It is now widely accepted that cash is king and at the same time, the lifeblood of any business. Imagine this situation in a cash strapped workplace: there is little cash to purchase run-out inventory, creditors are making arrangements to sue due to prolonged non-payment of credit granted, workers have not received their remuneration for months, little funds are available for administrative expenses, expected settlement of debts have far exceeded deadline for payments.
This is the result and indeed including many others when a firm’s cash flow is poorly managed. Cash flow management therefore becomes extremely important for any business’ survival and growth.
The practice of planning, organizing and controlling the way a firm’s cash goes out and comes in may be termed Cash flow management. Planning means setting cash flow goals and instituting measures to achieve them. In organizing, decisions are made as to when and how monies will leave and enter the business’ financial system.
It is crucial to note that effectively managing debtors lays a good foundation for any cash flow system. This article will therefore focus on effective management of debtors for business success.
WHO ARE DEBTORS?
They constitute the people and institutions that have received goods or services from a business on credit and have arranged with the business to pay at a later time.
WHY IS IT IMPORTANT TO MANAGE THEM?
A business benefits greatly from managing its debtors. A firm may have lots of short-term needs for cash and managing debtors will ensure that credits are settled in time. Many firms, especially banks have suffered from bad debts. Managing debtors effectively reduces the incidence of bad debts. There is also a healthy cash flow state. Funds will readily be available to meet rising financial obligations and this eventually spares the firm of any penalties and saves its reputation.
HOW DO I MANAGE MY DEBTORS EFFECTIVELY THEN?
The following are actions that promote effective management of debtors:
- Design and maintain a credit policy
The first should be the designing and maintenance of a credit policy. A credit policy is a document that details in simple and clear terms how a firm will manage credits given.
The policy should be in line with the firm’s cash flow goals and targets and its overall mission and vision. As a minimum, the policy should contain such information as how customers will apply for credit, minimum and maximum amounts that can be granted, and security measures for ensuring payment. In most companies, the credit policy is stated in other invoices given to customers which makes it easier for reference.
- Qualified and well equipped managers
The administration of the policy will be done by people. It is important that these people are well trained and equipped in areas such as finance, accounting and human relations. The way in which debtors are dealt with after receiving credits largely influences payment. Therefore, emphasis must be placed on human relations.
- Supplementary and supportive business advice and check up
Your business should show concern for the debtors by periodically finding out about their business and assisting them with any challenges they may be facing. This will serve to improve relations with them and enhance settlement of debts. The support should come with little or no cost.
- