Appraisal and Analysis of the Accounts Receivable Process - Woodlands Company - Example

ACCOUNTS DEPARTMENT ACCOUNTS RECEIVABLE PROCESS (Student Name) (Course No.) (Lecturer) (University) (Date) Appraisal and Analysis of the Accounts Receivable Process A process mapping generally outlines and visually describes the flow of activities in a given department or organization. It details the steps followed towards the completion of a given task. This paper describes the Accounts receivable process of Woodlands Company which is in-charge of assembling motor spare parts. The company receives various simple spares, assembles them and sells them to various consumers who needs such spares for completion of motor vehicle assembly and sells. The company has various departments which work towards completion of the activities in the company. The process described in this paper focuses on the planning and flow of activities within the Accounting and Finance department (Accounts receivable). The company has put in place a robust accounting department which is composed of various staffs performing different tasks. One of the most crucial areas in this department is the accounts receivable section. This section is in charge of following up on sales made on credit and ensuring that the company receives such amount due in the required time period. Therefore, the staffs under the Accounts receivable section follow the outlined process to ensure that they have proper planning and execution of activities for easy collection of the cash outstanding from debtors (Lockamy III & McCormack 2004). The first stage of this process regards the receipt of the invoice by the accountants. The invoice is normally received from the sections in charge of Invoice Preparation. This includes the determination of the items sold and setting up of the prices. Therefore, the invoice received at this stage includes the total receivable amount, the name and other details of the customer including the contact materials. This information enables the Accounts receivable accountant to determine the payment made and the amount due on the invoice. After ascertaining the amount due, the account then enters the 30days debtors’ period on the calendar. This is the period within which the debtor needs to pay the amount due on the invoice. Debt collection activities progress from this date including contacting the debtor to remind them on the amount due on their invoice. Therefore, payment is expected during the 30 day period. However, an expiry of the 30 day period without the payment of the due amount necessitates the setting of additional 15 day period within which the debtor needs to pay the said amount. During the 15 days, the debtor needs to ensure that the outstanding amount is paid without any forfeiture and in accordance with the agreed terms and conditions. Upon successful payment of the amount due, the department sends a mail statement to the customer. This indicates the total amount paid throughout the period, any outstanding amount and any interest chargeable. The accounts receivable process is meant to ensure that the company keeps proper track and records of all the debtors and also ensures prompt payment of any outstanding amounts. Therefore, the roles and the activities indicated in this process have a clear outline of the documentations, time periods and the events that need to be followed to ensure receipt of the amount due on sales. Problems identified The process indicated for the company’s Accounts receivable has benefits and strengths that have ensured proper debt collection in the company. However, there are some glaring and inherent operational problems which further jeopardize proper debt collection activities. Some of these problems include; The first problem relates to Exclusion of a legal alternative in case a debtor fails to oblige. This is the greatest operational problem which can clearly be observed and analyzed from the process map. It paints an oblique picture regarding the position of the company towards clients who forfeit and refuse to make settlements of the amounts owed to the company. The second challenge pertains to including two alternative debtors period in the same process. The process has the 30 day period and the provision of an alternative 15 day period on the same process. This is a common problem since several customers wish to delay until the elapse of the initial 30 day period and wait until the alternative 15 day period before making payments on their dues. This is seen as a disadvantage to the debt collection process (Smith & Fingar 2003). The other operational problem in this process concerns the insufficient information on the number of accountants and their specific roles within this section of accounting department. In many cases, companies have one, two or a more number of accounts in charge of collecting and following up on the debts owed to the company. Therefore, a typical process needs to indicate the various stages covered by the different accounts and how their roles intertwine to contribute to the main role of the department. Lack of this information is a potential recipe for work duplication and conflicts in duties. Analysis of the operational problems identified Exclusion of a legal alternative in cases of recovering the debts Debt collection and follow-up is one of the integral roles within the accounting department of larger organization such as a company. The sales department is normally responsible for the receipt of order requests, processing and issuing the items whether in cash and in credit. Where the sale has been made in cash, the obligation of the buyer to the seller diminishes at the point of payment of the cash. However, most of sales especially in companies are normally made in credit terms. Companies allow for a specific period such