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Management of Accounts Receivable

(Previously published in the Financial Management Manual Item #D-4)

The management of accounts receivable is an essential component of financial management and good business practice. Generally accepted accounting principles and internal control standards establish the framework for an agency's accounts receivable system. Accounts receivable are often a significant part of an agency's financial statements and will be audited in its annual audit.

Each agency should establish an accounts receivable system to assure that all charges are billed promptly and recorded accurately and that adequate collection efforts are made. Agencies may find the attached list of general criteria for effective management of accounts receivable useful when they are assessing their accounts receivable policy and procedures.

MANAGEMENT OF ACCOUNTS RECEIVABLE 

1. Accuracy of Information

Each agency (a) should have an accurate count of who owes the agency what amount of funds and (b) the subsidiary ledger of accounts receivable should be updated on a timely basis.

2. Policies and Procedures

Each agency should have written collections policies and procedures which (a) comply with applicable federal and state requirements, (b) are clear and understandable to all relevant parties, and (c) are likely to promote efficient and effective collections.

3. Compliance to Policies and Procedures

Each agency should document that (a) policies and procedures are routinely followed and (b) departures from established policies and procedures are infrequent and can be adequately explained according to unanticipated, unique circumstances.

4. Collections Priorities

Each agency should demonstrate that it has reasonable collections priorities. In the event that resource limitations prevent exhaustive pursuit of every account, the agency should establish and consistently follow reasonable collection priorities.

5. Timely Actions

Each agency should have timeliness standards for action at each step of the collections process which are reasonable and which are followed.

6. Defining and Measuring Success

Each agency should have established "benchmarks for success," or critical measures that the agency carefully tracks to monitor its success in accurately establishing and collecting accounts receivables. (e.g., percent of accounts meeting timeliness standards; trends in amounts collected as a percent of total outstanding; average time taken to fully collect from accounts; amount collected per dollars spent by the agency to collect from accounts; etc.)

7. Self-Improvement

Each agency should demonstrate that it routinely reviews these measures (and other relevant information, such as information on collection activities in use or being experimented with by other agencies) to identify areas where improvements could be made.

8. Prevention

Each agency should review patterns in the number, type, and causes of receivables as a means of identifying areas where the agency might pursue initiatives to prevent over-payments to begin with.

9. Contract Monitoring

If the agency contracts for collections services, it should (a) clearly articulate enforceable standards of performance the contractor is expected to achieve, (b) monitor whether contractor performance is satisfactory, and (c) act appropriately according to the results of its monitoring efforts.

10. Writing Off Receivables

Each agency should write off receivables only after fully documenting that: (a) rigorous collection efforts were pursued, (b) all activities were consistent with established policies and procedures, and (c) it is unlikely that the benefits to be gained from continued pursuit of the account will meet or exceed the costs of additional collections efforts.

11. Accounts Receivable Reports

The agency should demonstrate that it maintains effective and timely reports and communications with all parties that the agency needs to work with in order to achieve its objectives.

Last Revised:  July 12, 2010