Managing your debtors, creditors

right inside your business. The balance between paying your creditors and receiving payment from your debtors has a major effect on the cash flow of your business.
Debtors management
The more debtors you have, the higher the company’s liquidity position. However, you must appreciate that getting the balance right is important in determining what cash will be available to your business in the short term, and for identifying the cash, or working capital, needs of your business as it grows. As a company, you must be prepared to meet the costs associated with giving credit.
Such include bad debt losses, the cost of financing additional investment in working capital and even the day-to-day management of those creditors.
It is pertinent to keep accurate records of who owes you, how much they owe you and the date for settlement of that debt. Most progressive companies have put in place a credit policy, which provides guidance and direction of the type of customers that qualify for credit.
Strict guidelines are laid on their latitude to pay back and collateral in instances of default.
Some even have interviews that are conducted on their general attitude towards the economic operating environment and future business prospects.
All these together with the customers’ credit history give a rating for the customer.
The methods used to collect money are also an important consideration. In my company, we got very interesting responses when we introduced discounts on cash payments. It is a way of motivating the difficult customers that wish to buy time by taking the longest possible repayment period. It, of course, depends with the type of business you are in and your business cycle.
Remember the time-value-of-money concept when it comes to managing working capital if you can get money to move faster around the cycle — collect money due from debtors more quickly or reduce the amount of money tied up in inventory, the business will generate more cash. This means that there will be need to borrow less money to fund working capital. Any business must have a way of dealing with customers that have accumulated overdue accounts.
Levying interest to discourage those deliberate delays will help in collecting the much-needed funds.
Management must make a decision if credit terms are adjusted from an average 30-day term to a 45-day term.
Such decisions require a weigh in if the company intends on full capacity utilisation for the end benefit of increasing production. Concurrently, bad debt losses must always be kept at a minimum. An analysis of sales and administration costs for debtors must be made and kept at manageable levels. It can be tempting to pay cash, for fixed assets such as computers, plant, vehicles, etc.
If you do pay cash, remember that this is no longer available for working capital. If cash is tight, consider other ways of financing capital investment — loans, equity, leasing, etc.
Creditor management
In the environment we are operating in, companies may find themselves with the need to maximise the credit terms by paying on the last date of payment.
Since the customer is no longer entitled to the cash discount, they might as well maximise on this option.
Avoid the trap of tarnishing the company’s image through late payments to your suppliers.
Businesses that rely on one or two customers or one or two products have an increased exposure in times of economic downturn. It only takes one customer to move to another supplier or to cease trading to put your business at risk. Spread your risk as much as you can.
When a customer fails to pay, efforts must be made to collect the payment — do not be hasty with instituting legal action, relations may be tainted in the process.
Managing credit and debt is vitally important to the smooth and effective operation of your business and may even make the difference between your business surviving or failing. Most businesses have been known to fail because of lack of cash rather than profit.
Till next week, May God richly bless you!!