as 30 days or 60 days period within which the debtor needs to pay for the items collected. Therefore, the customer remains obliged to the company to the extent of the unpaid amount within the period agreed (Sadiq et al. 2007). The invoice raised at this point details the period agreed. In many cases, established companies pay promptly within the stipulated period in the invoice. However, some companies or individual buyers ignore the terms of agreement and possibly forfeit the payment of the amounts owed to the company. The designing of a service process is normally constructed to include all the steps and activities within the said department or activity. It’s essential that all activities be included so as to avoid omission of any step in case of any eventuality. The credit sales normally form a large percentage in Woodlands company due to the high value equipment and material that the company sales. Most of the clients prefer to engage in credit purchases and pay the agreed amount at the agreed date. Therefore, the process covers the extent to which the company engages either in cash or in credit sales but fails to provide for the necessary steps that need to be taken in case of forfeiture. According to the process map indicated in the first page, the company provides for the 30 day agreement for paying the debts. The accounts receivable section is therefore under the obligation to ensure the payment of the amount to the company within the stipulated time. Further, the process opens an alternative which allows for the 15 day period within which customers who fail to owner the initial 30 days need to fulfill their payment agreement (Van Der Aalst et al. 2003). These are the only stages provided within this process under which the accountants need to recover the debt owed by the various customers. However, the typical scenario usually witnesses occasions when a customer fails to owner the initial 30 day agreement and further fails to pay the amount wi5thin the extra 15 day period. In such a case, the process is silent on the next step available for the company towards receiving the amount that is owned by the debtor. Therefore, the process is deficient on how the company needs to solve the problem of forfeitures resulting from customers who fail to honor terms and conditions of the invoice. The operational challenge is normally a cause of substantial monetary loss to the company which needs the proceeds from its sale to run its activities. Besides, lack of this provision especially in the process has opened a chance for different debt recovery and collection activities which have been unfruitful. This has been the case in the previous years when the company lost millions from its association with a buyer that finally failed to pay for the amounts agreed upon (Becker et al., 2000). Therefore, the company has been left with no proper and clear guidance on how to manage and deal with clients who refuse to honor terms and agreement as stipulated in the invoice. Inclusion of two alternative debtor periods The debtor period is normally the duration allocated for debtors within which they need to honor their debt obligation to a particular creditor. Companies which operate in large scale such as Woodland Company have a provision to sell its products on credit agreement especially those of high value. This provision allows the debtors to agree on a particular period within which to pay the agreed amount. One of the principles in business practice advocates for shortening of the debtors period while prolonging the creditors period. This rule argues that it’s prudent to have a short period of collecting debts and a relatively longer period for settlement of debt (De Bruin & Rosemann 2005). Therefore, several customers tend to apply this rule as one of the principles that manages their monetary activities. The danger therefore applies when the company is unable to receive the agreed amount at the agreed time. Normally, customers would tend to bargain for a longer period within which to pay. This helps in allowing them an opportunity to have proper financial resources and planning before settling the debts. A robust process needs to factor in the resistant attitudes of some buyers who tend to bargain for a longer credit period. These customers tend to navigate through any lee-way so as t benefit from this bargain. The company has in place a 30 day period captured within the invoice as constituting terms of agreement. This policy requires all credit customers to make their payment not later than 330 days from the day of making the purchase. The account in charge of the accounts receivable section is under obligation to ensure that this period of agreement is adhered to without any failure (Weske 2012). Despite the knowledge of the different credit attitudes of the customers within the market, this process has provided for additional 15 day period subsidiary o the 30 day agreement. This provision implies that customers who fail to honor their agreement within the 30 day stipulated period have an additional leverage of 15 additional days. The 15 day extra period is therefore put in place as an extension of the initial 30 day period. In other words, the accounts receivable section has expanded its debtor’s period and further provided new additional days within which the customer can pay the debt. The expansion of this period is a fodder for easy avoidance of the initial 30 day period. Few customers with the knowledge of an additional 15 days will wish to settle their debt within the initial 30 days. Normal, all businesses and business individuals prefer a longer credit period. This allows them enough time to allocate resources and determine the amount to pay. However, the party which is injured with this kind of arrangement is the company which normally requires prompt