Accounts receivable and inventory management

Accounts receivable and inventory management

Main Current Assets

Current assets can be defined as cash and other assets or resources, which are expected to be converted into money, or consumed, during the economic cycle of the business. And among the most important we have:

1. Cash to Cash:

Cash is considered to be all those assets that are generally accepted as a means of payment, are the property of the company and whose availability is not subject to any type of restriction. In accordance with the above, the following will be accepted as effective:

to. Cash on hand:

• Coins and banknotes issued by the Central Bank. Coins and banknotes of other nations (currencies).

• Checks issued by third parties that are pending collection or deposit.

• Management checks pending collection or deposit.

• Documents for immediate collection or that can be deposited in bank current accounts such as: bank, telegraphic or postal money orders, credit card bills to deposit, etc.

b. Cash in banks:

The following will be considered as cash in banks:

• Bank accounts on demand or current deposits in national banks.

• Accounts in foreign currency deposited in foreign banks, provided that in those countries there are no provisions that restrict their availability or exchange controls that prevent their free convertibility.

If this item is considered as cash, it must be previously translated into national currency, at the exchange rate that exists at that time.

• Checks issued by the company itself against the current account of a bank but which, by a certain date, have not yet been delivered to its beneficiaries.

It is obvious that, in this case, despite the fact that the check has been issued and deducted from the bank balance on the books, we can at any time, dispose of that money for other purposes, as long as the checks remain in the possession of the company that had been issued. In any case, the most that could happen would be the appearance of a bank overdraft in books which we will talk about later.

Non-cash items

There are some items that, although they appear to have cash characteristics, do not meet the basic requirement of availability for the release of debts or obligations by the company.

In general terms, the following should not be treated as effective:

It will not be Cash in Cash:

Cash Vouchers: Often we will find that, when making a cash count or cash count, there are vouchers, authorized or not, that represent or support money withdrawals. The amount of them should be segregated and should be shown rather as accounts receivable.

Post-dated checks: these are checks whose origin can be very varied, the most common cases stem from the following events:

1) An employee issues a check against his own checking account but, since he does not have funds at that time, he issues it with a later date, asking the cashier to exchange it for cash. Of course, such a check remains in the box until the date arrives that allows it to be cashed or deposited in a bank.

2) A customer pays a debt with a post-dated check. This is a case similar to the previous one. The cashier must keep the check in his possession, until the date it can be cashed or deposited.

In both cases, these items must be segregated from cash and, as previously stated, be presented within the group of respective accounts receivable.

Returned checks: On some occasions, checks issued by third parties and received by the company as payment of debts are returned after being deposited in a bank.

The reasons why these returns occur are varied. Regarding this, it is recommended to take the following attitudes, depending on the reason for which the check was returned.

1) Checks returned for lack of funds: In this case, the returned check should not be considered as cash, since the unavailability of funds in the bank requires it.

2) Checks returned for reasons other than the unavailability of funds: Sometimes a check is returned for reasons other than not having funds. Such would be those returned by defective endorsement, defective signatures, disparity of quantities, etc. In these cases, returned checks could be considered cash and presented as such, provided that the cause for which the check was returned can be remedied in a short time.

Tax and Postal Stamps: It is obvious that such stamps are not accepted as a common payment stamp. Therefore, they must be separated from cash and presented in the balance sheet as "existence of stamps" in the prepaid expenses section of current assets.

It will not be Cash in Banks:

• Fixed-term bank deposits: It is obvious that when a company makes any money deposit in a fixed-term financial institution, it means that it will not be able to dispose of those resources until the agreed term expires.

Of course, if the fixed term is less than one year, the amount of those deposits must be shown in current assets, but in a non-cash item. If the term is greater than one year, it will be presented outside the current assets, in the group of permanent or long-term investments.

