Analysis Tracking
Consistency in monitoring factoring account receivable is bolstered by written monitoring procedures. Written procedures, particularly when their importance is emphasized, help make continuous monitoring into a habit. The procedures should address such key issues as verifications with account debtors, information reporting requirements, appropriate advance rates or reserves, requirements for initial and subsequent field examinations, and the tasking of monitoring responsibilities within the daily work flow.
A bank with an asset-based lending department or using a receivables purchasing software program has more monitoring tools at its disposal than traditional line-of-credit lenders. A customer's awareness of these tools can put his or her business on notice that questionable practices will be detected and addressed.
The purpose of such continuous review is to identify any unusual activity associated with the receivables, effectively raising a red flag that additional scrutiny or action is needed. Common red flags include, but are not limited to, the following items:
* Invoices that are much larger than average for the business (may indicate the business is fraudulently padding receivable balances to gain needed cash availability). * Unusually large credit memos or unexplained increases in credit memo activity (may indicate the removal of fraudulent invoices from the receivables balance or the beginnings of product or service quality problems). * Payments flowing through the lockbox that have been drawn on the business checking account (may indicate that diversion of funds has been taking place or that the business is satisfying a fraudulent invoice). * Frequent responses from account debtors to verification requests disputing amounts owed stating that goods have not been received or stating that payment has already been made (may indicate the presence of fraudulent invoices, diversion of funds, or a product or service quality problem). When any red flag is spotted, the situation must be analyzed to determine whether there is truly a problem or merely an unusual event. For example, unusually large invoices may indicate that the business has been successful in making several long-awaited large sales, but it also might point to an urgent need in the business for creating cash availability by fraudulent means. Recognizing, analyzing, and, more important, responding to potential red flags are critical elements in monitoring the quality of receivables. Effective monitoring also involves timely analysis of the reports available to the bank concerning the receivables. Having a disciplined procedure to analyze the receivables aging report as soon as it becomes available is another important layer of monitoring activity. If large amounts age to the point that they become ineligible (in a borrowing base arrangement) or must be repurchased by the business (in a receivables purchasing arrangement), it should never come as a total surprise, since monthly analysis of the aging report will show such amounts moving across the aging categories before they hit the ineligible status. Obviously, the usefulness of such analysis increases if the bank has been tracking the receivables in its own software and has immediate access to aging information rather than relying on the business to furnish it.
Account Receivables
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