This course is about helping you with the confirmation letters procedures when it comes to accounts receivables. Our aim is to start with explaining what we’re on about first and then move onto composing one, performing the procedure and also explaining the importance of it.
We aim to help you with the whole procedure to ensure you know what you’re doing, why you’re doing it and, equally important, how you do it all. We’ve also prepared a template to further help you with following the course and obviously in helping you to prepare your own confirmation letter.
The course is laid out in a logical order and written so it’s easy to understand, with simple words and “down to earth” style.
But enough about that, let’s kick off!
What’s a confirmation letter?
A confirmation letter is something you send to the other party to get your balances confirmed. Yes, the other party gets his confirmed just as well, but that’s not your concern.
In essence your aim with the letter is to make sure your balances are correct – they’re against right party, in the right amount and in the right period. Something you wont get with the letters however is a confirmation that all balances are recognized. If you have a 0 balance it’s up to you really if you decide to send the letters or not, but generally speaking you will not get a confirmation from your part if the balance is zero or non-existent even.
The latter is something that comes out if the other party is also performing confirmation letters procedure and decides to send out letters. Only then can you know of balances that are not recognized in your accounts.
How to compose one?
A confirmation letter is actually in the form of a letter – it has the addressee field and the content. What’s more, it’s also nice to put it all on your company’s letterhead.
Anyway, when starting to compose the letter you start off with the addressee you are making the letter out to. Once that’s done, you move onto explaining what’s the purpose of this letter and why you’re doing it. It’s very general, but a nice introduction to enlighten the respective party why they’re receiving such a letter from you.
From there you move onto more detailed section, which is the date you require information for and your accounting information you require to be confirmed. It’s the amount according to your records that you’re stating and it should be clearly enclosed that it’s “according to our accounting records” or in similar wording.
As such, please keep in mind that enclosing a clause “if you do not reply to the letter, we assume our balance is correct” or similar isn’t really the best practice. Why? Truth of the matter is that not always the letters reach them or they may forget replying. It’s real situations that happen and as such assuming automatically that they agree with the balance is premature.
And then you add the sentence where they can confirm their balance. In essence what you do is simply add a sentence where the respective party confirms they owe stated amount to your company at a certain date.
What’s to follow is two things – the credentials of the person confirming the owed balance and area for comments if need be (i.e. in the case the balance does not agree their records). How to deal with comments is something we’ll focus on in our next section that’s about the procedure itself.
And that’s really it when it comes to the letter itself. You have our template to help you with visualizing how it looks like and also to give you a template to build your own letter upon.
How to continue with the procedure?
Your first course of action was preparing the letters. Now that the letters to appropriate parties have been prepared (note also that the names and amounts are correct on the letters as well as the dates the balances are confirmed as at), we can move onto the next steps.
List of letters sent out
Prepare a list of all the letters sent out – the client’s name, the balance on the letter and the date the first letter was sent. It’s the minimum to ensure you’ve got some base track record of what was done. It’s the list you can edit comments in if need be, make a new column for additional letters or contact with the client (i.e. by e-mail or phone).
Dealing with responses
Most importantly it’s also the list you can keep track of all the replies received, balances confirmed, balances not confirmed etc. Essentially if a reply is received and it’s a confirming reply, you can make a separate column with a respective remark (i.e. “confirmed”, “agreed”, “ok” etc.) or simply colour it accordingly.
What if the balances do not agree?
In case your client has left comments stating the balance does not agree with their records there’s a bit more you have to do.
Essentially the first thing you’d have to do is gain an understanding why the balances do not agree – either there are invoices missing from their end, some booked into wrong periods, typos etc. There are various reasons and it’s something you have to figure out now together with your client.
Once it’s known what caused the balances not to agree, it’s time to remedy the conflict. If there are invoices missing, they should be resend and the balances amended accordingly by the party who didn’t have the invoices. If there are typos, those should obviously be corrected etc. Effectively the aim is to make all the amendments and adjustments into the proper period and not leave anything just as it were – “we have a mistake in our accounts and we’re going to rectify it in the next period”. No. It’s to be done in the period, which accounts you’re confirming.
Summarizing the results of the procedure
Remember you made the list? This list is your overview of how many replies you’ve received, which were “okay”, which did not agree and actions taken with balances not agreeing.
Something you have to decide now is, in case you have some balances you’ve not received a reply for, how to continue with them. Say that you’ve tried to call them, sent them e-mails and even resent the confirmation letters. Nothing. Not a single reply or action to follow promises given (i.e. “we will send tomorrow” etc.) What to do in such a case? At the end of the day it’s your judgement call. If it’s a significant balance you can always continue and follow-up. If the balance is insignificant you may drop the matter more quickly.
At the end of the day it comes down to the payment dates as well. If the due dates have arrived and the balance is going to be paid, there’s nothing to worry. However, if the balance does not get paid and you got no confirmation, it’s time to doubt about it’s value altogether.
So to summarize, if no confirmation reply is received just hold your breath that they still pay up their debt. That is not to say that if a confirmation is received they are going to pay, but it’s at least something. No confirmation however may indicate that they owe nothing according to their records.
Importance of it at the end of the day
Confirming your receivables is in essence making sure assets you’ve recognized in the accounts in fact do exist and that they are in the correct amount.
It’s your obligation to count for you inventory, reconcile bank accounts to balances on the balance sheet, and keep physical cash safe and obviously reconciling with accounts and just as it it’s equally important to “count” for your receivables. At the end of the day what are accounts receivable balances? They are your “cash to be received”. It’s a cash inflow that you’ve stated on the balance sheet you’re entitled to within the next 12 months. Your duty is to ensure you indeed have the amount flowing in by confirming the balances with respective parties.
Failure to do so isn’t that big of a deal, but you have to accept the fact that part of what you may have thought your client should have paid they’re not going to do. And then you have to deal with it anyway – contacting them, reconciling open invoices, resending missing ones, crediting etc. It’s your call at the end of the day, but I’m sure you by now got the importance of it.