• Frozen bank deposits: These are the cases in which a company maintains money deposits in financial institutions that have been declared in suspension of operations, or have been intervened by the competent authorities. Representative cases of this type of deposits are those that any company maintains, for example, in the Banco de Fomento Comercial, which were intervened and, until the date of publication of this text, remained in that state.

• Bank deposits for special funds: Sometimes, companies create special funds through deposits in banks, with the aim of facing any future obligation such as acquisition of fixed assets, amortization or redemption of bonds or obligations, payment of pensions. and retirements or to cover the costs of a judgment that is pending sentence, in case it is lost. These special deposits must be presented in the group of other assets on the balance sheet, unless those funds are to be used within one year for their intended purposes. In this case, they will be shown within current assets, but always segregated from cash.

• Restricted deposits in foreign banks: When you have deposits in banks in other countries and for different reasons the availability of these funds is restricted, the corresponding amount must also be segregated from cash, and presented rather as other assets.

Box:

It is the account through which the available cash held by the company is controlled, within the company's facilities.

Any movement of cash that is received by the company must be registered in this account.

Given the nature of the asset it controls, the cash account must be presented in the balance sheet headed the group of current assets.

Ascending to the objective that is pursued with the funds that are mobilized, the cash account can be: Petty Cash and Main Cash.

Petty Cash: As we will see later, a healthy measure of internal control is that all payments be made by check and never with the cash in the cash.

However, there are a series of repetitive expenditures in each company and each one is so small that it would make it impractical and in some cases impossible to pay by check. We are referring to disbursements for the concept, for example, of purchasing newspapers, coffee, taxis, gasoline for vehicles, etc.

In any case, the directors of the company, after estimating the expenditures that will be made through this box during a given newspaper, will establish the amount of the fixed fund with which said box will operate, as well as the maximum amount that can be spent in each case.

Negotiable Securities: They are titled assets, written commitments to pay an amount defined at a specified future date belonging to one person or organization and that can be sold or transferred to another without any type of restriction, according to the convenience that this transaction has for the organization.

Negotiable types of securities:

• Promissory notes: These are obligation papers for an amount to be paid on time. The one that is transferable by endorsement, without new consent of the debtor. The balance sheets of many companies often include an asset entitled documents receivable (promissory notes), which are written commitments to pay a defined amount at a specified future date. These documents are used to grant credits to clients and extend the payment period of accounts receivable pending. Such documents are frequent in some industries and unusual in others.

• Checks: These are documents issued in the form of a mandate through which a person can withdraw, at his or her own or a third party's order, funds held by another. The person who has amounts of money available at a credit institute, or held by a merchant, has the right to dispose of them in favor of himself, or of a third party, or by means of checks.

• Letters of Credit: These are documents that are intended to make a conditional exchange contract between the giver and the policyholder, the perfection of which depends on whether the latter makes use of the credit that the latter opens.

The letter of credit will designate the time within which the borrower must make use of it. It must also contain the amount for which the credit is opened, and if it is not expressed it will be considered as a simple introduction. The holder of a letter of credit must put the model of his signature on it.

Accounts Receivable:

They are rights legitimately acquired by the company that, when the time comes to execute or exercise that right, will receive in exchange cash or any other kind of goods and services.

Classification of Accounts Receivable:

Depending on their origin, accounts receivable can be classified into: From sales of goods or services and

Not from the sale of goods or services.

• Accounts Receivable from Sales of Goods or Services: This group of accounts receivable is made up of those whose origin is the credit sale of goods or services and which are generally supported by the acceptance of an «invoice» by the client.

Accounts receivable from credit sales are commonly known as "trade accounts receivable" or "accounts receivable from customers" and must be presented in the balance sheet in the group of current or current assets, except those whose maturity is greater that the normal cycle of operations of the company, which, in most cases, is twelve months. In those companies where the normal cycle of operations exceeds one year, they can be included in current assets, even when their maturity is greater than twelve months, as long as they do not exceed that normal cycle of operations, in which case they must be classified outside current assets, in the group of long-term assets.

