Are Your Company’s Debtors Harming Your Cash Flow?

There’s a saying that goes, “Profit is an opinion, but cash is a fact.” In part, this alludes to the notion that profit can be calculated in numerous ways and there can be many different interpretations of profit results. It also asserts that cash is more tangible and that cash flow is the lifeblood of a business.

A business can have great profitability as traditionally measured, but simultaneously also have cash flow problems. This is often the prime reason for business failure. We find it interesting that businesses with cash flow problems often devote a lot of energy to increasing sales but pay little attention to other factors that impact cash flow such as waste, rostering inefficiencies, stock control, and debtor control.

Debtors are those customers who owe you money. An effort to increase sales often results in extending more liberal credit arrangements to customers, leading to greater cash flow problems when sales increase. Businesses that achieve increased sales but at the same time increase their overdraft would be aware of this problem. It seems counter-intuitive but sadly it is often true.

Your debtors are an asset, but the longer it takes them to pay you, the greater your likelihood of ongoing cash flow problems. That makes debtor control of critical importance in running a successful business.

Many people do not enjoy involvement in debtor control because it has unpleasant connotations. However, if it is integrated into your regular customer contact program, it can add to the quality of the customer relationship and increase the likelihood of regular prompt payments. If you are not already doing so, try to implement the following:

  • Ensure that you have the facility to run and interrogate debtor reports regularly.
  • Be disciplined in designating times and responsibilities for debtor control.
  • Design a debtor contact strategy that takes into consideration the amount owed, the period the debt has been outstanding, the value of the client, the form of contact, and the person responsible for making contact.
  • Design customer contact scripts to ensure that all issues are covered and that the required message is conveyed.

You may still have a section of your invoices marked for notification of outstanding amounts over 30, 60, 90, and even 120+ days. By doing this, you are building in an extended credit facility and signaling to your customers that it is okay not to pay invoices on time because you will tolerate late payment. If they never get a call from you before 90 days, you can be sure they’re using their available funds to pay those creditors who are more systematic and assertive in ensuring that overdue accounts are addressed appropriately.

Instead, try this strategy: Insert a ‘due by’ date and remove the 30, 60, 90, and even 120+ days’ columns on your invoices. Replace them with a single overdue or outstanding column. Match this strategy with a client notification and contact process when overdue amounts exceed 30 days.

You already have an investment in your debtors, you just may need to invest more effort into ensuring that your asset is realized within your set terms of trade.

Robert-Olszewski-Kreischer-Miller

Robert S. Olszweski is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at rolszewski@kmco.com.    

 

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