There’s a saying that suggests: “profit is an opinion, but cash is a fact”. This, in part, alludes to the notion that profit can be calculated in many different ways, and many different interpretations can be made of profit results. It also asserts that cash is more tangible and cash flow is the lifeblood of a business.
A business can have significant profitability as traditionally measured and have simultaneously great cash flow problems, which is often the prime reason for business failure. We find it interesting that many businesses with cash flow problems devote a lot of energy to increasing sales but pay little attention to the other factors impacting cash flow such as waste, rostering inefficiencies, stock control and debtor control.
Debtors are those customers who owe you money, and debtor control is critical to running a business. More significant effort to increase sales often results in more liberal credit arrangements being extended to customers, leading to improved 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.
While your debtors are an asset, the greater the time these debtors take to pay you, the greater is the likelihood of you having ongoing cash flow problems. The bottom line is that effective debtor control needs to be viewed as fundamental to business success.
Many people do not enjoy involvement in debtor control because it has unpleasant connotations. Suppose it is integrated into your regular customer contact program; however, 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, you can make a start by:
It is ensuring that you have the facility to run and interrogate debtor reports regularly.
We are being disciplined in designating times and responsibilities for debtor control.
Designing a debtor contact strategy that considers 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.
We are designing customer contact scripts to ensure that all issues are covered and that the required message is conveyed.
Try this strategy – You may still have a section of your invoices devoted to notification of outstanding amounts over 30, 60, 90 and even 120+ days. What you are doing is building in an extended credit facility by signalling to your customers that it is OK not to pay immediately because you will tolerate late payment. Suppose they never get a call from you before 90 days. In that case, you can be sure that they will be using their available funds to pay those creditors who are more systematic and assertive in ensuring that overdue accounts are addressed appropriately.
First, insert a ‘due by date and remove the 30 days, 60 days, etc., columns on your invoices. Replace them with a single overdue or outstanding column. Match this strategy with a client notification and contact process when due amounts exceed 30 days.
You already have an investment in your debtors; you may need to invest more effort into ensuring that your asset is realised within your set terms of trade.