DR. D. Y.

PATIL UNIVERSITY DEPARTMENT OF BUSINESS MANAGEMENT

ASSIGNMENT ON IMPACT OF ACCOUNT RECEIVABLE ON MARKETING COST

UNDER GUIDANCE OF: Asst. Prof: MANGESH PATIL Place: Navi Mumbai

SUBMITTED BY:Kailash Chandra Joshi Raaj Matthews Gibin George Manoj Popat Hadawale Devrath K. Harsh Madhvani

A- Definition of Accounts receivable

Money which is owed to a company by a customer for products and services provided on credit. This is often treated as a current asset on a balance sheet. A specific sale is generally only treated as an account receivable after the customer is sent an invoice. Accounts receivable are the amounts owed to a business by its customers, and are comprised of a potentially large number of invoiced amounts. Accounts receivable constitute the primary source of incoming cash flow for most businesses, so you should be able to analyze these invoices in aggregate to ascertain the health of the underlying cash flows.

B- USES OF ACCOUNT RECEVABLE Companies can use their accounts receivable as collateral when obtaining a loan (asset-based lending). They may also sell them through factoring or on an exchange. Pools or portfolios of accounts receivable can be sold in capital markets through securitization. For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit - a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts consistent with their past experience of customer payments, in order to avoid over-stating debtors in the balance sheet.

C- ACCOUNTS RECIEVABLE ANALYSIS One of the easiest methods for analyzing the state of a company's accounts receivable is to print an accounts receivable aging report, which is a standard report in any accounting software package. This report divides the age of the accounts receivable into various buckets, which you can sometimes alter within the accounting software to match your billing terms. The most common time buckets are from 0-30 days old, 31-60 days old, 61-90 days old, and older than 90 days. Any invoices falling into the time buckets representing periods greater than 30 days are cause for an increasing sense of alarm, especially if they drop into the oldest time bucket. There are several issues to be aware of when you analyze based on an aging report, which are:

Individual credit terms. Management may have authorized unusually long credit terms to specific customers, or perhaps only for particular invoices. If so, these items may appear to be severely overdue for payment when they are, in fact, not yet due for payment at all.

Distance from billing date. In many companies, the majority of all invoices are billed at the end of the month. If you run the aging report a few days later, it will likely still show outstanding accounts receivable from one month ago for which payment is about to arrive, as well as the full amount of all the receivables that were just billed. In total, it appears that receivables are in a bad state. However, if you were to run the report just prior to the month-end billing activities, there would be far fewer accounts receivable in the report, and there may appear to be very little cash coming from uncollected receivables.

Time bucket size. You should approximately match the duration of the time buckets in the report to the company's credit terms. For example, if credit terms are just ten days and the first time bucket spans 30 days, nearly all invoices will appear to be current.

1-Account receivable collection period Description: Some people find that the accounts receivable turnover figure is easier to understand if it is expressed in terms of the average number of days that accounts receivable are outstanding. This format is particularly useful when it is compared to the standard number of days of credit granted to customers. For example, if the average collection period is sixty days and the standard days of credit is thirty, then customers are taking much too long to pay their invoices. A sign of good performance is when the average receivable collection period is only a few days longer than the standard days of credit.

Formula:Divide annual credit sales by 365 days, and divide the result into average accounts receivable. The formula is as follows: = Average Accounts Receivable Annual Sales/365 days

2- Accounts receivable turnover ratio

Description: Accounts receivable turnover measures the ability of a company to efficiently issue credit to its customers and collect it back in a timely manner. A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, while a low turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital.

