When You Need More Cash Manage Debtors And Creditors

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. Bad debts are serious business and while using business resources ihn time and money the negative impact on working capital can be critical. High levels of bad debt indicate a failing of the accounting system, the accountants responsible and can cause a business to fail as is often seen during a credit crisis.

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. UK value added tax may be paid monthly or quarterly, a vat cash accounting scheme can smooth out cash flow requirements and depending upon the size of the wages bill paye payments by smaller businesses can be paid quarterly.

Every opportunity should be considered to improve liquidity and that would include the frequency which employee salaries and wages 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. If higher than normal stock balances are funded by free or cheap credit from suppliers the cash flow and credit tightening on other parts of the business can be eased. Cheap credit can easily be measured being any credit received that costs less than the cost of other methods of borrowing.