When the operations cycle of a company is greater than one year, and that, as mentioned above, this fact allows accounts receivables with a maturity of more than twelve months to be presented within current assets, they must appear separate from those that will expire within a year. If this rule is disregarded and the two groups are separated in a single account, this fact must be revealed by means of balance sheet notes.

• Accounts Receivable Not From Credit Sales: As the title indicates, it refers to rights receivable that the company has arising from transactions other than sales of goods and services on credit.

This type of accounts receivable must appear classified in the balance sheet in the current assets group, as long as it is expected that they will be collected within the normal cycle of operations of the company, which, as mentioned, is generally of twelve months.

According to the nature of the transaction that originates them, accounts receivable not from sales of goods or services can be classified in turn into two groups: Accounts receivable that represent rights receivable in cash and Accounts receivable that represent rights receivable on non-cash assets.

• Accounts Receivable Non-Sales Received in Cash: These accounts receivable refer to rights that will be collected in cash. The origin of these accounts receivable is very varied. Among them, we could mention the following:

o Accounts receivable from workers: The origin of these accounts receivable could be from loans granted by the company or from sales made to workers for their own consumption.

o Interest receivable: Refers to rights receivable arising as a result of having loaned money to third parties.

o Rentals receivable: These accounts receivable appear when the company leases a property or part of it and the lease fee is received for overdue periods. When a balance sheet is going to be prepared and it is observed that, by that date, the company has already accrued some amount for this concept, it must be recorded as rentals receivable and the account must be presented in the balance sheet within the current assets. However, when the natural objective of the company is to rent real estate, the amounts it receives for this concept constitute its normal income from the sale of a service. In this case, rents already accrued but not collected will be recorded in commercial accounts receivable.

o Claims receivable from insurance companies: All receivables arising from claims of any kind made to insurance companies will be recorded in this account.

o Claims receivable from suppliers: With some frequency the case arises in which the company purchases merchandise in cash and, subsequently, such merchandise is returned to the supplier for any reason. If you have been convinced that the supplier will return the corresponding value in cash and not by means of a new merchandise immediately, the right to collect should be registered in the account "claims receivable from suppliers".

o Judicial claims receivable: Any claim that is being litigated and that there is a high degree of certainty that the judgment will be favorable, must be recorded in this account and presented as current assets if it is expected that it will be collected within a period of twelve months..

o Deposits in guarantee of fulfillment of contracts: When the company is hired to carry out any work or provide a certain service, and the contractor requires that a guaranteed deposit be made that the objective of such contract will be fulfilled, the amount of the current assets, always that it is contemplated that the work will be completed or that the service will be provided within the next twelve months.

o Royalties receivable: Royalty is understood as the compensation for the use or employment of assets, generally calculated based on all or part of the income from the usufruct or exploitation of such assets. For example, the periodic charge by the landowner for the exploitation of minerals (oil, coal, etc.) and the charge made by the author of a book for its sale or by a manufacturer for the use of its equipment when it produces goods or services for third parties. Any type of royalty that the company has earned but has not yet received, must be registered in this account.

o Accounts receivable from shareholders: This account registers any debt that the shareholders have contracted with the company for concepts other than what they still owe on the capital they subscribed. Passive dividends receivable: Although this account will be discussed in detail when studying the topic of “Corporations” in the higher accounting module, it is convenient to know its origin and how it should be presented in the balance sheet from now on. When a corporation is incorporated, the partners or shareholders "subscribe the capital." That is, they commit to contribute a certain amount of resources, the law allows such resources to be paid or delivered to the company in parts, provided that the first delivery is not less than 20% of the total commitment.The part of the capital that the shareholders have left owing to the company, must be paid as they decide. When the shareholders decide to pay the company an additional part of the capital that they owe, the company is said to have decreed the collection of a passive dividend and this account must be classified within current assets, if the term to collect it does not exceed twelve months. Otherwise, it must be presented in long-term assets.if the term to collect it does not exceed twelve months. Otherwise, it must be presented in long-term assets.if the term to collect it does not exceed twelve months. Otherwise, it must be presented in long-term assets.

