The Impact of Invoice Errors in Accounts Receivable
Original post by Cynthia Gomez of Demand Media
Accounts receivable are payments due to a company or payments it expects to receive, likely for services rendered. Keeping an accurate tally of these accounts is a way for company executives to gain a better understanding of the company's cash flow. Unfortunately, when invoice errors occur, accounts receivables are impacted in a variety of way, all of them negative.
Invoicing Errors Get Passed On
Errors made on invoices are often passed on to accounts receivables. If invoice data goes from one system (invoicing) to another (accounts receivables) without a person actually touching the data, then there's no way for the system to correct the error. Even when data is passing through a person, that person may have no way of knowing that an error was made. For example, he may see that customer Joe is being charged $150, and not see any reason to suspect that that $150 should in fact be $125. Thus, he then enters the erroneous figure into the accounts receivable system, perpetuating the error.
Deceiving Picture of Incoming Payments
When errors made in invoicing are perpetuated in accounts receivable, those errors throws off the resulting picture of how much money the company has in expected payments. For example, if Joe gets billed $150 instead of $125 for services rendered, the invoice with the wrong figure --$150 -- goes to accounts receivable. But presumably, Joe is an informed consumer and knows he should only pay $125, so that's all he pays. The company is then $25 short. Even if Joe calls the company and talks to someone, who confirms that he only owes $125, it's unlikely that customer service representative will pass on the new invoice data to accounts receivable.
Small Errors Add Up
In the aforementioned example, the company's accounts receivable are short just by $25 -- not a big deal. But let's assume that whatever problem resulted in the error on Joe's bill is not isolated (for example, a glitch in new invoicing software or incorrect coding on the part of a data entry employee), and many customers were billed more than they owed. The result is that the company's accounts receivable are not short by just $25, but potentially by thousands of dollars.
Smaller Cash Flow then Expected
When errors passed on from invoicing to accounts receivable are not isolated, a company can end up with a drastically different picture of how much cash it has coming in. For example, in the aforementioned example, let's say that accounts receivable tell company executives it should receive $9,000 for a billing period, but in reality it will only receive $7,000. Account executives then end up with $2,000 less to put back into the company. But they may not know that before committing the expected $9,000 to things like vendors and marketing. Thus, the company ends up in the hole.
- Peachtree Solutions: Invoice/Accounts Receivable Flow Charts
- Cathy Cakebread, Consultant: Accounting for Oracle Receivables
About the Author
Cynthia Gomez has been writing and editing professionally for more than a decade. She is currently an editor at a major publishing company, where she works on various trade journals. She also spent many years working as a newspaper reporter. She holds a bachelor's degree in journalism from Northeastern University.
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