Customer Credit Analysis - Task 5 Flashcards
BPP- mock exam - task 7
Roxy plc - Dispute the invoice for £2,250, claiming never to have received the goods concerned. The signed delivery note cannot be traced. They are a regular customer and represent 20% of your company’s sales revenue. Normally there are no problems dealing with Roxy plc and the rest of the account is up to date.
Review both customers and discuss appropriate actions to take including whether any amounts should be provided for as doubtful or written-off as irrecoverable.
As Roxy plc is a large customer care needs to be taken not to risk a profitable business
relationship. As the delivery note cannot be located, it could be possible that Roxy plc did not in
fact receive the goods. We could try to obtain additional information from the delivery driver, to
see if a delivery took place and also look at supporting ordering documents. Retention of title
clauses will not help here as Roxy plc may not have received the goods. Until we can internally
confirm that the goods were actually delivered no legal or other action should be taken. As the
amount is relatively small we should continue trading until this issue has been resolved. No
allowance for doubtful debts are needed at the time being as the customer is still trading and is up
to date with other transactions. If it is found that the goods were not delivered then a credit note
can be raised for the £2,250 and a letter of apology sent to Roxy plc.
BPP- mock exam - task 7
Flames Ltd − The invoice for £2,500 is dated 28 January 20X6. It has been reported in the press that one of Flames Ltd’s major customers has recently gone into liquidation and that Flames Ltd are experiencing cash flow difficulties as a result. This account is not credit insured and is not in dispute.
Review both customers and discuss appropriate actions to take including whether any amounts should be provided for as doubtful or written-off as irrecoverable.
As this customer owes money from 90 days plus this account should be put on stop with
immediate effect and no further orders accepted. As this account is not credit insured we need to
consider whether to instruct a solicitor or debt collection agency to chase this debt. The amounts
are not in dispute so an appropriate action can be to instruct a solicitor to send a legal letter
requesting payment. If payment is not forthcoming then stronger action will need to be taken
either legally as Flames Ltd are in breach of contract. There have been some negative reports
surrounding Flames Ltd and it would be prudent to create an allowance for doubtful debts until
either the debt is settled with a view to write-off as irrecoverable if payment is not received.
Kaplan exam kit - mock b
Standard Ltd manufactures and supplies wood beams. It also assembles and supplies bespoke beds made to individual customer specifications. VAT is charged at the standard rate on all supplies.
Payment terms are 30 days from the invoice date.
Standard has credit insurance for certain named customer accounts.
You work in the credit control department of Standard. Today’s date is 31 July.
Review the information provided for each customer below and prepare comments and an action plan for dealing with the outstanding amounts due to Standard.
Your action plan should include a summary of the options available to Standard to pursue outstanding amounts, along with recommendations for provisions or a write off of irrecoverable debts where appropriate.
1) Scenario: AJP is a regular customer of Standard and always pays to terms. AJP is responsible for 10% of Standard’s annual turnover. AJP had ordered 10 bespoke beds for a hotel it is regenerating. The order had specified that all 10 beds were to be delivered by 10 June in time for the hotel to open. Standard delivered 5 beds on 10 June. However, due to a machine breaking down Standard could only deliver the remaining beds on 30 June.
The total value of the invoice to AJP dated 30 June is £18,000 including VAT. AJP has complained about the late delivery, stating that this has significantly delayed the opening date. AJP is withholding payment and asking for compensation.
Care needs to be taken here as AJP seems to be a customer who places regular orders and provides Standard with a substantial part of their sales. – A tactful approach is therefore required. The terms of the sale contract need to be reviewed carefully, as well as delivery documentation, as AJP is possibly in breach of contract if the delivery date was not part of the agreed terms. Even though part of the order was delivered on time, the reminder was 20 days late. If Standard was determined to be in breach of contract, it would be liable for damages. The amount of damages would be determined based on what AJP might have incurred by the way of costs or lost revenue as a result of the delay. It would therefore be preferable to meet with AJP and negotiate some kind of discount for the problems and inconvenience caused. This would avoid any legal costs, maintain customer goodwill and hopefully bring about payment of the outstanding amount less any discount. As AJP has always otherwise paid to terms, there is no reason to make any provision or take other action to collect the debt at this point.
