Cash Management. Unless you have a business which operates purely on a cash basis, you will have debtors. These are customers who owe you money after you have delivered goods or services. When this happens in a business it’s essential to have proper and effective credit management in place. This is sometimes easier said than done. To create something effective requires a strategy and tools. Two things that will transform your cash management are to have a credit policy and a robust cash collection process.
Companies of any size need to have a credit policy. It’s even more important when a company is growing as the focus tends to be purely on winning the order. In fact when a company is growing there is an increased pressure to have cash to pay for improvements in infrastructure. Importantly a credit policy actually helps ensure that sales are negotiated with integrity. This of course is in the best interest of the company. Any sales contract that is not negotiated properly will have an adverse affect on cash management.
Terms of business – make it clear when you want to be paid. Have this communicated verbally and in writing to your customers. There should never be any inconsistency in the way you communicate with your customers.
Credit responsibilities and authorities – make it clear who has the authority in your company to grant credit. This should normally be sanctioned at management level. What, if any, credit assessment is conducted and by whom. This then determines how much credit is given to each client. A separate person should be responsible for monitoring debtors, stopping supply and credit and in the worst case appoint a debt collection agency. The level of Debt you grant depends on your particular company circumstances. If your average sales invoice is £10,000 then there is likely to be little value in having a credit policy of only £1,000 per client.
Cost – do you actually know what it is going to cost you to give your customers credit? Have you in the past year had a bad debt?
Company objectives – do you produce management reports within 48 hours of your month end? Do you know how long it took you to collect your debts last month? Do your customers consider you as a priority for payment? Management should have a handle on this information at all times. This information should be reviewed at least every month.
An effective cash management/credit policy should have the input of both sales and the finance function. Team work is essential here. For example there is no use having a collection policy of 7 days when Sales know that the industry standard is 60 days. A 7 day credit policy will result in fewer sales. A regular review of the credit policy should be conducted, normally a quick review every month and detailed review every quarter.
There are many cloud accounting packages, e.g. QuickBooks and Xero, which cater for the SME sector. If used effectively are essential in having a robust collection process. The basis of a good collection process is effective communication with you customers. With technology advances companies can now communicate with their customers in fast and cost effective ways. Emails and sometimes text messages are now often used to remind customers to pay on time. It’s also important to make a record of the conversations that you have with a client. When clients don’t respond to payment requests there must be an escalation process. Cloud accounting packages such as Quickbooks and Xero will have built in features that flag debtors older than payment terms.
Access to good quality information about your client so that you can make informed choices about who you do business with.
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