Page 144 - Accounting Best Practices

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7–5 Outsource Collections
None of the reasons for not applying cash are valid, given the consequences
of wasting the time of the collections staff. Only two solutions need to be
installed to ensure that cash is applied at once. First, cash application is always
the highest priority of whomever is responsible for cash applications, thereby
avoiding all arguments regarding other items taking priority, or not having
enough time to complete the task. Second, all cash must be applied, even if it is
only to an ‘‘unapplied cash” category in the accounts receivable register for those
items that cannot be traced immediately to an open invoice. In these cases, sim-
ply having the total of unapplied cash for a customer clearly shown in the aged
accounts receivable listing is a clear sign that the customer is correct—it has paid
for an invoice and now the collections person knows how to apply the cash that
was already received. Applying cash to accounts receivable as soon as it is
received is critical to ensuring that the collections staff has complete information
about customer payments before calling a customer.
Ensuring that cash is applied on time is a key internal auditing task. Without
periodic review by a designated auditor, the person in charge of cash applications
may become lazy and delay some application work. To avoid this problem, audits
must be regularly scheduled and should verify not only that all cash is applied in
a timely manner, but that the amount of cash received each day matches the
amount applied. If these controls are rigidly followed, it becomes an easy matter
to enforce this most fundamental of best practices.
Cost: Installation time:

7–5 OUTSOURCE COLLECTIONS

Some companies have a very difficult time creating an effective collections
department. Perhaps the management of the function is poor, or the staff is not
well trained, or it does not have sufficient sway over other departments, such as
sales, to garner support in changing underlying systems in a way that will reduce
the amount of accounts receivable to collect. Whatever the reason or combination
of reasons may be, there are times when the function simply does not work. A
variation on this situation is when a collections staff is so overwhelmed with
work that it cannot pay a sufficient amount of attention to the most difficult col-
lection items. This is a much more common problem. In either case, the solution
may be to go outside the company for help.
The best practice that solves this problem is to outsource the entire function
or some portion of it. When doing so, a company sends its accounts receivable
aging report to a collections agency, which contacts all customers with overdue
invoices that have reached a prespecified age—perhaps 60 days old, or whatever
the agreement with the supplier may specify. The supplier is then responsible for
bringing in the funds. In exchange, the collections agency either requires a per-
centage of each collected invoice (typically one-third) as payment for its services