Standard Ltd manufactures and supplies wood beams. It also assembles and supplies bespoke beds made to individual customer specifications. VAT is charged at the standard rate on all supplies.
Payment terms are 30 days from the invoice date.
Standard has credit insurance for certain named customer accounts.
You work in the credit control department of Standard. Today’s date is 31 July.
Review the information provided for each customer below and prepare comments and an action plan for dealing with the outstanding amounts due to Standard.
Your action plan should include a summary of the options available to Standard to pursue outstanding amounts, along with recommendations for provisions or a write off of irrecoverable debts where appropriate.
2) Scenario - CPP has an outstanding invoice for £13,200, including VAT. The invoice is dated 1 April. CPP has often been slow to pay in the past, and has given several excuses to delay payment, ranging from being unable to trace any of the original documentation to the authorised cheques signatory being away. Standard has supplied CPP with copies of all relevant documentation and, in accordance with the credit control policy, is now about to instruct a debt collection agency or commence legal action.
The HR director has asked you to refrain from sending the debt collectors or instructing solicitors because the Managing Director of CPP is the president of the local chess club. She wishes to join this club, and she is concerned that any unpleasant tension will affect her application.
Answer: CPP seems to have used a variety of excuses and delaying tactics, while Standard has done its best to prove the amount owed. The debt is now substantially overdue (payment was due by 30 April, it is now 31 July, so the debt is 90 days old) with no apparent reason, even though CPP is normally a slow payer. A credit control policy is in place to ensure that Standard does not suffer any unnecessary problems or unnecessary debts. As there is no business reason for not pursuing the debt in accordance with the credit control policy. Standard should proceed to instruct a debt collection agency or commence legal action.
Causing ,unpleasantness’ is not a sufficient reason for Standard not to protect its business position. The HR director’s personal situation should have no bearing on Standard’s business decisions and she should not use her position as a director to influence how a policy should be applied for here own personal gain. It may be prudent to make a provision for this debt and to investigate whether the account is insured.
Kaplan - mock a tutorial
Scenario - Lake Limited debt is now long overdue, there is no dispute regarding the amount, however when their file was reviewed it appears they did not receive a reminder phone call or a reminder email. Over 90 days overdue debt. What action should be taken?
reminder email. Over 90 days overdue debt.
It would not be appropriate to put the debt in the hands of a collection agency or start legal proceedings without having gone through the reminder process. Therefore a phone conversation with their finance team reminding them of their debt and a letter should be sent immediately.
Kaplan - mock a tutorial
Scenario - Copse Limited say they have some short-term cash flow issues and have offered to settle their debt at £1,000 per month. Altogether 10000 over 60 days.
What action should be taken?
This appears to be a reasonable offer of payment in light of their cash flow issues. Therefore get a copy of this payment plan in writing and review on a monthly basis the amounts being paid. Put their account on stop for future sales until they have sorted out their cash flow issues and cleared this debt.
Kaplan - mock a tutorial Scenario - Pond Trader - this amount related to 20 items that were ordered and came to a total of £4,000. Pond is refusing to pay as one of the items is different from that ordered. Over 90 days overdue – 4000.00
What action should be taken?
There is a dispute over one of the goods delivered. Action needs to be taken to resolve the dispute and the correct item needs to be dispatched. It would then be wise to speak to their finance team and request payment for the other 19 items and if not legal action needs to be taken to seek payment.
Kaplan - mock a tutorial Scenario - Tarn Limited - when we have tried to contact them by phone the message says “number out of service” and our reminder letter was returned to us “not known at this address”. They are a new customer and their account is not credit insured. Overdue 7000 between 31 and 60 days.
What action should be taken?
Further investigation will be required but it appears the company no longer exists. A provision should be made for the debt. Credit insurance is not valid.
FI - task bank - Task 6(example1) Scenario: Customer A Customer A has been a customer for many years and they have historically been a good payer. They have informed us that they have an outstanding large sum of money due from one of their customers, and that they will send a cheque for £2,000 this week and pay the further outstanding balance within 14 days. Balance of 14000 overdue up to 45 days. What action should have been taken and should be taken now?
Customer A has a balance of 2000 which is over 31 days outstanding. A statement should have been sent and an email sent when it was 14 days due. A letter will have been sent a week later and at 28 dyas due this would have put the account on stop. We would need to establish the date of the invoice to identify whether a letter has been sent warning of legal proceedings.
If they send a cheque this week it will clear the 2000 before it reaches 45 days so no legal proceedings will be instructed. If the further outstanding balance is settled withing 14 days this will also avoid legal proceedings but until this point the standard procedures should be followed. An email will have been sent for the 8000 and a letter to follow if it is 21 days due. This should be monitored to ensure the account is placed on stop if it becomes 28 days overdue.
FI - task bank - Task 6 (example1)
Scenario: Customer B B limited has an invoice which was issued 14 days ago, they have been a customer for 6 months placing regular orders. They have also requested that their credit limit be increased by a further £8,000. What action should be taken?
As their balance is now due at 14 days we should send an email reminder. We should assess their position and trading history to see whether their credit limit should be increased.
FI - Task bank - Task 6 (example1)
Scenario: Customer C Customer C has not placed any orders since the purchase for £500 which is still outstanding. Debt is overdue 45 days. What action should have been taken and should be taken now?
The 500 is seriously overdue and we should have followed through our credit procedures and should now be taking legal action. Investigation is needed to identify the reason fo it not being paid, whether it is in dispute or there has been an error or if it is just unpaid. This account should be taken to the Finance Manager for a decision to be made as to whether to instruct a debt collection agency or commence legal proceedings.
FI- task bank - Task 6(example1)
Scenario: Customer D has sent a cheque for £8,000 and has promised to pay the other invoice within the next couple of days. This invoice is currently 14 days old. What action should be taken?
The balance of 8000 is over 14 day due so an email reminder will have been sent. Once the cheque is received this will clear the balance which is outside of their credit terms and no further action will be taken. The balance of 750 will have the normal credit procedures applied and as it becomes 14 days due. At present no further action is required.
FI - task bank - Task 6 (example1) Scenario: Customer E has a credit limit of £20,000. They have recently been declared insolvent. Which action should be taken?
They should contact the insolvency practitioner to register the debt and notify the account so VAT can be reclaimed as necessary.
FI - task bank - Task 6 (example2)
Scenario: Hedges has been a customer for many years and has a credit limit set at £6,000.
Invoice - 0 - 30 days : 6000
Overdue Invoice - 31-60 days. Which action should be taken?
Hedges Ltd has 4000 which should have been settled after 30 days so if this is now 37 days due they should be telephoned. No further action will be needed unless they don’t pay and the amount becomes 35 days overdue. They are exceeding their credit limit, this is set for 6000 and the balance is on their account is 10000, this should be investigated to find out where the system has failed allowing a customer to exceed their credit limit. The customer should be contacted to see if they need and increase to their credit limit so an assessment can be made if necessary.
FI - task bank - Task 6 (example2)
Lawns Ltd has not placed any orders recently.
Overdue 90 days invoice
Which action should be taken?
Lawn has a 250 which is seriously overdue. This should be investigated to find out if there is any dispute as to this balance. They will have been warned of legal action and if this balance is outstanding the Finance director will need to decide if legal action is to be taken or debt collection agency instructed. This account will be on stop.
