Where accounts receivable breaks: handoffs, exceptions and workarounds

Accounts receivable breaks where a payment has to be matched to what was billed. Unidentified receipts, credits agreed outside the system, returned payments and late ledger postings cause most of the rework. Each leaves a trace, usually a swelling suspense balance or an aging report that disagrees with the ledger.

Cash that arrives without a story

The deposit is the easy part. The trouble starts when the bank file or lockbox shows money with no invoice number, a payer name that matches nobody on the customer master, or one payment covering several bills with no breakdown. Someone parks it in an unapplied or miscellaneous account and promises to come back to it.

That promise is where delay accumulates. Collectors chase customers who have already paid. Statements go out showing balances that are not real. Customers get annoyed and stop sending remittance detail at all, which makes the next month worse.

The tell is an unapplied cash balance that never quite clears, plus a habit of research notes kept in a personal spreadsheet. Ask to see the oldest item in suspense. Its age says more than any policy document.

Allocation rules nobody wrote down

Where a receivable carries interest, penalties or administrative fees, a partial payment has to be split in a set order. If the system does not enforce that order, staff apply it by hand, and different people apply it differently. The customer's balance then depends on who happened to process the payment.

Watch for disputes where the customer's arithmetic and the ledger's disagree by small, odd amounts. Those almost always trace back to inconsistent allocation.

Credits and adjustments agreed in the wrong place

Sales, service or program staff often settle a complaint with the customer directly. A discount is promised on a call. A fee is waived by email. The receivables team hears about it only when the customer short pays.

Now the adjustment arrives as an exception with no approval trail, and the team must decide whether to honor it. Some get posted with a vague reason code. Others sit in dispute while people hunt for whoever made the promise.

Signs of this: a large share of adjustments booked under a catch-all code, credit memos raised after the payment instead of before it, and auditors asking for support that has to be reconstructed.

Returned payments

A bounced check or reversed electronic payment has to undo work already done. The original application must be reversed, the invoice reopened, any fee for the returned item assessed, and the customer contacted. When these steps live with separate people, one gets skipped. The usual casualty is reopening the invoice, so the account looks paid while the bank has taken the money back.

Compare returned items on the bank statement with reversals in the subledger. Gaps between them are the evidence.

Aging that informs nobody

Many teams produce a polished aging report that no one acts on. Collection contacts happen when someone has spare time. The decision to write off, or to refer a debt for outside collection, waits for a senior person who is busy with close.

You can see this when the oldest buckets keep growing while the newer ones look healthy, and when write offs arrive in large batches at year end instead of steadily.

Settlements between related entities

Billings to affiliated organizations or other agencies follow their own route. Performance has to be accepted by the buyer before settlement, and the receiving side often records acceptance late or at a different amount. Each party then reports a balance the other does not recognize.

The symptom is a standing list of reconciling differences that is reworked every period without ever shrinking.

The handoff to the general ledger

The subledger and the ledger drift apart when postings are summarized late, when manual journals bypass the subledger, or when the period closes before the last cash batch is applied. Close then turns into a hunt for the difference.

Look for a recurring reconciling item with the same description each month, and for manual journals to receivables control accounts that cite no source batch. Either one means the interface is being patched by hand.

Questions to ask the people who run it

The documented process and the working process rarely match. These questions surface the gap:

• When a payment arrives with no reference, what happens to it on the first day, and who decides where it goes?
• Is there a spreadsheet, inbox or shared folder that the system cannot work without?
• Who outside finance can promise a customer a credit, and how does finance find out?
• When a partial payment comes in on a balance with fees and interest, how is the split decided?
• After a returned payment, which step gets forgotten most often?
• Which accounts are left alone in collections, and why?
• What gets fixed by manual journal at month end, and has it always been that way?
• If one person went on leave, which part of the work would stop?

The answers to the last question usually point straight at the workaround holding the process together.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.