As part of the initial investigation when Ascentant Accountants take on a new Bookkeeping client, is a close look at the age of the invoices the company has received that are still outstanding, ie a Creditors Report.
These can no doubt be supplied by the Company’s Accountancy / Bookkeeping software, but how reliable are the reports? Some outstanding bills are probably not reached the 30 – 60 day old payment due date, but what about others that are 90 or 120 days old? These could be a cause for concern, is the business incapable of paying them or has the payment process broken down somewhere. Kevin Drew, Ascentant’s Managing Director, outlines possible causes of ageing debts.
Reasons for Outstanding Invoices
1. Invoice has been recorded on the Supplier Company Account Record but the settlement classed as a bank payment and not an invoice payment.
Recording an invoice from a supplier and then marking down its payment as a bank payment rather than a purchase payment against the invoice is in effect duplicating the invoice. You have duplicated the expenditure, will claim twice the VAT element and your supplier account record will show anomalies owing to invoices being marked as unpaid.
2. The Bill was settled with a credit but the credit advice has gone astray or never received.
If a credit note that will clear an invoice is expected then the note should be obtained and set against the invoice. Should the credit note not be acquired for any reason then the creditor’s record in your accounts will never be correct and you will have claimed VAT erroneously.
3. Duplication of the invoice.
When an invoice is recorded in your accounts it is classed as an expenditure to be set against the net profit element. Should that invoice be recorded twice then your net profit is incorrectly reduced further and the duplication will result in your accounts being incorrect. You will also lose the ability to compare with previous years and forecasts will be wrong.
4. The invoice was paid from a source outside of the business’s main bank account, eg by cash, credit card or different bank account.
We all know that however careful businesses are there will be a time when, for whatever reason, owners will purchase items from personal funds, or use a personal credit card or from an alternative bank or credit card account unconnected to the business, or even from petty cash. This obviously causes a headache for bookkeepers, who are then left to try and understand and fathom out how these items were paid for but, knowing they are a business expense, will add the expense as a supplier invoice but leave it outstanding and unpaid.
We have come across some businesses who have unpaid invoices going back three or sometimes even four years but the business owner is quite resolute that all invoices have been settled. Previous Accountants have not flagged these up as issues and that the creditor list is incorrect and haven’t identified that there have been duplicate expenses and accordingly VAT has been claimed incorrectly. Accountants should always want to know the creditors and any amounts outstanding at the company’s year-end and therefore the Supplier Ledger should be checked to see that it tallies with the expected business figures.
When you are basing business decisions or are creating future financial forecasts on historic data it is of the utmost importance that your Supplier Ledger is as accurate as possible. Creating a forecast Cash Flow projection is futile if this is not accurate and kept current.
Should your creditor balance show flawed figures then this will not only incorrectly reduce your VAT liability and net profit but also increase the liabilities on your balance sheet and so makes your business look worse than it actually is.
It is advisable for all businesses to regularly check whether the outstanding bills in their accounts are accurate. Find the Aged Debtors (Aged Payables) report in your software and check the age profile of your bills and invoices received.
If you find any anomalies in the current Financial Year then these should be investigated immediately and take the necessary remedial action. However, if there are oversights that date back into previous Financial Years then these will require flagging up to your accountant. They should then rectify the outstanding amounts in the most appropriate way that does not alter the balances that the accountant has already prepared. The use of an ‘Accountant Adjustment‘ will not clear the invoices from the supplier ledger. These invoices will remain on your accounts for always if they are not rectified correctly, additionally your creditor liability will continue to show your business’s value at a lower level than it actually is.
Conversely, Debtors are customers who owe you money. It is easy for Company Owners to fall into the mind-set that their invoices have been paid on time, they are on top of Invoice Chasing and that all in the financial garden is rosy. Although your Accounting Software may supply a good handle for your Debtors List it is always safer to have a back-up that is independent of this.
Having a semi-manual electronic record of your Invoice Payments could involve the simple moving of an invoice from an ‘Outstanding’ Folder to a ‘Paid’ Folder, you may not have a record of the Paid Date, but this could potentially be shown by altering in the File Name to include the Paid Date.
It is good practice to be able to see an overview of the invoices without having to open every one, so the File Name could include Client Name, Invoice Number and Issued Date.
This method will show you an overall, broad view of the state of your Debtors List.
If you can’t tear yourself away from feeling the touch of paper then you could print every Invoice when it’s issued and file them in an ‘Invoice Outstanding’ Folder. When your Bank Account is reviewed (hopefully daily) and invoices are paid then the bill could be moved from the Outstanding Folder into a Paid Invoice Folder and write the Paid Date on the paper invoice. A Partial Payment could be recorded with the payment amount written on the paper bill with it remaining in the Outstanding Folder.
Accounts Software Package
The most efficient method of tracking debtors is to utilise an accounts software programs like Xero (Ascentant are Xero Certified). Invoices are raised and sent, and they remain set as Unpaid until the payment is received at the bank – you then add that payment to the invoice. If your company utilises a CRM that raises / tracks invoices then this can be updated when an outstanding invoice is paid, assuming that your CRM does not automatically link with accounts software when a payment is made. By keeping your CRM system updated with payments you can tell at a glance if a customer has any monies owing to you.
One of the key aspects in maintaining a good Cash Flow is keeping on top of your debtors list, and it is bad practise not to send reminder notices to laggard customers as this encourages late payment, and can give a bad impression of your company’s organisational ability.
If you are a small business and need professional advice or services please contact Ascentant Bookkeepers in Derby for more information ring 01332 981920, or email email@example.com