FI - task bank - Task 6 (example2)
Paths is a long standing customer, they have a history of paying late but they do pay eventually.
3 outstanding invoices. Which action should be taken?
Given the relationship with this customer and that they have a history of paying late we should now be contacting them to find out when they will be paying the 1000 which is now 61-90 days overdue. They will have received a reminder and we should discuss the situation with them before putting their account on stop.
FI - task bank - Task 6 (example2)
Fences Co sent a cheque for £7,000 but did not detail which invoices were being paid.
Outstanding invoice 18000 between 31-60 days.
Which action should be taken?
Fences will need to be contacted to identify which invoices the 7000 relates to so this can be accurately analyzed. They will have received a statement and reminder on their account and when the remaining 11000 become overdue at 37 days, they will receive a telephone reminder that that accounts needs to be settled.
FI - task bank - Task 6 (example2)
Leafies has not placed any recent orders
3 outstanding invoices:
31-60 days: 700
61-90 days: 500
Over 90 days: 500
The account is worrying with a number of invoices outstanding and no recent orders. This should be investigated to check whether this was a full balance outstanding or partial invoices. We need to identify whether they have not settled any of their account of if these sums are in dispute, incorrect discounts or invoices perhaps. If these sums are outstanding the Finance director need to decide whether a legal proceedings are to be commenced. They will have received reminder telephone call and also a letter warning of legal proceedings.
FI - Mock 1 - Task 6
Scenario:
Homely Things Ltd is a long standing customer who is known to have a slightly chaotic accounts
team, but has always paid their bills eventually. They have an overdue balance of £23,560, which
is 65 days overdue. Your plan should include a brief
summary of the options available to the company and recommendations for provisions or write
offs of irrecoverable debts where appropriate.
The amount is more than 60 days overdue but given the long relationship with Homely Things the
first step would be to try to resolve the issue without resorting to legal proceedings. The sales
account manager should speak to the customer in order to see if we can obtain payment.
If this is not successful, then legal proceedings should be considered subject to the agreement of
the finance director.
As the amount is large and over 60 days overdue, a provision should be made for the entire
amount.
FI - Mock 1 - Task 6
Scenario: Lamps Ltd is a new customer, a start-up company which has been trading for less than 1 year.
They were very prompt payers at the start of the relationship but have been paying later and
later. There has been no response to a telephone reminder for payment, made 27 days ago. The
balance outstanding is £540.
Given that the company has only recently started operations, and considering their deteriorating
payment pattern, this may be a company with liquidity problems.
Lamps Ltd should be placed on the stop list and a meeting arranged to clarify the position.
Given the strong possibility that the company is in financial trouble, a provision should be made
for the entire amount.
FI - Mock 1 - Task 6
Scenario
Rugs Ltd are a long standing customer who have historically paid on time. They have a total
balance of £43,200 which is over their credit limit of £40,000. Of this £41,500 is now 30 days
overdue with the remaining £1,700 over 90 days overdue.
As we have a longstanding relationship with Rugs then investigation over the balances should be
done. A telephone call should have already been made to chase the £41,500 and as they are over
their credit limit a stop should be placed on the account. Given it is unusual for Rugs to not pay on
time, we need to consider whether they are in trouble which is why no payment has been made.
Could arrange a client visit and look at trade press to see if there are any signs of difficulties. The
£1,700 should be discussed to see if it is in dispute and then a decision made as to whether to start
legal proceedings for it, or to write it off as a bad debt.
FI - Mock 1 - Task 6
Scenario:
Furnishings Ltd has gone into receivership owing Carft Ltd £8,210. The last delivery was made 2
weeks ago, so the debt is not overdue yet, but it is unlikely that Furnishings Ltd will be able to pay
the full amount
Carft Ltd has a retention of title clause on all of its invoices. This means that the buyer does not
have ownership of the goods until payment is made.
