EFFECTIVE MANAGEMENT OF ACCOUNTS RECEIVABLES - PRESENTATION.pptx

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1. TRIVIA QUESION I have Six eggs, I break two, Fry two and Eat two, How many eggs are left?

2. EFFECTIVE MANAGEMENT OF ACCOUNTS RECEIVABLES

3. Effective Accounts Receivables Management-Key Pointers For effective Accounts Receivables Management-Credit Controllers need to Keep a keen eye on: Comprehensive Credit Policy Onboarding of customers Debt Follow-up Closure of Customer Accounts

4. Conservative Approach-Accounts Receivable A rigorous, carefully crafted and well-documented new account evaluation process, including a process to set credit limits as well as payment terms for new credit applicants Conservative approach to accounts receivables in most cases translates to liberal approach in debt collection. Conservative approach is preferrable where the product is in high demand and the organization s product is the prize.

5. Liberal Approach-Accounts Receivables A liberal approach to credit risk often involves taking a more lenient or flexible stance on lending criteria and risk management. Here’s a breakdown of what that typically entails: Easier onboarding process-Where the company does not put a lot of bottle necks to the onboarding process. Most Company that choose the liberal approach to credit risk use is where the environment is highly competitive And flexible repayment plan -A liberal approach might include more flexible repayment terms, such as longer repayment periods, lower down payments, or more lenient restructuring options for struggling borrowers.

6. Onboarding Customers-Risk Assessment The biggest Investment a client must make for effective accounts receivables is in its onboarding process. Risk assessment forms the very basic and important part of effective accounts receivables management, if you get it right at this point chances of having a healthy accounts receivables becomes high. Organizations at the point of onboarding clients consciously or unconsciously always choose between Conservative or Liberal Approaches. This stage answers the 5Cs in credit equation, Capacity, Character, Collateral, Capital and Conditions. Capacity - Capacity refers to the ability to pay for the services every business will want to enagage a customer who is in a position to pay for services rendered. Collateral – While applying Credit skeptism you ask whether in the event of default there is a fall back plan to cushion you from 100% default or some extent. Character – This refers to the previous record while repaying debt, the credit controller would wish to rely on previous record to assess credit worthiness.

7. Client Onboarded-Invoicing The Client This stage means you have already done the KYC and approved the customer for onboarding. Documentation required to enable the billing accountant proceed on with Invoicing the customer is Fully signed engagement contract stipulating the mode of payment, if it’s a one off service i.e Valuation of a property its important for the contract to request 50% payment upfront before the actual valuation works. Fu If a commercial property its important to ensure there is a fully executed lease contract between the Landlord and Tenant. As a tenant may end up being a protected tenant and incase of default it may be difficult to evict. Customer details captured correctly-A customer may be Emmanuel Kitche but trading as KW Consultants so you will want to capture the trading name during invoicing.

8. Invoicing the Client-Ensuring Invoice delivery A debtors first line of defense for not paying an invoice is they have not received the Invoice for payment. In the age of systems and efficient management of accounts receivables you will want to consider soft copy invoices to the client and where a company has the luxury of a rider or a messenger hardcopy follow to the right recipient. The invoice should have the correct details and meet the requirements of etims invoice to avoid the back and forth of payment .

9. Debt Collection-Processes First email reminder of the outstanding invoice and attaching the same where possible – This should be on a friendly tone and may be followed up with a phone call. During this first follow-up it will even be more important to liaise with the sales executive or leasing agent who contacted the customer. This is the friendliest part of debt collection and relationships are protected. First Demand Letter-This is done where a debtor has defaulted on his commitment in the first email reminder. The demand letter should be firm and articulate consequences for non-payment (14 Days) Meet the Debtor-After the first demand letter has lapsed without commitment, it’s a sign of redflag organize a meeting with the debtor seeking to understand reasons for non-payment. Minuted action points should be taken during this meeting and sent to the debtor for confirmation of the agreed action points. Second and final Demand letter-This should be served after action points agreed in the meeting have been defaulted. At this point a credit controller should be thinking of a third party debt collector.

10. Debt Collection-Third Party Debt Collector Third Party Debt Collector-Is an independent debt collector contracted by a company to collect debt on its behalf. This can be done using auctioneers like Philips Auctioneers or Keysian Auctioneers who have debt collection departments or other debt collection Agents as KW Consultants and Nexus Solutions Services. A third party debt collector should have precise collection period to enable you make

11. Debt Collection-Litigation (Collection through the Courts Where possible try and avoid debt collection through Litigation. But it becomes necessary when: The amounts involved are significant and all reasonable collection procedures have been attempted. All necessary documentations are in order i.e signed contract for services All possible collection avenues have been attempted without success-Mostly the court review this and may influence the judgement. Reasons why the Courts are discouraged in debt collection include: The cost of collection may be expensive i.e Legal fees It strains business relationship and, in most cases, leads to closure of business together

