Part 1: Minimum of 250 words
Examine the five (5) steps to managing accounts receivable. Speculate on the step that is most vulnerable to fraud. Suggest at least two (2) actions that a company can take in order to protect this step from fraud.
Imagine that your company has tasked you with developing a plan for factoring accounts receivables. Create one (1) scenario that demonstrates the key benefits and / or detriments to your company from factoring accounts receivable.
Part 2: Please respond to the below and give your opinion on the response. Minimum 200 words.
The (5) steps to managing accounts receivable are (1) Determining who to extend credit to (2) Establishment of payment period (3) Monitor collections (4) Evaluate liquidity of receivable (5) Accelerate cash receipts from receivable when necessary. The most vulnerable step of the 5 steps to managing accounts receivable against fraud is the ‘extending of credit.’ If this step is compromised, the other steps usually don’t have a chance. If the extension of credit has been extended to an unreliable customer due to ‘false representation’, setting up a payment plan would be policy and procedure but it will be in vain also because it won’t be paid. But, two actions a company could take to protect against this is to (1) run credit checks to determine if a receipent is reliable in paying his/her bills on time and (2) request bank references on behalf of the new customer. This protects cashflow. In doing these two things, you are ensuring that (a)the customer pays his/her bills on time and (b) if the customer happens to default on a payment(s), which is highly unlikely, the responsibility to pay the balance is shifted to the third party (the bank).
The key benefit is usually the recovering of 80 to 85% of your accounts receivable by factoring invoices to a third party. The detriment of this is that the company still loses on a smaller scale because account receivables are not paid in full to the original creditor. In my opinion, it’s a double-edge sword and there is almost always a waiting period to collect, even it the waiting period is short. “The balance, less the factoring charges is paid one the FACTORING COMPANY RECEIVES payments from your customers (Cole-Ingait, 2018). The scenario I would use to display the example is that of an insurance company and the insuance agent. For instance, the insurance agent is fronted $4,000 by the insurance company to jumpstart his/her business as an insurance agent. Written in the contract is the agreement that disbursed funds will be repaid by the receiver on a month-to-month basis until payment is cleared. The agent decides the commissioned based career is not for him and resigns. After noticing the loans hasn’t been repaid, a third party is assigned to collect the funds from the former agent. Once collected, 80 to 85% of the receivable will go to the insurance company, the rest goes to the third party collection agency.