Factoring Companies Guidebook
Creditors Ledger
The Client's record of outstanding trade creditors.
See also: - Contra Trading
Concerns
The creditor ledger is often mistakenly not considered to have to great an importance to us in its security assessment, as the principal security lies in the sales ledger book debts. However, it can highlight such things as debt erosion through contra trading, creditor pressure through the ageing, cast doubt on the integrity of the Management Information received and at worst fraudulent trading.
Creditor pressure can be indicated by the ageing profile of the ledger. Also while the appearance of new suppliers may be indicative of better sources of raw materials, it may equally indicate the Client needing to source new suppliers due to those existing, withdrawing credit. Incidences of trade creditors being paid 'round sum amounts' can be indicative of creditor pressure.
The Client removing balances as soon as cheques are raised, but not despatching the payment to creditors may distort the total outstanding and the age profile. This could suggest that creditors are being paid to terms and there is no cash flow pressure, whereas the opposite applies.
Conversely, indicators that the creditors are paid to date and are being paid promptly could indicate a greater risk to us. This situation has arisen in the past where the Client raises fraudulent sales ledger invoices which are assigned to us, subsequently clearing them off by matching fraudulent purchase invoices, against which they raise their own cheques. These purchase ledger invoices would normally be raised and cleared very quickly, to the extent that they never appear as outstanding on the creditor ledger. In assessing these issues, due consideration needs to be taken of the business sector.
Identification
Obtain a copy of the creditor ledger and review the ageing profile. Review the creditor's correspondence file.
Compare material creditor ledger balances to supplier statements and investigate any material differences arising via the bank reconciliation/accruals listing/etc. p>
Monitor the movement in the creditor ledger with the level of creditor cheques clearing the bank account.
Consider the creditor days outstanding against the debtor days outstanding. If the creditor days are quite noticeably lower than the debtor days, how is the Client managing to pay their creditors so promptly?
Review the level of purchases against the level of sales turnover assigned. Are enough stock and raw material being acquired to produce the level of sales assigned?
Compare the outstanding creditors ledger against the outstanding debtors ledger
¨ Are they moving inline with each other
¨ Are margins fairly constant
¨ Major divergences from the expected profile are appearing
Check suppliers names against Dunn & Bradstreet records not only to verify they exist but also whether the level of supposed purchases can be supported by the credit rating
Examine the actual purchase invoices and verify their authenticity against original order records.
Review the level of stock in the Client's warehouse (if applicable) to the level of purchasing and the level of sales.
Treatment
The manner in which any issues highlighted by reviews of the creditors ledger are handled is dependant upon the matters raised, obtaining a full understanding of the situation and the Client's response.