Reconciling Customer Payments (#339)
/The Cash Receipt Reconciliation Problem
The cash receipts clerk can have major problems reconciling the payments received from customers. This occurs when you receive a payment from a customer, but you don’t know how to apply it to your open invoices, because either there’s no accompanying detail, or the detail is wrong. For example, someone might be incorrectly paying an invoice for a second time, or maybe is not paying the sales tax portion of the invoice, or maybe has elected to only pay a small part of the invoice – this might happen when they’re protesting part of your billing, so they’re only paying for the part that they agree with. Or, they might have recorded the wrong invoice number in their system, so the reference number you’re seeing on the remittance advice doesn’t match anything in your system.
Cash Receipt Reconciliation Solutions
What can you do, other than open a bottle of scotch and ponder your career choices? The first action is to not make the situation any worse. This means not trying to force-allocate the payment onto particular invoices when you really have no idea what the customer was thinking. Instead, only allocate the cash to what you’re absolutely certain is the correct invoice. Then record the rest as an unallocated general receipt for that customer, and document what you’ve done.
The documentation should state the total amount of cash received, and which invoices you’ve allocated the cash to, as well as the amount of cash that hasn’t yet been allocated. And if the payment was made by check, go ahead and cash the check at the bank. Don’t let these issues get in the way of your cash flows. If you want to be careful, make a photocopy of the check before you cash it, and attach the copy to the rest of your documentation.
The next step is to contact the customer, and the sooner the better. These receivable allocation issues can really pile up over time, so it makes sense to get them cleared as fast as you can. So, this will be one of your higher-priority items.
It can sometimes be difficult to contact the accounts payable person on the customer’s side who sent you the payment. They’re busy, so they don’t always answer the phone.
You might want to do a runaround through your sales department, to see if the assigned salesperson can contact the person. Or, you can summarize the issue and send the payables person an email, and hope for the best. Another option, which may work a bit better, is to contact the customer’s controller; they tend to be a bit more responsive. Or, you could send an actual letter, that states the issue, and begs them to respond. Just making that initial contact can really be a tough one.
However you make the contact, walk the person through the issue, jointly figure out what happened, and then allocate the remaining cash to the correct outstanding invoices.
As you can see, this is a really time-consuming process. It’s not easy to completely fix the issue, unless you want to make everyone pay in advance, which isn’t usually possible. But there are some ways to reduce the issue.
Every time you talk to one of these payables people, try to figure out why the problem came up. For example, if the person had trouble figuring out where your invoice number was located on the invoice, it’s time to restructure the invoice. It needs to be at the top of the invoice, in large font, in bold, with a box around it. If you can install a blinking arrow on the invoice that points to the invoice number, then do that, too.
The same issue arises if you’re sending someone an electronic invoice. It still needs to be legible.
Here’s a second item. A few customers refuse to pay sales tax. They may claim that the tax doesn’t apply to them, that there’s some sort of exemption. That may be a valid claim, but if they don’t have an exemption certificate, you still have to charge them sales tax. If they continue to not pay the tax, then you have to decide whether you should be doing business with them, since somebody has to pay the tax, and if the customer isn’t doing it, then you are. Which cuts into your profits.
Here's a third item. The customer might be short paying you for some sort of problem with your products or services. OK, that happens. But, you’re the person applying cash to open receivables. You shouldn’t be the first person to be hearing about this. If the customer has a problem, there has to be a communication back to your customer service people, so that they can issue a credit memo to the customer.
This problem could be with the customer, who’s too screwed up to notify your company about the issue. Or, the problem could be with your customer service department, which isn’t issuing credit memos in a timely manner.
If the problem is with the customer, your sales department needs to talk to them about how to deal with these issues. And if the customer is too difficult deal with, it might be necessary to drop them. But, if your own customer service department is the issue, have your controller take the issue to senior management. See if they can resolve the problem.
In short, there’s usually a pattern to these botched customer payments. You can detect it by keeping a list of causes, based on your calls to customers. Some of the reasons are within the control of your company, so they can be fixed internally. And other reasons lie with customers. In the latter case, you may be able to work with customers to fix the issue. In a very few cases, customers may be so difficult that you can’t do business with them any longer. And unfortunately, in some cases the sales with a screwed-up customer are so profitable that upper management overrides everything and tells you to just put up with it. So, this is not always a resolvable issue, but it is possible to reduce it.