12. Bad Debts Write-off Case Study Bad debts are an allowable expenses (Section 15 of the Income Tax Act) Kenpoly Manufacturers Limited Vs Commissioner of Domestic Taxes. Facts of the Case The Appellant ( Kenpoly ) deducted Kshs.170,036,147.00 as bad debts owed to it by Nakumatt Holdings Limited for the tax period January 2016 to December 2019 However, the respondent (commissioner of Domestic Taxes) upon review added back the amount deducted and raised additional assessment amounting to Ksh.55,014,358.63 After unfruitful engagements with the respondent, an appeal was made to the Tax Appeal Tribunal

13. Debtor Accounts Closure Debtor account will be closed when: The debtor pays all the outstanding amount or the amounts is written off as Bad-debts. The Income Tax Act Section 15 (2) issues guidelines on allowability of bad debt for tax purposes. It says a debt shall be considered to have become bad if it is proved to the satisfaction of the commissioner General that is has become uncollectible after all reasonable steps have been taken to collect it. A debt shall be deemed to have become uncollectible when: The Creditor losses the contractual right that comprises the debt through a court order No form of security is realizable The security or collateral have been realized but the proceeds fail to cover the entire debt. The cost of recovery exceeds the debt. The debtor is adjudged insolvent or bankrupt by a court of law

14. Case Study:Kenpoly Vs Commissioner of Domestic Taxes Facts of the Case: Kenpoly (The Appellant) deducted Kshs.170,036,147.00 as bad debts owed to it by Nakumatt Holdings Limited for tax period January 2016 to December 2019 However the commissioner of domestic taxes upon review added back the amount deducted and raised additional assessment amounting to Ksh.55,014,358.63 After unfruitful engagement with the respondent, an appeal was made to the Tax Appeal Tribunal. Kenpoly Position Commissioner of Domestic taxes wrongfully interpreted section 15 of the Income Tax Act by disallowing the bad debts. That the appellant ( Kenpoly ) had clearly satisfied all conditions necessary for allowing bad debt The Respondent failed to apply Article 47 of the constitution in conducting its affairs

15. Case Study : Kenpoly Vs Commissioner of Domestic Taxes Commissioner of Domestic Taxes Position (Respondent) KRA Argued based on Section 15(2) of the ITA for doubtful debts to become allowable, they must be proved to the satisfaction of the Commissioner to have become bad. The appellant did not put enough efforts to the satisfaction of the Respondents as it filed a suit in Uganda but did not pursue it to its logical conclusion and simply issued demand letter in Kenya. Issue For Determination: Whether the Respondent was justified in its decision to disallow the appellants claim for bad debts against supplies to Nakumatt Holdings Ltd. The Tax Appeal Tribunal in its ruling dated 14 th April 2023 argued that the respondent was not justified in its decision to disallow the appellants claim for bad debt reasons amongst them being: By Virtue of Nakumatt Holding Limited state of Insolvency as per the court order and being that Kenpoly was not a secured creditor.

16. Accounts Receivables Accounting entries Sales on Credit (Invoice Creation) When a company sells goods or service on credit, it creates an accounts receivable, reflecting the amount the customer owes This transaction increases (Accounts Receivables) which is an asset. Dr. Accounts Receivables (A/R) (Representing the money owed) Cr. Sales Revenue ( Recognising revenue earned) Collection of Receivables When the customer pays the amount owed, the cash account increases and the A/R account decreases. This reflects the receipt of cash and settlement of the receivables Dr.Cash or Bank (Increases the cash or bank account with the amount received) Cr.Accounts receivables (It decreases the A/R account as the receivables has been settled.

17. Accounts Receivables Accounting entries Bad Debt Expense (Writing off uncollectible Receivables) Sometimes a customer may be unable to pay their dues and the Company must recognize this as a loss. Writing off a receivable involves removing it from the A/R account and recording it as an expense Dr. Bad Debt expense (Recording the uncollectible amount as an expense, impacting the income statement.) Cr. Accounts Receivables (Removing the uncollectible amount from the A/R)

18. Accounts Receivables Accounting entries Adjusting entry: IFRS 9 Require that companies provide Allowance for doubtful accounts this includes all amounts in the aged bracket from 1 day old debt. DR. Bad Debt Expense (Recognizes the estimated uncollectible receivables as an expense) Cr. Allowance for Doubtful Accounts (Creates a contra-asset to offset the A/R Balance. Recovery of previously Written-off Accounts Occasionally, a customer might pay after their accounts has been written off. In such cases the original write-offs is reversed and the payment is recorded Reverse the Write-offs Dr. Accounts Receivable Cr. Bad Debt Expense (or allowance for doubtful Accounts )

19. Accounts Receivables Accounting entries Record the payment Dr. Cash or Bank Cr. Accounts Receivables

20. Moderator Contacts Details Name: CPA, CCP EMMANUEL KITCHE EMAIL ADDRESS:[email protected] Mobile no: 0719851227 0r 0785606140