Formula: Add together beginning and ending accounts receivable to arrive at the average accounts receivable for the measurement period, and divide into the net credit sales for the year. The formula is as follows:

Net Annual Credit Sales (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

D- Accounts Receivable Auditing

If your company is subject to an annual audit, then the auditors will review your accounts receivable in some detail. Accounts receivable is frequently the largest asset that a company has, so auditors tend to spend a considerable amount of time gaining assurance that the amount of the stated asset is reasonable. Here are some of the accounts receivable audit procedures that they may follow: Trace receivable report to general ledger. The auditors will ask for a periodend accounts receivable aging report, from which they trace the grand total to the amount in the accounts receivable account in the general ledger. (If these totals do not match, you may have a journal entry somewhere in the general ledger account that should not be there) Calculate the receivable report total. The auditors will add up the invoices on the accounts receivable aging report to verify that the total they traced to the general ledger is correct. Investigate reconciling items. If you have journal entries in the accounts receivable account in the general ledger, the auditors will likely want to review the justification for the larger amounts. Test invoices listed in receivable report. The auditors will select some invoices from the accounts receivable aging report and compare them to supporting documentation to see if they were billed in the correct amounts, to the correct customers, and on the correct dates. Match invoices to shipping log. The auditors will match invoice dates to the shipment dates for those items in the shipping log, to see if sales are being recorded in the correct accounting period. This can include an examination of invoices issued after the period being audited, to see if they should have been included in a prior period.

 Confirm accounts receivable. A major auditor activity is to contact your customers directly and ask them to confirm the amounts of unpaid accounts receivable as of the end of the reporting period they are auditing. This is primarily for larger account balances, but may include a few random customers having smaller outstanding invoices. Review cash receipts. If the auditors are unable to confirm accounts receivable, their backup auditing technique is to verify that customers have paid the invoices, for which they will want to review checks copies and trace them through your bank account. Assess the allowance for doubtful accounts. The auditors will review the process that you follow to derive an allowance for doubtful accounts. This will include a consistency comparison with the method you used in the last year, and a determination of whether the method is appropriate for your business environment. Assess bad debt write-offs. The auditors will compare the proportion of bad debt expense to sales for this year in comparison to prior years, to see if the current expense appears reasonable. Review credit memos. The auditors will review a selection of the credit memos issued during the audit period to see if they were properly authorized, whether they were issued in the correct period, and whether the circumstances of their issuance may indicate other problems. They may also review credit memos issued after the period being audited, to see if they relate to transactions from within the audit period. Assess bill and hold sales. If you have situations where you are billing customers for sales despite still retaining the goods on-site (known as "bill and hold"), the auditors will examine your supporting documentation to determine whether a sale has actually taken place. Review receiving log. The auditors will review the receiving log to see if it records an inordinately large amount of customer returns after the audit period, which would suggest that the company may have shipped more goods near the end of the audit period than customers had authorized. Related party receivables. If there are any related party receivables, the auditors may review them for collectibility, as well as whether they should instead be recorded as wages or dividends, and whether they were properly authorized. Trend analysis. The auditors may review a trend line of sales and accounts receivable, or a comparison of the two over time, to see if there are any unusual

trends. Another possible comparison is of receivables to current assets. They may also measure the average collection period. If so, expect them to make inquiries about the reasons for changes in the trends. Importance of accounts receivable

Accounts receivable consists of money due from customers as a result of an organization's normal business operations. The management of accounts receivable is an extremely important function since the collection of outstanding receivables represents the single most important source of cash for all organizations selling goods on open account. Because of the impact that accounts-receivable collections have on cash flow, it is important that responsibility for the day-to-day management of credit and collections activities be delegated to a single individual within the organization. Benefits receivable factoring, or financing, is a very beneficial, long-time practice used for small businesses that are seeking an improvement in cash flow or the release of working capital for business ventures. The reasons are really numerous as many businesses are finding a reason to take advantage of invoice factoring for the better of their operations day to day. There are three main benefits to most small businesses that use factoring:

1- Release of working capital already earned. 2- Relinquishment of collections. 3- Quick financing

Release of Working Capital

When you have a great deal of unpaid invoices, you are really sitting on working capital that has been earned, yet you cannot use. Factoring is a great process to release this working capital you have already earned. These factors purchase your accounts receivable for a discount and you are able to use this working capital almost immediately. Relinquishment of Collections Having a great deal of collections to monitor and deal with can sometimes take away from your other business functions that are quite essential to smooth operation. When you use invoice factoring, you are passing off these collections to the factor for a discount and will be able to focus more on the other aspects of your business. Quick Financing The best benefit of accounts receivable factoring is that it provides a quick financing option that is painless and doesnt involve tying out business assets for collateral. Within only about 24-48 hours you can receive the advance which can be up to as much as 97% of the amount you sold your receivables for. No waiting for a bank approval and no having to fax a million documents. Factoring is a great process that provides businesses, especially small businesses in various industries including construction, with much needed working capital without the ultimate price being cost to the business. You have earned the money and factoring gives you the chance to get that money you earned without waiting on outstanding invoices to be paid.

