Minimise the growing level of bad debts

You have recently been appointed by the management board of JKL Ltd, a small electrical accessories company, to design a company-wide computer-based sales/debtors system. To date, the company has maintained a manual record system for its sales/debtors.

For the previous three financial year the company has had an average annual turnover of £18m (all sales are in the UK), and average annual profits of approximately £4.4m. The company has approximately 50 employees working at six locations throughout the UK: Manchester, which is the company’s head office, Birmingham, Leeds, Swindon, Bristol and Newcastle. In Manchester, five staff are directly involved in sales/debtors system, whereas in the remaining five locations only 10 members of staff are directly involved – two at each regional location.

For the year ended 31 January 2007, approximately 95% of the company’s sales were trade sales to UK retail companies, of which 88% of these sales were on credit. In addition, for the past three financial years, bad debts relating to trade sales have averaged approximately 5% of the company’s turnover in each year, resulting in lost income over the three years of approximately £2.7m. It is this loss of sales income that has prompted the management board of the company to review its sales/debtors system.

The company purchases all its retail stock

Required

Making whatever assumptions you consider necessary, prepare a draft design for the management board of JKL Ltd indicating, where appropriate, the necessary control procedures you recommend in order to minimise the growing level of bad debts.

Solution: