Implementing an Enterprise Resource Planning (ERP) system is a significant investment for any business. To maximize returns and ensure the success of an ERP implementation, engaging effective ERP functional consultancy is paramount. Let’s delve into both tangible and intangible returns on investment, businesses can expect from this strategic partnership:

Process of Managing Accounts Receivables (O2C) Invoicing

Accounts recievable Process

Process of managing accounts receivables

Introduction:

The design of any process is dependent on the framework which is used in designing it. It is the structure which helps us design a process. The accounts receivable process (AR) is no different from any other process and it is a part of the order-to-cash process (o2c). The framework which is used in designing this process is the COSO framework. It is a framework which divides the process into 5 levels.

  1. Control Environment.
  2. Risk Assessment.
  3. Evaluation of Controls.
  4. Information and Communication.
  5. Monitoring.

AR process is a group of processes. AR process contains many other processes and each of such processes has subprocesses. This process document will discuss the sub-process level of business.

Account receivable meaning, in a business context, refers to the outstanding invoices or money owed to a company by its customers for goods or services delivered but not yet paid for. It is essentially a line of credit extended by the company to its customers, allowing them to pay for their purchases at a later date. Accounts receivable is recorded as an asset on the company’s balance sheet, representing the company’s expectation of incoming cash flow. Efficient management of accounts receivable is crucial for maintaining healthy cash flow and ensuring the financial stability of a business.

In this part, we are only going to discuss 1 of 38 other processes

Invoicing to Customers – Process Code [AR0001]

Objective:

This process aims to manage and direct the Accounts Receivable (AR) team in handling the invoices generated by the organization for its sales. This process is essential due to the numerous statutory, legal, and operational risks associated with it.

  1. For example:
    • Executive “A” issues an invoice to customer “B,” based on the order communicated by the salesperson through a sales order or other means of communication.
      • Product Code Item – 001, Quantity: 5, Price: ~$700
      • Product Code Item – 002, Quantity: 3, Price: ~$4000
      • Product Code Item – 003, Quantity: 10, Price: ~$1000
  2. Installation charges for the products amount to approximately $500.
  3. The discount policy states that for total purchases of $20,000, a 5% discount will be applied to the overall bill, and customers earn 1 loyalty point for every $1 spent. Additionally, accumulating 1000 loyalty points allows customers to redeem a $100 discount.
  4. The customer’s credit limit is approximately $30,000, with a credit period of 45 days. If payment is made within 10 days, an extra discount of 2% is given; if made within 20 days, a 1% discount applies. Payments beyond 20 days receive no discounts.
  5. If payment is made by the due date, 5 preference points are awarded. For every 15 days of delay, 1 point is deducted. If the last three payments are on time, an additional 10 points are granted.
  6. In the event of delays past the due date, 1 preferred point is removed for every 5 days overdue.
  7. Additionally, the sale is an ex-factory transaction, and transportation charges will be reimbursed by the customer based on actual expenses.
  8. Discounts do not apply to shipping and installation charges. If discounts are utilized, no goods can be returned.
  9. This example illustrates one of the simplest transactions in multinational corporations (MNCs).

After reviewing this example, we can grasp the significance of the invoicing process.

Quote: “To maintain goodwill, customers must be invoiced accurately and promptly!”

Process Risks:

  1. The risk of underbilling or overbilling.
  2. Non-compliance of statute.
  3. Risk of losing the customer.
  4. Non-recoverability of the receivables.
  5. Inappropriate Discounts Applied.
  6. Inappropriate Credit limit provided.
  7. Inaccurate data entered or recorded to generate invoices.
  8. Inaccuracy in customer master data.
  9. Delays in invoicing leading to cash flow issues.
  10. Errors in tax calculations impacting financial statements.
  11. Miscommunication between sales and finance departments.
  12. Failure to update customer records promptly.
  13. Over-reliance on manual processes increases the chance of human error.
  14. Inadequate training of AR team members affecting efficiency.
  15. Insufficient documentation for audit trails.
  16. Lack of alignment with organizational policies and procedures.
  17. By identifying and addressing these risks, the AR process can be streamlined to ensure accuracy, compliance, and customer satisfaction. This will not only enhance the financial health of the organization but also strengthen customer relationships and trust.
 

Process Owners:
Individuals with a minimum of three years of experience in the AR process, specifically in managing a team of at least five members.