payment to enable sufficient budgetary controls (Bandara et al., 2005). This challenge affects the manner in which the department manages its debt collection activities. Several customers have opted to enjoy the additional 15 day period with an aim of expanding the period within which they pay the debt. The challenge has further been evident in arranging for a more comprehensive and unfair debt policy in the company. The accountants within the accounts receivable section have therefore been under the obligation to monitor the two different periods allowed for the debtors. Suppose the period of agreement was one, it would be easy to negotiate and keep proper tracking of the customers so as to ensure debt collection agreement. Besides, the placement of a single period policy would be of much importance in recording the collection trends for different customers in the company. This challenge occurs due to poor structure in terms of the period of collection lack of proper alternative to manage those who are likely to forfeit their obligations. Suppose there were elaborate structures to manage the agreements made and signed by the clients, there would be no instances of customers extending their agreed payment periods and seeking for additional arrangement. Beside, institutions of an alternative legal means would make it easy for all the clients to honor the agreements signed in the invoice and enable the company to have proper debt management policies in place. Recommendations The two operational challenges mentioned in the section above need to be addressed since they are one of the most crucial concerns for the company. The following are some of the recommendation, strategies and techniques which need to be employed by the company so as to address the various challenges; Institution of legal debt recovery procedures within the process Debt recovery has proved to be a difficult activity especially when dealing with companies or business individual who have little respect t terms of agreement. Accountants charged with managing accounts receivable have a challenge in ensuring a hundred percent debt collection when dealing with such category of customers. Therefore, the invoice normally stipulates legal terms of conditions. The customers consent to such terms by acknowledging engaging in business within the framework of the stipulated agreed terms and conditions. One of such conditions relate to the period of settling the debt extended by the company (Hepp et al. 2005). The invoice involves normally spells out the period of settling the debt. In this company, the agreed period is 30 days within which the customers need to settle their credit agreement. Some customers however lack the decorum to honor the agreement made and signed between them and the company. The best way to manage this operational challenge is to provide a process of seeking legal intervention in case a customer fails to honor the agreement within the invoice. The accounts receivable section need to be buttressed with legal option which provides for seeking legal processes to compel adherence to the terms of the invoice. A debt collector with legal backing need to be included within the process especially after the expiry of the period agreed. This makes the process of debt collection more simple and structured (Weske 2012). It provides for the separation of the role of accountants and inclusion of the role of legal officers in the process of debt collection and management. Besides, it helps to guarantee the company of a sure receipt of its financial; resources in case the company sales on credit terms. This paper recommends for the establishment of the office of a debt collector within the company. This office keeps track and record of all the customers who fail to honor their obligation with the company and evade settlement of their promises to the company. Elimination of the two debt payment period from the process The collection of debts from credit customers requires a proper agreement between the company and the customers. The essential part of the agreement is the aspect of honoring the said terms and conditions within the invoice. A clear determination of the customer behavior indicates that customers generally seek for a longer payment period of their credit obligation. On the other hand, the seller requires a relatively shorter period within which to collect the debts. Therefore, the agreement of the payment period in case of such credit sales needs to favor all the parties in the sale. Considerations need to be made on the essential issues surrounding such sale agreement. Presently, the company provides for two different payment periods within its process. In many cases, the customers have opted to fail honoring the 30-day agreement so as to have the benefit of 15 additional days. This provision has therefore been exploited by many customers making the 30-day initial agreement void in most circumstances (List & Korherr 2006). The company needs to abolish the second alternative and come up with a more negotiated period for the customers. The agreement on a particular period needs to be negotiated between the company and the customer. Therefore, this makes it possible to agree on 15 day period, 320 days, 60 days or even 60 days provided both the company and the customer agree. Non-adherence to this agreement would constitute breach under the law and therefore invoke the action of the debt collector. This negotiated agreement is beneficial since it provides the chance for the parties to come up with periods convict and avoid cases of forfeitures as witnessed in the current case. References Bandara, W., Gable, G. G., & Rosemann, M. (2005). Factors and measures of business process modelling: model building through a multiple case study. 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