Custody of receivable files: Overview, definition, and example
What is custody of receivable files?
Custody of receivable files refers to the management and safekeeping of records related to a business’s accounts receivable—essentially the money owed to the business by its customers. These files typically contain detailed information about invoices, payment schedules, payment history, and outstanding balances. The "custody" of these files means that someone is responsible for ensuring that the information is securely stored, easily accessible, and accurately updated. This responsibility may fall on the accounts receivable team, the finance department, or an external third-party service provider.
For example, if your business is tracking customer payments for products sold on credit, the custody of receivable files ensures that the documentation related to each transaction is properly maintained and that payments are tracked correctly.
Why is custody of receivable files important?
The custody of receivable files is important because it ensures that accounts receivable are properly managed, reducing the risk of errors, fraud, or mismanagement. Proper custody helps keep accurate records of customer transactions, which is essential for maintaining cash flow, following up on overdue payments, and preparing financial reports. Well-maintained receivable files also help businesses stay compliant with tax regulations and improve overall financial visibility.
For SMBs, good management of receivable files is crucial for ensuring that the business collects outstanding payments efficiently and avoids potential cash flow issues.
Understanding custody of receivable files through an example
Imagine your small business sells products on credit to several customers, and you need to keep track of outstanding invoices and payment history. The custody of receivable files involves storing and organizing all relevant documents—such as sales orders, invoices, payment receipts, and correspondence—in an accessible, secure system. This helps ensure that you can easily identify overdue accounts, follow up with customers, and ensure accurate reporting when it’s time to prepare financial statements.
In another example, if your business outsources its collections to a third-party service, the third-party would have custody of the receivable files and be responsible for managing the collection process, ensuring that payments are received, and maintaining accurate records of each transaction.
An example of custody of receivable files in action
Here’s how custody of receivable files might be referenced in an internal policy or contract:
“The accounts receivable department will maintain custody of all receivable files, ensuring that invoices, payment records, and customer correspondence are securely stored and regularly updated. Only authorized personnel will have access to these files to prevent unauthorized changes or access to sensitive financial data.”
Conclusion
Custody of receivable files refers to the management and safekeeping of documents related to money owed to a business. For SMBs, ensuring proper custody of receivable files is essential for maintaining accurate records, improving cash flow management, and ensuring compliance with financial regulations. Properly managed receivable files help businesses track payments, minimize risks, and improve financial operations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.