Flow Saddle
Effective management of credit to the profit and cash flow
Give credit to customers is a necessary part of business. So is management. Are you managing your credit function profitable? Are your customers because of their liquidity problems? What are some signs warning that you need to pay attention to when assessing credit to their customers?
Cost of credit
Most companies offer terms credit to their customers. Makes your attractive offer to customers, and is often instrumental in getting sales. Let's review the costs of the company when offering its products and services on credit conditions. They are divided into five main categories:
• The cost of financing (borrowing cost or opportunity cost of funds of lead)
• Cost of implementation of credit operations
• Cost of time to pursue debts
• Cost of bad debt
• The cost of debt recovery (legal)
Some best practices in managing credit operations
It first thing to do is doing its part right. You incur unnecessary delays in funding through charges to its customers. If you are slow in monitor overdue accounts, you create unnecessary pressure on cash flow in your business. To begin:
• Ensure customers are invoiced and invoices Time sent
• Ensure the accuracy of bills
• Follow up promptly after the expiration
Some common stalling tactics
Whether your customers pay you on time or at all, depend on two main factors: the willingness and ability. Your customers may be able and willing to still paid on time. On the other hand, may actually be unable to pay you.
Here are some of delaying tactics commonly used by customers that could be a symptom of problems with the collection:
• Claiming that the bills are not received and requesting that they resent
• Claiming that certain items in the bill not received
• Consult a small item on an invoice and payment is not the whole bill until this particular point has been resolved
• Missing the race check and asks you to wait a month
• Confirm that the check signers are out of town
• Change payment payment habits: getting slower
Three macro warning signs
Other danger signals about the company may also exist that could pose a potential collection problems. Credit controller usually has limited direct contact with customers. Moreover, the sales staff should first hand knowledge of customers updated. This is where the finance function can work closely with the sales function to take precautions and preventive measures to avoid a loss for the company. In particular, sales people can look out for the following clients during their regular visits, and sufficiently following working smart as his finance team:
• Significant changes in key management
When management personnel Key suddenly resigns, including independent directors, this could indicate internal conflicts and major disagreements about the overall direction of the company. If this is true, it would have ramifications on the operations, and perhaps even the survival of the company.
• High turnover in public finance department
The finance head is usually the first company to see if there is a serious financial problem. You can also resign if you disagree with the Director General on the accounting treatment of a major operation which he believes could compromise their professional integrity. A brief exercise of a CFO or a rapid succession of the CFO is not healthy for a society and acts as a strong warning signal to outsiders.
Also find out if there is rapid turnover accounts of the officer in charge of accounts payable. This could be indicative of a position that is highly stressed due to pressure from suppliers to pursue payments.
• The loss of significant customers, and excess capacity
A loss of significant customers could jeopardize the viability of a company. This is especially true if the company is based on a few large business customers.
If the company has excess capacity, it may soon lead to losses and liquidity problems, since it is not selling enough to at least cover expenses.
Take preventive action
If experience of the joint venture customers delaying tactics, and if the three macro warning signs were present, then there may be a need to consider appropriate course of action with respect to this client group. This could include a gradual reduction in the amount of credit granted and put them on watch list for signs of deterioration more on performance pay. System and a large collection effort may be necessary to enable to make sure to limit your exposure. This would ensure greater chance of recovery of outstanding debts.
Correct Credit detection
As for lending, prevention is actually better than cure. If you are able to make a quick financial review of the financial statements of a customer to verify their financial capacity even before asking that sales pitch (see my article on "to convert financial information into a financial crisis"), you can save time and headaches down the road. Time is money. The less time your company spends chasing bad loans, the more time it could happen in U.S. dollars sales generation that translate into real cash flows.
Conclusion
The credit management process does not end with the completion of the application form credit by the customer. It is an ongoing process and monitoring will be rewarded handsomely in terms of protecting your company's earnings and cash flow. The team sales is in direct contact with customers, and therefore is in an excellent position to be the eyes and ears of the finance team in respect of accounts collecting receivables. This partnership will help the company stay ahead of the game and not be caught unaware when it is loaded with debts offs, which in turn could threaten the survival of his entire company because of low profitability, losses and increasing cash flow problems. Remember that an ounce of prevention is worth a pound of legal notices.
About the Author
James Leong, Chartered Accountant, is the managing director of VisionsOne Consulting Pte Ltd. His experience includes teaching as an Adjunct Associate Professor with National University of Singapore.James can be reached at jamesleong@visions1.com.sg or
http://www.visions1.com.sg
.
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