What Are the Pros & Cons of Accounts Receivable? The "accounts receivable" entry in the general ledger is used in accrual-based accounting to signify when a business has earned revenue for products or services. By using accounts receivable entries for outstanding balances, businesses can obtain detailed pictures of their finances. If businesses do not use accounts receivable entries, they typically operate using cash-based accounting methods. Asset Accuracy Accountants write an accounts receivable debit entry once revenue is earned for products or services, giving a business a more accurate picture of its financial standing. This is advantageous for businesses with customers who pay on credit or at the end of a fiscal period. If a business waits until the transfer of physical cash to record revenue while customers do not pay immediately, it may appear as if the business has not earned any revenue on its financial statements. This can cause problems at the end of a quarter when investors and outside parties analyze the health of a business. If investors think a company has not received revenue and is in poor health, they may sell their shares. Account Tracking An accounts receivable entry makes tracking customer debts and payments easier for accountants and bookkeepers. Instead of solely relying on outstanding invoices and other tracking methods, accountants can reference the hard numbers in the general ledger and determine how much a customer owes. For instance, if a customer disputes an outstanding invoice, an accountant can point to the general ledger statements and lack of physical funds on the business' financial statements. Cash Access A debit to accounts receivable is technically an asset, but a business does not have access to the cash because the customer has not paid the accounts receivable balance. For instance, if your business performs $10,000 in services for a client and you mark it in your accounts receivable column, but the client has not yet paid, you are still owed $10,000 in physical cash. The delay in actual cash payments can, needless to say, cause problems for businesses that suffer financial setbacks or need to purchase equipment.

Tax Liability Businesses that record earned revenue in an accounts receivable account are liable for the taxes on that revenue at the end of the fiscal year. This means that, even though the business does not have the physical cash from services rendered, it must still pay the appropriate tax liability. If a business runs low on capital at the end of the year it may have problems paying the taxes it owes The Advantages of Maintaining Accounts Receivable Accounts receivable refers to sales made by a company or organization from which payment or total payment has yet to be made. Companies utilize accounts receivable to offer clients long-term payment plans or to establish credit. Proper maintenance of accounts receivable can offer several advantages to businesses of all sizes. Build Customer Loyalty Allow clients to purchase goods and services using IOU's, credit accounts or longterm payment options can offer companies a significant sales advantage. Maintaining easily referenced and highly organized accounts receivable information on each client allows companies to take advantage of these sales. Businesses can establish goodwill and loyalty amongst their customer base when allowing clients to make purchases in good faith, paving the way for potential future sales. Track Customer Credit Data regarding past plans and purchases can allow companies to make individualized decisions about extending credit to customers who have a positive history of repayment and refusing it for clients who have spotty records. Wellmaintained accounts receivable files that are digitized can be sorted by all kinds of metrics, including length of time to pay off purchases, type of purchases made on credit and many other parameters.

