Cash Flow Management of Debtors And Creditors In A Credit Crunch
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Sales turnover and net profits may follow a rollercoaster pattern familiar to
most business but when the cash flow dries up the game is over. Cash flow
management is critical not just to business performance but to business survival
in the days and months of a credit crunch. Accounting software can offer many
solutions but there is no substitute for astute management to boost cash flow
and reduce liquidity risks.
Most businesses will experience periods of lower sales and times when losses
may be incurred as expenses exceed sales income. With a sound business the
position is recoverable by gaining extra sales growth or reducing expenditure. A
business that runs out of cash resources is dead in the water.
Debtors and sales income management
The objective is to obtain payment from customers as fast as possible
improving cash flow and minimising the risk of bad debts and not being paid at
all.
Payment terms offered to customers should be clearly stated and fixed as
standard accounting figures according to the amount of funding the business is
prepared to offer its clients. Because that is exactly what credit terms to
customers is, free cash funding in exchange for eventual sales income.
Consideration should be given to using a cash discount system to encourage
sales invoices to be paid faster. In some businesses it would be appropriate to
obtain up front deposits and scheduled payments. Review this practise to obtain
a greater proportion of payments faster to improve liquidity.
New customers should be subjected to a strict credit check. All new customers
where credit check details are not available should be invoiced by the
accounting function on a pro forma basis. Any businesses who fail to meet the
highest credit score required should remain on a pro forma invoice basis.
Each business should determine a set of credit control procedures including
issuing sales invoices, producing customer statements of outstanding balances
and a standard set of credit control letters that actually get the cash in. An
essential process in the credit control procedure would be to ensure the
accountant or bookkeeper always issues sales invoices and customer statements
promptly.
Incorporate into the terms of trade a set of rules to invoke interest
payments for late payment and late payment debt recovery costs. In the UK the
Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory
rights of business to claim interest and costs.
Consider the possibility of factoring sales invoices due from debtors either
by selling the sales invoices to a third party or raising cash on the value of
those invoices pending payment. Factoring has the disadvantage of often not
being cheap but does have the advantage of generating a regular stream of cash.
Bad debts have a double impact on any business and all possible steps should
be taken to reduce the risk. A bad debt not only uses valuable resources in
chasing the debt with the negative impact on cash flow and liquidity but also is
a straight loss to the net profit and a strong indicator that the accounting
function is failing the business.
Creditors and expenditure management
The objective is to extend the time allowed for payment of expenses the
business incurs.
Consider the frequency of all payments made to suppliers. Small business
often has alternative payment terms available for the payment of taxes. In the
UK value added tax can be paid quarterly or monthly, vat cash accounting can
ease the tax liability due in critical periods and paye payments can be paid
quarterly rather than monthly for smaller businesses.
Consider the frequency which wages and salaries are paid. A sensitive area
since it involves the most important people to the business success but adopting
a payment period to coincide with the receipt of cash from customers may in some
circumstances balance liquidity.
General creditors are a major area to be addressed in terms of both the
amount of credit received from suppliers and the time required to pay those
creditor accounts. Larger orders on extended payments terms creates a risk area
should the goods not be used but can greatly assist cash flow as the business is
effectively borrowing free cash from its suppliers.
Stock levels are crucial to financial management of the creditor total. High
stock levels use valuable working capital which is offset in part by the level
of creditors. Higher levels of stock financed by free credit from creditors
lowers the cash flow requirements on the other parts of the business.
About the Author
Terry Cartwright is a qualified accountant designing
Accounting Software
on excel spreadsheets providing complete
Small Business Accounting Software solutions for small to medium sized
business with simple Bookkeeping to assist financial control through automated
tax returns.
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Article Published/Sorted/Amended on Scopulus 2008-04-03 12:43:02 in Business Articles