Examples:

  • Financial Controller
  • AR Process Manager
  • Finance Manager
  • CFO

Process Roles:

  1. AR Process Executive
  2. AR Process Manager
  3. Finance Manager
  4. CFO

Process Flow:

Definition and Risks:

  1. Product Specifications: Ensure that all product specifications are documented clearly, detailing the materials, dimensions, and functionalities of each item. This documentation serves as a reference for quality assurance and compliance with industry standards.
    1. Risk: Inaccurate specifications can lead to product defects, customer dissatisfaction, and potential legal liabilities.
  2. Branch/Location/Area: Choosing the right branch, location, and area is vital for an efficient invoicing process, as it affects sales operations, customer satisfaction, and inventory management. Unique characteristics of each branch, such as customer demographics and regional demand, influence product offerings and sales strategies. A skilled salesperson further enhances the invoicing process by accurately capturing details and communicating payment terms, minimizing errors and disputes.
    1. Risk: The potential for fraudulent transactions and billing discrepancies poses a significant threat to invoicing accuracy, necessitating strong procedures and controls to safeguard against these issues.
  3. Selection of Sales Person: Recording the right salesperson is essential for an effective invoicing process, as it directly influences commission calculations and overall sales performance.
    1. Risk: Relying solely on performance metrics for selecting salespeople can lead to ethical lapses, such as misrepresentation of products, which may damage the company’s reputation and result in customer dissatisfaction.
  4. Product Sold Vs Product Invoiced: It is essential to maintain a record comparing the quantity of products sold to the quantity invoiced. This ensures that all sales are accurately captured and billed, facilitating proper inventory management and financial reporting.
    1. Risk: Discrepancies between sold and invoiced products can result in revenue loss, inventory shortages, and customer disputes.
  5. Product Sold Quantity Vs Product Invoiced Quantity: This analysis involves reviewing the actual quantities sold against those recorded on invoices. Regular reconciliation helps identify errors in billing or inventory levels.
    1. Risk: Failure to reconcile these quantities may lead to financial inaccuracies, stockouts, or excess inventory, negatively impacting cash flow and customer trust.
  6. FOC Goods: The procedure for managing Free of Charge (FOC) goods should be clearly outlined, specifying the conditions under which products are given away without charge. This includes documentation and approval processes for such transactions.
    1. Risk: Mismanagement of FOC goods can lead to untracked inventory loss, misuse, and financial discrepancies if not properly documented.
  7. Product Sales Price Vs Product Invoiced Price: Regularly compare the sales prices set for products against the prices listed on invoices to ensure consistency and accuracy. Any variations should be investigated and resolved.
    1. Risk: Inconsistent pricing can lead to customer dissatisfaction, loss of trust, and potential revenue loss.
  8. Credit Terms: Clearly define the credit terms offered to customers, including payment periods and conditions. This establishes expectations and helps manage cash flow effectively.
    1. Risk: Ambiguous credit terms can result in delayed payments, increased delinquency rates, and cash flow issues.
  9. Payment Terms: Document the specific payment terms for transactions, including accepted payment methods and due dates. This helps streamline the accounts receivable process.
    1. Risk: Poorly defined payment terms can lead to payment delays, increased disputes, and financial instability.
  10. Scope of Service: Clearly outline the scope of services provided to customers, including any limitations and exclusions. This ensures that both parties have aligned expectations.
    1. Risk: Ambiguity in the scope of service can result in unmet customer expectations, disputes, and potential legal issues.
  11. Serial No of Invoices: Maintain a systematic record of invoice serial numbers to ensure accurate tracking and referencing of sales transactions. This helps in organizing records for auditing purposes.
    1. Risk: Lack of systematic tracking can lead to lost invoices, difficulty in reconciliation, and potential fraud.
  12. Modifications: Establish a procedure for handling modifications to orders or invoices, including documentation and approval processes. This ensures that all changes are recorded accurately.
    1. Risk: Untracked modifications can lead to discrepancies in inventory and financial records, resulting in customer dissatisfaction.
  13. Approvals: Define the approval processes for transactions, including who is authorized to approve sales, discounts, and modifications. This provides accountability and transparency in operations.
    1. Risk: Inadequate approval processes can lead to unauthorized transactions, financial losses, and compliance issues.
  14. Discounts Provided: Document the criteria and processes for offering discounts to customers, ensuring clear communication and approval protocols. This helps maintain profitability while incentivizing sales.
    1. Risk: Uncontrolled discounting can erode profit margins and lead to financial instability if not tracked properly.
  15. Sales Promotion Schemes: Clearly outline the terms and conditions of any sales promotion schemes, including eligibility and duration. This helps in effectively managing and communicating promotions to customers.
    1. Risk: Poorly managed promotions can lead to customer confusion, revenue loss, and brand reputation damage.
  16. Goods Return Policy: Establish a clear goods return policy that outlines the conditions under which returns are accepted, including timelines and processes for returns. This ensures customer satisfaction and efficient inventory management.
    1. Risk: Lack of a clear return policy can lead to confusion, increased returns, and potential loss of customer trust.
  17. Customer Account Validations: Implement a standardized process for validating customer account details, ensuring that all necessary documentation and information are collected and verified.
