Learning Objectives Describe the relationship between the B/AR/CR process and its business environment. Illustrate the potential of the B/AR/CR process to assist management decision making. Summarize how enterprise systems, e-business and other technologies can improve the effectiveness of the B/AR/CR process. Depict the logical and physical characteristics of the B/AR/CR process. Prepare a control matrix for some typical billing and cash receipts processes, including an explanation of how business process control plans can accomplish operations and information process control goals. 2
3 Introduction The billing/accounts receivable/cash receipts (B/AR/CR) process is an interacting structure of people, equipment, methods, and controls designed to create information flows and records that accomplish the following: –Support the repetitive work routines of the credit department, the cashier, and the accounts receivable department. –Support the problem-solving processes of financial managers. –Assist in the preparation of internal and external reports.
4 Horizontal View B/AR/CR 1. Shipping department informs the accounts receivable department (billing section) of shipment.
5 Horizontal View B/AR/CR 2. Accounts receivable department (billing) sends invoice (2a) to customer, accounts receivable department (cash applications [2b]), and general ledger process (2c).
6 Horizontal View B/AR/CR 3. Customer makes payment on account.
7 Horizontal View B/AR/CR 4. Cashier sends deposit to bank (4a) and informs accounts receivable department (cash applications [4b]) and general ledger process (4c) of payment.
8 Horizontal View B/AR/CR 5. Accounts receivable (cash applications) informs general ledger process of payment.
9 Cash Receipts Management In the billing function, the goal is to get invoices to customers quickly, hopefully reducing the time it then takes to obtain customer payments. Having the B/AR/CR process produce invoices automatically helps ensure that invoices are sent to customers shortly after the goods have been shipped. Electronic bill presentment and payment (EBPP) systems help achieve more timely billing and cash receipts at reduced costs (Technology Summary 11.1). Treasurer’s goal is to reduce float - the time between the customer tendering payment and the availability of good funds (funds on deposit and available for use).
10 Cash Receipts Management Procedures designed to reduce or eliminate the float associated with cash receipts: –Credit card For a fee, a third party removes from the risk of non-collection of the account receivable. Collecting company submits charges to the credit card company for immediate payment. The credit card company bills the consumer. –Debit card Authorizes the collector to transfer funds electronically from the payer’s bank account to the collector’s bank account. –Electronic banking websites & customer self-service systems Convenient ways for customers to pay bills (electronic banking website) or obtain information and correct errors (customer self-service systems).
Credit Card Transaction Flow 11
12 The Fraud Connection B/AR/CR process provides opportunity to manipulate final results. Revenues and AR can be inflated by violating GAAP revenue recognition rules. Improper segregation of duties between handling cash and recording cash transactions can result in misappropriating cash: –Lapping occurs when funds being paid by one customer are stolen and the theft is covered up by applying funds from another customer and so on. –Some lapping frauds become so large that the employee has to manipulate the accounting records after hours. –Rotation of duties and forced vacations help prevent this type of fraud.
13 B/AR/CR Context Diagram
14 B/AR/CR – Level 0 Diagram
15 B/AR/CR Process - Diagram 1 Perform Billing
16 Sample SAP Invoice Data Screen
17 B/AR/CR Process Diagram 2: Manage Customer Accounts
Sample Accounts Receivable Aging Report 18
19 B/AR/CR Process Diagram 3: Receive Payment
20 Data Descriptions in B/AR/CR A/R master data –Repository of all unpaid invoices issued by an organization and awaiting final disposition. –Two types of accounts receivable systems exist: (a) Balance-forward (b) Open-item
21 Balance-forward System AR records show a customer’s balance - current and past-due and current account activity. Monthly statements display previous balance, payments, and balance forward which is added to new charges to get the current balance due. Unpaid current balances are rolled into the past- due balances. Electric and gas utility companies typically use balance-only systems.
22 Open-item System Appropriate where invoices are prepared and sent for each sale. In the AR master data, each record consists of individual open invoices, to which payments and adjustments are applied. Periodic statements list invoices (new and settled within the current period) and payment details. Each open invoice is grouped by aging category and aged individually. Monthly, or at specified times, customer accounts are aged and an aging schedule is printed.
23 Data Descriptions in B/AR/CR Sales event data –one or more invoice records (details contained in invoice data) A/R adjustments data –write-offs, estimated doubtful accounts, sales returns, etc. –journal voucher #, transaction code, authorization Cash receipts data –details of customer payments
24 E-R Diagram (Partial) for B/AR/CR
B/AR/CR Process Relational Tables 25
26 Types of Billing Systems Post-billing system –Invoices are prepared after goods are shipped and shipping notice compared to sales order notice. –There may be a delay between receiving the order and shipping. Pre-billing system –Invoice prepared upon receipt of order (after inventory and credit checks). –There is little or no delay between receiving order and shipping.
27 System Flowchart of the Billing Function
28 Control Matrix for the Billing Process
29 System Flowchart of the Cash Receipts Process
30 Control Matrix for the Cash Receipts Function