As a small business owner, you must understand how essential it really is to organize your finances. One area which requires particular consideration is your accounts receivable (A/R), i.e., the cash customers owe you for products or services sold on credit. Occasionally your accounts receivable processes are audited, internally or by an outside party. Being prepared and organized for such an audit means you can pass the test with flying colors and keep your company running smoothly.
Here, we’ll describe the fundamentals of accounts receivable audits and offer several useful suggestions to enable you to maintain the pace.
What’s an Accounts Receivable Audit?
An accounts receivable audit examines your company’s A/R records to make certain they are compliant, complete, and current with accounting standards. The objective is to confirm that the money due to you by your customers is recorded properly and that your business adheres to the right tracking and collecting methods.
These audits are essential for many reasons:
- Accuracy: They make certain your financial reports are right.
- Compliance: They verify you’re following accounting laws and regulations.
- Efficiency: They pinpoint inefficiencies or errors in your collection process.
- Fraud Prevention: Audits may find suspicious activities or discrepancies in your records, preventing possible fraud.
How to Prepare for an Accounts Receivable Audit
Now we know what an A/R audit is, let us discuss how to prepare for one.
1. Keep Detail and Organized Records
The most essential step in an accounts receivable audit is maintaining precise, organized records. These records are the foundation of your A/R process & proof your accounts are in good shape.
What you should track:
- Invoices: Each sale on credit must be followed by an invoice indicating the sum owed, due date and buyer information.
- Payment Receipts: Document each payment you get, such as reference number, amount, and the date for the transaction.
- Communication: Keep records of your communication with customers, including payment reminders or disagreements over invoices.
- Credit Agreements: If you offer credit terms to your customers, have the agreement signed describing the conditions.
All of this information available will help auditors verify your accounts and reduce discrepancies or questions.
2. Review Your Accounts Regularly
Regular internal checks can save you time and stress later during an audit. Watching your accounts early can catch problems before they become bigger problems during an audit.
Set aside time every month to:
- Reconcile Accounts: Verify that your accounting records match payments from customers.
- Follow Up on Overdue Payments: Track any outstanding invoices and alert customers about unpaid balances.
- Check for Errors: Check your invoices and payment records for errors (overcharges or even duplicate entries).
Make these reviews a regular habit so your A/R processes remain accurate and clean.
3. Set Clear Credit Policies
When selling services or products on credit, you require consistent policies. This might lessen confusion and prevent problems that could arise during an audit.
Important credit policy tips:
- Set Credit Limits: Don’t give more credit than your business could lose. Limit just how much credit you provide to each customer, and stick with it.
- Define Payment Terms: Define your payment terms, i.e., when payment is due, late payment penalties & early payment discounts. Be sure customers understand these terms before you accept a sale.
- Run Credit Checks: Look into credit score before you extend credit to a brand new customer. This can enable you to evaluate the danger of non-payment.
With a solid credit policy in place, you have a procedure to follow and can defend your decisions in case asked during an audit.
4. Automate Your Accounts Receivable Process
The manual handling of accounts receivable is time consuming and filled with mistakes. Automating your A/R helps you save time and helps preserve consistency and accuracy in your records.
How automation can help:
- Automated Invoicing: Send out invoices to your customers automatically once a purchase has been completed, thereby lowering the likelihood of a delay or even missing invoice.
- Payment Reminders: Create automatic reminders for customers whenever their payment obligations are due.
- Track Payments: Track payments in accounting software and compare them together with your invoices to discover discrepancies easily.
Automating as much of the procedure as you possibly can is going to eliminate human error and allow it to be simpler to offer auditors the info they require.
5. Monitor Key Metrics
An audit will call for a thorough understanding of your business financial health – particularly your receivables. One is by tracking key metrics which measure your A/R process performance.
Important A/R metrics to monitor:
- Days Sales Outstanding (DSO): This metric displays the average days it takes to collect payment following a sale. A lower DSO means you get paid faster.
- Aging Reports & Information: These reports show which invoices are overdue and by how long. Utilize them to follow up on late payments and keep your cash in motion.
- Accounts Receivable Turnover: This metric displays how frequently your A/R is collected over a period. A higher turnover rate means you take money more effectively.
Watching these metrics will enable you to spot possible issues and take corrective action prior to an audit really happening.
6. Be Prepared for the Audit Process
Lastly, be prepared if an audit is announced. If you organize your records and follow the suggestions above, you are on your way. However there are several additional things you are able to do to make the audit run smoothly :
- Assign a Point of Contact: Designate somebody in your business as the main contact for the auditor. This particular person should know your A/R processes and can provide any documents or info requested.
- Review Procedures: Review your A/R processes. Correct known problems prior to the audit begins.
- Be Calm: Recall, audits are normal business practice. But in case you are prepared and cooperating, it ought to go smoothly.
Final Thoughts
An accounts receivable audit need not be stressful. Organizing your records, automating where appropriate and frequently reviewing your accounts will help you deal with the audit process. Adopting these suggestions can help you not only during an audit but additionally in maximizing your A/R management efficiency for much better cash flow and company success.
For expert accounts receivable and accounting help, contact StartupFino today! Our experts are here to help you.
FAQs
How do you ordinarily prepare for an audit of your accounts receivables?
Preparing for an accounts receivable audit requires organizing all data – invoices, payment receipts, as well credit agreements – in order to ensure accuracy. Review your A/R accounts often, reconcile balances often and complete your documentation. Using accounting software will assist with the flow and improve accuracy for audits.
How does a small business manage accounts receivable?
Smaller businesses generally extend credit to clients, issue invoices, monitor payments, send payment reminders, and also follow up on due accounts in accounts receivable. The aim is timely collection of payments to maintain financial stability and cash flow.
How to perform a receivable audit?
A receivable audit checks all accounts receivable documents including invoices, payments and credit policies. Reconcile outstanding balances, verify records, and check for discrepancies. Auditors might also evaluate internal controls, payment procedures and effectiveness of collection efforts.
What are 5 steps in managing accounts receivable?
1. Set up clear credit policies which define payment terms.
2. Issue timely invoices with payment details.
3. Track payments and send reminders on overdue invoices.
4. Watch key metrics likeDSO.
5. Automate operations to automate operations and minimize error.