    1. Risk: Inadequate validation can result in fraudulent activities, financial losses, and reputational damage.
  18. Authenticity: Verify the authenticity of business documents such as incorporation certificates, trade licenses, and other relevant registrations to ensure compliance and legitimacy.
    1. Risk: Failing to validate authenticity can lead to legal disputes, penalties, and loss of credibility.
      1. Incorporation Certificate: Ensure that the incorporation certificate is current and valid as part of the customer account validation process. This confirms the legal status of the business.
          1. Risk: Using an invalid certificate can result in regulatory violations and loss of business relationships.
      2. Trade License: Check the validity of the trade license to confirm that the customer is authorized to operate in their respective industry.
          1. Risk: Working with unlicensed entities can expose the company to legal liabilities and reputational harm.
      3. Labor License: Validate the customer’s labor license to ensure compliance with labor laws and regulations.
          1. Risk: Inadequate verification can lead to involvement with non-compliant businesses, resulting in legal issues.
      4. Bank Account Details: Collect and verify bank account details of customers to facilitate smooth payment processing.
          1. Risk: Incorrect or fraudulent bank information can lead to payment delays and financial losses.
      5. GST/VAT Registration No: Ensure customers provide valid GST or VAT registration numbers for tax compliance and record-keeping purposes.
          1. Risk: Using invalid registration numbers can result in tax penalties and legal complications.
      6. EXIM Documents: Verify the validity of EXIM (Export-Import) documents for customers involved in international trade to ensure compliance with trade regulations.
          1. Risk: Non-compliance may lead to customs issues, fines, and damage to business relationships.
  19. Other Details: Gather and maintain accurate customer details, including email accounts, contact persons, phone numbers, and addresses, to facilitate effective communication and service delivery.
    1. Risk: Inaccurate customer information can lead to miscommunication, delivery issues, and loss of business opportunities.
      1. Email Account: Ensure that customer email accounts are valid and regularly monitored for communication regarding orders and inquiries.
          1. Risk: Invalid email addresses can hinder communication, leading to delays and customer dissatisfaction.
      2. Contact Person: Designate a specific contact person for each customer to streamline communication and relationship management.
          1. Risk: Lack of a designated contact can result in confusion and ineffective communication.
      3. Phone No: Collect and verify accurate phone numbers for customers to facilitate prompt communication and issue resolution.
          1. Risk: Incorrect phone numbers can lead to missed opportunities and unresolved customer issues.
      4. Address: Maintain up-to-date records of customer addresses to ensure accurate delivery of goods and services.
          1. Risk: Inaccurate addresses can lead to delivery delays, increased costs, and customer dissatisfaction.
      5. Delivery Address: Verify delivery addresses to ensure that goods are shipped to the correct locations, minimizing errors and returns.
          1. Risk: Incorrect delivery addresses can cause delays and additional shipping expenses.
      6. Company Website: Collect and verify the company website of the customer to ensure legitimacy and facilitate research on their business.
          1. Risk: Associations with fraudulent companies can harm reputation and lead to financial losses.
  20. Track Record: Maintain a record of the customer’s historical transactions and payment behaviors to assess creditworthiness and reliability.
    1. Risk: Ignoring track records can lead to extending credit to unreliable customers, resulting in losses.
  21. Delinquency Status: Regularly review the delinquency status of customer accounts to identify late payments and manage credit risk effectively.
    1. Risk: Not monitoring delinquency can result in increased bad debts and cash flow problems.
  22. Credit Limit: Establish and monitor credit limits for customers based on their financial health and payment history to mitigate risk.
    1. Risk: Overextending credit can lead to financial exposure and increased risk of non-payment.
  23. Payment History: Maintain detailed records of customer payment history to evaluate credit risk and make informed decisions regarding future transactions.
    1. Risk: Inadequate tracking can lead to overlooking patterns of late payments, increasing financial risk.
  24. Type of Customer: Classify customers based on their type (e.g., individual, business, government) to tailor services and credit policies accordingly.
    1. Risk: Misclassification can lead to inappropriate credit terms and service issues.
  25. Creditability Ratings: Regularly assess the creditability ratings of customers through reliable sources to inform credit decisions and manage risk effectively.
    1. Risk: Relying on outdated ratings can expose the business to high-risk customers, increasing the likelihood of defaults.
 

Conclusion: In conclusion, the effective management of the Accounts Receivable (AR) process is a critical component for sustaining a company’s financial health and fostering strong customer relationships. By adhering to a well-structured framework, such as the COSO framework, businesses can systematically address the complexities and risks associated with invoicing and credit management. Implementing robust controls, accurate record-keeping, and clear communication protocols ensures compliance, reduces errors, and enhances customer satisfaction. Moreover, by regularly assessing and refining these processes, organizations can not only improve cash flow and reduce the likelihood of financial discrepancies but also build a trustworthy reputation in the marketplace. As businesses continue to evolve, maintaining agility and adaptability in AR processes will be essential in navigating future challenges and opportunities.

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