One of the biggest issues in daily routine accounting operations is the way accounting teams approach cash receipts and payments. We are using the dreadful clearing accounts because we are trying to make the processing of cash transactions during the month easier and avoid any variances with bank account balances.
To do this we sacrifice so much insightful and useful data. We cannot directly observe the payment for each customer invoice. Therefore, while we know in aggregate that settlements occur, we remain uncertain about the time taken to settle each customer’s invoice. Perhaps, we can manually estimate it by jotting down notes for each of the thousands of customers we track. “This is feasible as long as the person who has known these settlement details for the past three, five, or ten years hasn’t left the company.
Anyone who was trying to calculate loss transition rates for receivable aging buckets as part of the CECL adoption noted that in real life receivables may be written off before they transition to the last aging bucket. In addition, older aging buckets typically store data about invoices that were paid but never cleared because it was deemed unnecessary.
Therefore, please rethink your cash clearing process to effectively track payments for each invoice. It is not overly difficult; it requires a bit of diligence and automation. This way we can build more reliable and relevant business data that everyone will appreciate at the end of the day.
If you want to go even further, consider classifying every receipt and payment consistently according to the appropriate captions in the cash flow statement. This will provide you with an unmatched ability to analyze your cash flows, drill down into financial statement numbers, and understand the extent of non-cash settlements that keep your business going.
