations.

These are a few of the ways in which you and your clients can begin to take better control of accounts receivable, but such measures are no substitute for a systematic and disciplined approach to a company's receivables.

Elements of A Receivables

Program

A systematic approach to controlling receivables would include the following:

1. Documentation. You and your client will have difficulty successfully challenging a scope of service question or an alleged infraction without a complete file substantiating all the details supporting the position taken. The quality of the documentation communicates an important message: namely, that you or your client take seriously its claim and the balance owing. For these reasons, paperwork must be available to present the case in a disputed transaction. In the personal service business this would include the engagement letter, memos or correspondence on changes in scope of services, records of phone conversations, and transmittal letters of all services delivered. On the merchandising side this would include remittance advises; credit and debit memos; copies of checks; shipping documents; authorizations for returns; any policies the client has announced to the store account; advertising tearsheets, or copies if the sales representatives keep the originals; post-marked envelopes accompanying payment when trade discounts have been taken pas the expiration date or for other irregularities; any other document you need to establish a disputed claim.

2. Files. Inadequate or inefficient paper organization can sabotage collections procedures. You and your client should establish a central filing system kept under the control of one manager. Files should be organized by client/customer and should contain, as a minimum, a current listing of client/customer personnel; shipping and routing guides, chargeback policies and schedules; identity of personnel authorized to resolve disputes, including amount limitations, if any; description of past disputes, including those in which your client was culpable, and past dealings with the account; and documentation as listed above.

3. Staff. Management controls should be adopted to govern all dealings undertaken in connection with monitoring and collecting receivables. For example, responsibility for each client/customer should be assigned to an individual to provide continuity in all dealings with the customer. It will give staffers an opportunity to learn each account in-depth. Also, staffers will develop a better working knowledge of store personnel, a definite asset in an ongoing and sometimes troubled business relationship.

Most accounting firms place the responsibility for collecting receivables with the partner responsible for the work. Some firms, however, have successfully made collection an administrative function, with routine follow-ups at the clerical or administrative level.

Another area requiring special attention is staff evaluation and education. The client should consider establishing performance checks and a monitoring program to assure that staffers conduct themselves professionally and productively in dealings with customers. Recommend that staffers be kept aware of any special information or of problems anticipated with assigned customers. Keeping staff "in the loop" will assure that they act quickly and intelligently when special situations-- including credit "alerts" and impending bankruptcies--arise.

4. Schedules. Your and your client should establish monitoring programs and follow-up systems and schedules for outstanding receivables and for processing chargeback counterclaism and collecting past due invoices. Set a minimum dollar amount to trigger a counterclaim--some firms start at the first dollar--and set a schedule for the first letter to go out or the call to the customer to alert them that a letter is coming, and for the timing of all follow-up contacts. Similarly, help establish an action schedule for past due amounts.

These are the Basics

The elements discussed above are basic to any program designed to control receivables. None of these suggestions involve any great investment. Nor are expensive computer installation and complex failsafe programs necessary to control and manage receivables.

You and your clients can get a grip on receivables with disciplined management, strong documentation, timely execution of procedures, and a properly informed staff.

Sheila Pekar is President of Internal Audit Bureau, Inc., an accounts receivable consulting firm headquaterd in Hamlin, Pennsylvania. Internal Audit Bureau has assisted numerous consumer goods manufacturers in improving their receivables programs.