o Dividends receivable on investments: When the company has investments in shares in other companies, they often decide to distribute part of the profits obtained among its shareholders. When this has happened, the investing company arises the right to collect the part of those profits that corresponds to it, which must be recorded in the account "dividends receivable".

o Accounts receivable from subsidiary companies: One company is said to be a subsidiary of another, when the latter owns more than 50% of the capital of that company. The "dominant" company is called the "parent company". The parent company must record in this account any loan, advance, etc., that it grants to the subsidiary. Of course, the receivables from sales of goods or services to the subsidiary must be recorded under "commercial accounts receivable", but separate from accounts receivable from other customers. These accounts will be presented in current assets, if they are expected to be collected in a period not exceeding one year.

• Accounts receivable not from sales that will be collected in goods other than cash: This group includes those rights receivable that when executing its collection, it will be produced by means of any good or service other than cash. Among them, we can mention:

o Claims to suppliers: Refers to cases where, after having made a purchase of merchandise and having paid for it, such merchandise was found to be defective or arrived with a missing item, and the supplier will attend to the claim by replacing the missing merchandise or which came with flaws.

o Advances to suppliers: On some occasions, a company finds it necessary to make an advance on account to guarantee the supply of merchandise or the provision of the service. Therefore, a right arises from this company that will be charged at the moment the merchandise or service you have purchased is received.

o Rights to charge for packaging: There are companies such as soft drink bottlers that, the product they sell to their customers, is only the content of the bottles. The containers, the bottles in this case, are billed to the customer separately and the value of them will be charged through their return by the customer. It is for this reason that the receivables for packaging are not presented within the commercial accounts receivable, but in a separate account since, commonly, they will not be collected in cash.

o Advances to contractors: When a company requires to do, for example, a construction site, an advance is usually given on account. This advance constitutes a right to collect, which will be charged at the time the work is received and finished.

We wanted to comment in this introduction about the most common accounts receivable, different from commercial accounts receivable. We will return to them as we come to the issues related to the transactions that originate them. For now, we continue to treat only business accounts receivable.

THE ADMINISTRATION OF THE CASH

Cash management is of primary importance in any business because it is the means of obtaining goods and services. Careful accounting of cash operations is required because this item can be quickly reversed. Cash management generally centers around two areas: cash budgeting and internal accounting control.

Accounting control is necessary to provide a basis for the planning function and also to ensure that the cash is used for the company's own purposes and not wasted, poorly invested, or stolen.

The administration is responsible for internal control, that is, for the protection of all company assets.

Cash is the most liquid asset in a business. An adequate internal control system is needed to prevent theft and prevent employees from using company money for personal use.

The purposes of internal control mechanisms in companies are as follows:

- Safeguard resources against waste, fraud and insufficiencies.

- Promote the proper accounting of data.

- Encourage and measure compliance with company policies.

- Judging the efficiency of operations in all divisions of the company.

Internal control is not designed to detect errors, but rather to reduce the opportunity for errors or fraud to occur. Some measures of internal cash control are to take all necessary precautions to prevent fraud and to establish an appropriate method of presenting cash in accounting records. A good accounting system separates cash handling from the function of registering it, making payments, or depositing it in the bank. All cash receipts must be recorded and deposited on a daily basis and all cash payments must be made by check.

Cash management is one of the most important areas of working capital management. Since they are the most liquid assets of the company, they can constitute in the long run the ability to pay the bills when they are due. Collaterally, these liquid assets can also function as a reserve of funds to cover unexpected disbursements, thus reducing the risks of a 'solvency crisis'. Since other current assets (accounts receivable and inventories) will eventually be converted into cash through collection and sales, cash is the common denominator to which all liquid assets can be reduced.

