When you analyze accounts receivable, it is important to scrutinize the quality and creditworthiness of the debtors as well as whether they pay on time. But, it is just as important to look at the accuracy of the accounting transactions behind the balances.
Are the financial statements audited? Does someone at the bank or an accounting firm regularly verify that receivable balances are true and accurate? It takes no more than the generation of an invoice to book a receivable against which money can be borrowed from the bank.
Does your client number their invoices? If not, they could accidentally duplicate billings and overstate receivables. Your clients’ lack of organization could also make it easier for their customers to dispute the billings.
Bookkeepers often forget to match payments received with outstanding receivables. When this happens, the receivable stays on the books even though it has been paid, and the sale is actually booked twice. In fact, with any of these cases, if an uncollectible receivable is on the books, then a ficticious sale is on the books too. When receivables are overstated, so are sales.
Do you lend to a business with membership income? The accounts receivable of any business or organization that charges membership dues or receives pledges can be misleading. When membership dues are paid in arrears (at the end of a month or year), then their customers may claim that they did not actually participate or intend to join; they may refuse to pay these bills. When dues are paid up front, the corresponding receivables may be even more questionable, because their customers may not be obligated to join at all. Some percentage of those who are billed will not actually renew or pay the bills.
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