Error in Cash Discount-Company had to Pay 0.21 Million

Background: Client was in the business of selling and buying garments. We were engaged to look at the existing process on discounting and billing and internal controls for financial transactions.

What We Did: We took the sales register for one year. Against the sales, we plotted the received amount. We then calculated number of days to receive the payment invoice wise. We also added a column, where cash discount was given. Then we looked at the report for the correctness of Cash discount.

Results: Finally, it was concluded that the company paid close to excess of INR 0.21 Million. When we reported this to the client, then client agreed to it saying it was attributable to manual systems and lack of proper control. Basically, the system of giving cash discount was not formalized. Post this; we set up a discount master data in the accounting software at the customer level. So the moment there was an error in cash discount, the software sent out the alerts to responsible parties in the company. Since this company had a large volume of sales on daily basis, a review mechanism to review the cash discount on weekly basis was setup.

Also for excess cash discount of INR 0.21 Million was subsequently recovered from the customers via debit note. With this information in hand, we also looked at cash flow statement of the client on month to month basis. Cash discount was given to plug the gap between the receivables and payables, and at times it was not necessary to really give a Cash discount. Mind you our client was giving on an average of 2% Cash Discount. We estimated that if the client had managed Cash Flow well, it could have avoided 0.202 Million of Cash Discount. What We Can Learn from this: It’s a good idea to review the cash discount calculations on a monthly basis