What if I told you that you don’t really have an accurate handle on your company’s receivables? You might disagree and point to a report printed from your management system. But stick with me through this column, and I bet you’ll realize that report may not be as accurate as you think and isn’t all that you need to properly understand and manage receivables.
But first, let me introduce myself, in this my first column for ABRN. Last year I joined Mike Anderson’s team of consultants at CollisionAdvice, helping collision repair businesses interested in having clear and accurate financial information with which they can measure and improve their business. I’m a CPA and brought with me to this new position years of banking and small business accounting experience – including experience helping single-location and MSO collision repair operations.
That experience has given me access to dozens of shop’s financial records, and I can tell you that virtually all of them initially had problems related to receivables.
Here’s one reason. Most of the collision repair businesses I’ve worked with are using a management system, and most run a receivables report from that system. But most shops are not also reconciling receivables in their accounting system, so the two systems may show very different numbers for receivables balances.
One way this lack of reconciliation of both systems impacts your business is at tax time; chances are, your CPA uses figures from your accounting system rather than your management system, so if the two don’t jive in terms of receivables balances, your CPA isn’t getting accurate information.
I recommend checking with your bookkeeping staff to ensure they are trained to reconcile receivables correctly in the accounting system. In some systems, for example, if the name on an invoice and the name on a payment aren’t exact matches – even just a missing comma can create an issue – the payment may not be matched up to the invoice in the system, and both could be left hanging out there.
Another area that can lead to inaccurate receivables reports are write-offs – when that insurance check, for example, comes in for $10 or $20 less than the invoice. You need to have a clear policy on how these situations are handled. There should be a designated limit above which you supplement and below which you write-off. All write-offs should be reviewed and approved by someone other than the person who has the capability to write-off the funds in the systems.Then you need to understand what your management system does and doesn’t push over to the accounting system. I’ve found that some of the industry’s management systems don’t push these negative write-off amounts over, again leading to the two systems showing different amounts of receivables.
But perhaps the most common problem I see with receivables reports is that they don’t properly account for pre-payments or deposits received on jobs that have not yet been completed and closed. Most systems just log these pre-payments as receipts, which can make your receivables look lower than they are.
Receivables can be calculated using this formula:
Sales - Receipts + Pre-Payments = Receivables
For example, say your report shows you have $100,000 in sales and $60,000 in receipts; you might think your receivables are $40,000. But if $10,000 of those “receipts” are actually pre-payments you’ve received on work not yet completed, that should be added back to accurately show your receivables as $50,000, not $40,000. The $10,000 in pre-payments should be accounted for as a liability.
So I encourage you to check with your bookkeeping staff to make sure both your management systems and accounting system receivables information is being reconciled. Ask your management system provider whether negative write-off amounts are automatically pushed to the accounting system. And ensure your pre-payments are being accurately accounted for in both systems and on your balance sheet.
The pay-off for your company is more accurate receivables reports that make it easier to ensure you’re collecting monies owed in a timely fashion – so critical to a collision repair business’ cash flow.
Email your questions for me for future columns at [email protected].
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