Efficient cash management is of great importance to the success of any company. Care must be taken to ensure that sufficient cash is available to pay current liabilities and at the same time avoid excessive balances in checking accounts.

Cash is often defined as "an asset that does not generate profits." It is necessary to pay for labor and raw materials, to buy fixed assets, to pay taxes, dividends, etc.

Companies hold cash for the following fundamental reasons:

Transactions.

Compensation to banks for the provision of loans and services.

Caution

Speculation

Aspects necessary to efficiently manage an accounts receivable system:

The accounts receivable from a company represent the extension of a credit to its clients in an open account. In order to keep their regular customers and attract new ones, most manufacturing companies consider it necessary to offer credit.

Nowadays companies prefer to sell for cash instead of selling on credit, but competitive pressures force most companies to offer credit. In this way, the goods are shipped, inventories are reduced and an "account receivable" is created. Finally, the client will pay the account and at that moment the company will receive cash and the balance of their accounts receivable will decrease.

The maintenance of accounts receivable has both direct and indirect costs, but also has an important benefit, the granting of the credit will increase sales. Administration of accounts receivable begins with the decision of whether or not credit should be granted.

Credit Policies:

It is the set of measures that, originated by the principles that govern the credits in a company, that determine what has to be applied in a specific case to obtain favorable results for it. For example: a company's credit period, credit standards, collection procedures and the documents offered.

Credit Conditions:

They are agreements in which the company and the client agree and undertake to fulfill and carry out the form and time of payment of a certain operation.

The expansion of credit sales has been a significant factor in relation to economic growth in various countries. Companies grant credits in order to increase sales.

Collection Procedure:

It is the method that the company uses to carry out its collections, which can be carried out as follows:

Direct collection; This is carried by the cashier of the company by this means, customers cancel directly to the company and, Collections through collectors, said collectors are the banks which, for carrying out the collection, keep a percentage of the collection.

Cost and Utilities:

As already described in the previous collection process, it can be very expensive in terms of expenses, whether they are immediate (when carrying out the collection process) or that the account simply cannot be collected and all efforts to try to do so are lost. cash the collection; In short, in the collection process, costs only end when the debt becomes effective.

So far, we have only discussed the costs resulting from the granting of the loan. However, it is possible to sell on credit and it is possible to set a fee for keeping accounts receivable that are unpaid, so credit sales may actually be more profitable than cash sales. This is especially true for consumer products of a durable nature (cars, clothing, electrical appliances, etc., but it is also true for certain types of industrial equipment). From which we can say that some companies that lose money on their cash sales, can obtain a recovery in excess of said ones due to the derived charges for maintaining their derivatives for maintaining their sales on credit.Charges for maintaining outstanding credit sales are approximately 18% based on a nominal interest rate.

Inventory Management

The most commonly used methods in inventory management are:

1.- The ABC system.

2.- The basic economic order quantity (CEP) model.

3.- The reordering point.

1.- The ABC system: A company that uses the so-called ABC system divides its inventory into three groups: A, B, C. Maximum investment has been concentrated in products A. Group B is made up of the articles that follow the A regarding the magnitude of the investment. Group C is made up mostly of a large number of products that only require a small investment. The division of its inventory into products A, B and C allows a company to determine the level and types of inventory control procedures required. Control of products A should be the most careful given the magnitude of the investment involved, while products B and C would be subject to less strict control procedures.

2.- Basic model of economic order quantity (CEP): One of the most elaborate instruments to determine the optimal order quantity of an inventory item is the basic model of economic order quantity (CEP). This model can be used to control companies' A items, as it takes into account various operational and financial costs, and determines the order quantity that minimizes total inventory costs. The study of this model will cover: 1) basic costs, 2) a graphical method, and 3) an analytical method.

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