“Turnover is vanity, cash is sanity” It’s a cliche but it is still true. Too much owed to suppliers and the bank. Too little cash being collected from debtors.
Later I came across an article confirming that he was right. Too much money going out, too much owed to the bank and too little coming in, it said, is responsible for over 75% of all business failures.
A recent survey by the Chamber of Commerce showed that cash flow is a major problem, with over 30% of respondents seeing a worsening condition. The same survey also revealed that
- The threat of bad debt is increasingly stressful and actual bad debts have increased by over 30% in the last 12 months
- 55% of respondents see late payment of invoices as effecting their ability to survive
So, the fact is that most business owners, particularly small business owners, have problems with cash flow and bad debts.
And, despite that, another finding of the Chamber of Commerce survey was that
- Almost 50% of local businesses have no system to manage their debtors.
Why is this so? Surely any business owner worth their salt, when they see a problem, will take action and set up a system to manage the situation?
Well, one of the major reasons is the pressure to achieve turnover or sales. Sales are what business is all about. It’s reason for existence. People set up businesses to sell things, products or services. Sales are an easy target to set and an easy way to judge success or failure.
Sales are a Process. But what many business owners and managers fail to realise it that the actual transfer of goods of services from their company to a third party is only one part of the sale. The complete sales process should also involve specifying the terms of the sale, raising an invoice in a prompt manner, and collecting payment. There should also be a system for monitoring the process and making sure that it is fully completed, i.e. that the sale is paid for. A sale without a subsequent payment is not a sale, it is an illusion, or a trick of numbers for your bank manager. And it is an illusion that will bring your company down if it is not addressed.
The Cash Flow Roller Coaster. The relationship between many business owners and their cash flow is like a roller coaster. When they have cash in the bank, credit control is not a problem. They do not worry that debtors are slipping from 30 days to 40 days, 60 days or more. Then they wake up one morning and there is little or no cash in the bank. Suddenly they are on the phone to customers who owe them money.
But the customers get to know and understand this sort of roller coaster behaviour. They learn that, if they hold on long enough, somebody else will pay and the pressure to settle that invoice will be off them again for a while. That is why a system of regular contact with debtors is crucial. Because in a world where money is tight, the people who get paid are the people who ask consistently and who do not take no for an answer.
The other problem business owners often face in asking for payment is that of relationships.
Let’s face it. Getting sales and retaining customers usually involves a long time building up a relationship. And it is hard to risk that relationship by asking too forcefully for payment. But, in reality, a sale isn’t a complete sale until it is paid for. A relationship based on take and no give in return is not a relationship.
A system to Manage Debtors provides a partial solution to the relationships problem. If you have to ask for payment or have to refuse to sell to a customer until they have paid for the last purchase you can always say – “I’m sorry but it is the way the system works and it is out of my hands.”
What Does a System Involve? Any debt management system starts at the initial sale and works on from there.
The system should involve
- Clearly stated terms and conditions of sale, including payment terms and retention of title where appropriate.
- A means of verifying that you have completed your part of the contract.
- A process for producing invoices and sending them out to customers as soon as possible after the sale.
- Regular communication with debtors at specified intervals and by established means of contact.
- The ability to resort to legal action if necessary.
But the system should also include an overview of all debtors and a regular review of the company’s debtor situation. How much money is owed in total? How much is outstanding over 30 days. Is the amount owed and the length of time that it is outstanding improving or getting worse, both in real terms and as a proportion of the sales of the company?
Debtor Days. Here is a simple calculation for you to use:
Total money owed on outstanding invoices, divided by Total Annual Sales, multiplied by 365. Do this calculation every month. If the answer, this month, is larger than the month before, you may have a credit control problem.
At Clear Accounting NI. we can work with you to show you how to develop and maintain a system that will ensure you stay on top of your debtors and help improve the process of getting paid on time. You can contact us by email: email@example.com or call 02891072561