Cash Management – getting it right
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.
Factors to consider in determining Credit Policy
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.
Steps to reduce/illuminate slow payers
Access to good quality information about your client so that you can make informed choices about who you do business with.
- Have a credit application form. This lets your customer know that you take the process seriously. Asking for end of year company accounts, management accounts and asking clients to sign payment terms is essential.
- Do a credit search on your customers and let them know that you will be doing one. If they have issues with this then it’s an indication that they will be a problem customer.
- Have payment terms in your written contracts with your customers. Make sure that they know what these terms are.
- Once you know the credit worthiness of your client make sure to set realistic credit limits. Incorporate these limits within any accounting software that you have.
- Make sure that you get a purchase order form your customers before you provide your service or goods. A purchase order from you customer can save a lot of headache if anything is disputed.
- Make sure you invoice promptly and do this using the fastest means possible, email.
- Make sure to send all customer’s statements of account. Again streamline your systems and costs by using email.
- Communication is the key, use the phone and email to chase payment.
- Make sure you keep a document audit trail in case of dispute resolution
- And if a client persistently refuses to pay and or breaks payment agreements then it’s time to call in a collections agency. In many cases your company lawyer should be able to write a letter for you. In the vast majority of cases this should be sufficient to get your money in.
- Make sure the Sales process is completed with integrity
- Have a defined cash management/credit policy
- Have a robust collection process
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