Track Uncollected Profits Perhaps the most important element of accounts receivable is tracking uncollected profits. Non-payment data is key in organizational attempts to collect on past due accounts, establish repayment plans with clients and initiate collection procedures. Accounts receivable information can also act as key information should any collections proceedings find their way into judicial, arbitration or mediation proceedings. Overall Fiscal Organization In order to realize total success, an organization's accounts receivable department must be a facet of a well run financial and client management outfit, inclusive of sales, client services and business development. Analysis of the purchasing and borrowing trends of previous customers can be a major asset in the conception of new marketing strategies and sales initiatives, which can lead to wide scale growth and new client bases. Accounts Receivable Strategies Maintaining a positive cash flow is essential for a business to survive. Ideally, you want more money flowing in than out. Part of the process of improving your company's cash flow situation is to develop effective accounts receivable strategies. Take some time to analyze what strategies your company is currently using and take the necessary steps to improve your accounts receivable collection methods. Invoicing Prompt invoicing of purchases is the most effect means of ensuring you will receive payments on time. If your business only invoices customers quarterly, consider going to monthly or even weekly invoicing. The customer may have just forgotten about the debt owed and need a reminder notice. Try offering a discount for early payments. This is an incentive for customers to make their payments on time. Delinquent Accounts The most effective accounts receivable strategy is to go after receivables before they become delinquent. However, once an account becomes delinquent, you must

go after the payment quickly. The longer the debt goes unpaid, the greater chance you will never collect your money. Start with a reminder call and mail out a late notice. Try to get a commitment from the customer as to when and how much he will pay and also when you can expect to receive the balance due. Extending Credit If you see a trend of more delinquent accounts developing, maybe it is time to rethink your strategy for extending credit. Easy credit has become a way of life for many consumers. Check the customer's credit history before extending credit. Requiring a substantial down payment for credit purchases is a way to improve your organization's cash flow situation. If delinquent accounts continue to be a problem, you may want to go to a cash-only method of sales. Writing Off Bad Debts Take some time to analyze how much your company is spending to go after delinquent accounts. There comes a time when it is more cost-efficient to sell these bad debts to a third-party collection agency. You can sometimes sell a bad debt for 50 to 75 cents on the dollar. The difference between the value of the debt and the amount it was sold for can be written off. Consult with a tax professional to determine how bad debts should be reported on your company's income tax return. What Are the Consequences of Overstating Your Accounts Receivable? Companies report their accounts receivable in the balance sheet based on accounting sales records. Companies might engage in credit sales to allow customers to buy on accounts and record revenue in the form of accounts receivable. Without proper evaluation of customers reliability, companies could overstate accounts receivable. Overstated accounts receivable affect not only the balance sheet but also reported income and equity. However, overstating accounts receivable has no effect on a companys cash flow, another major element in financial reporting. Uncollectible Accounts Receivable Companies overstate their accounts receivable when they choose not to exclude from total outstanding accounts receivable the amount of potentially uncollectible accounts of certain customers. Under generally accepted accounting principles, or GAAP, companies estimate the amount of uncollectible accounts receivable based

on experience and current market conditions if its probable that some customers mighty not honor their accounts. By doing so, companies avoid having overstated accounts receivable when they decide to write off those that are deemed, in fact, uncollectible. Overstated Carrying Value Overstating accounts receivable directly inflates the size of a companys balance sheet. Following GAAP, companies report assets at their original cost but reevaluate and make adjustments over time based on an assets changing fair market value. Accounts receivable are reported as a current asset in the balance sheet, and overstating accounts receivable results in unadjusted and thus inflated carrying value of the initially reported accounts receivable. Under GAAP, the carrying value, or fair market value, of outstanding accounts receivable is the amount of originally recorded accounts receivable subtracted by the amount of uncollectible, or doubtful accounts. Understated Bad Debt Any uncollectible accounts receivable are unpaid debt by customers and constitute a bad debt expense for the company. As a result of not taking into account uncollectible customer accounts, overstating accounts receivable understates a companys bad debt expense. Such bad debt expenses would have been reported in a companys income statement as a deduction from revenue. Thus, overstating accounts receivable indirectly overstates a companys reported net income. When net income is closed to retained earnings at the end of an accounting period, retained earnings as an equity in the balance sheet is also overstated. Unaffected Cash Flow Companies sometimes refer to accounts receivable for cash flow calculation. For example, when calculating cash flows based on net income, companies need to subtract any increase in accounts receivable from net income because accounts receivable as sales included in net income are not cash. It seems then that used as a subtraction from net income, overstated accounts receivable may further reduce cash flow. However, because the same overstated accounts receivable has been also included in the net income calculation, the net effect of overstating accounts receivable on cash flow is actually zero.