This means that Carft Ltd can retrieve its goods. Carft should notify the receiver of this in order to
ensure that the goods are not sold on.
Furnishings Ltd should be placed on the stop list immediately
FI - Mock 2 - Task 6
Scenario:
A is a new business and has just gone into receivership. Crystal Ltd supplied the business
with raw materials for glass making. The account was not insured. A sales manager
visited the business to see if there were any of Crystal’s products remaining for a
retention of title claim. The raw materials have all been used to create one piece of
commissioned artwork which is partially completed. This would require more raw
materials if it were to be finished.
Prepare an action plan for each of the accounts. Your plan should include a brief summary of
the options available for the company to pursue outstanding amounts and recommendations for
provisions or write offs of irrecoverable debts where appropriate
Raw materials are covered by a valid ROT clause whereas the materials converted are not. A
strategy to deal with the receiver needs to be agreed. The receiver may agree to pay something
for the outstanding amount due to Crystal if Crystal sells A enough raw material to complete the
commissioned artwork.
FI - Mock 2 - Task 6
Scenario:
B has said that there is an error on their monthly statement. There are 2 invoices for
£5,000 in the previous month, whereas there should just be one. The first delivery was
for the wrong product, and this was returned, and the correct items were dispatched
and received by B.
B has further requested that they receive a discount of 10% on the invoice for the
inconvenience
The orders, goods received notes and returns inward documents should be checked to see if B is correct.
If the documents prove that the goods were returned by B then Crystal should issue a credit note for the relevant amount.
If the documentation shows that 2 different orders were fulfilled, Crystal should send B the documents that indicate that the goods were sent to them and ask B to provide documentation that they returned the goods.
Since B has received the goods it has ordered there seems to have been little inconvenience to them, so there is no reason for a discount to be applied to the account.
The sales account manager should be notified of the discussions so that the relationship with the
customer can be managed effectively.
FI - Mock 2 - Task 6
Scenario:
C is a major customer and during negotiations last year negotiated longer credit terms,
of 60 days rather than the normal 30 days. C has a credit limit of £50,000, which it
regularly exceeds, since the sales manager is so worried about losing the customer if its
requirements are not met. The account balance is currently £62,000, of which £20,000 is
over 30 days overdue.
Over a third of this major customer’s debt is over 90 days old. Although clearly a key customer,
C appears to be taking unfair advantage of its 60 days net credit terms.
For the future, we should consider:
(a) Holding a meeting with C’s management to discuss how prompt payment could be
improved.
(b) Offering a settlement discount for early payment.
(c) Improving communication with C’s payables ledger department and sending reminder
letters followed-up by telephone calls.
(d) Reviewing the credit limit for the company
FI - Mock 2 - Task 6
Scenario:
D has gone into receivership owing Crystal Ltd £20,000 plus VAT at 20%. Crystal Ltd has
contacted the receiver who has stated that it is unlikely that the retention of title will be
valid because D purchased glasses from several suppliers and so the goods are not
identifiable as being supplied by Crystal Ltd. The receiver also stated that the existing
debt will be classed as an unsecured creditor. 80% of the debt is insured.
Crystal Ltd should insist that they be allowed to visit the premises to attempt to identify goods supplied. Since Crystal’s goods are handmade they may have features that mean they can be identified.
The Receiver may be trying to avoid the retention of title claim by stating that the claim is not
valid in the hope that Crystal will not pursue the claim any further. The threat of legal action can be used if the receiver is not cooperating with a possible identification visit.
Crystal should visit D’s premises immediately to identify any goods so that an ROT claim can be made.The receiver should be present to confirm identification if possible.
The company can claim VAT of £4,000 (20,000 × 0.2) from HMRC, and the remaining amount will
be reclaimed under the insurance policy of which the company will receive 80%, £16,000 (20,000 × 80%) and a provision for a doubtful debt should be made for the remaining £4,000.
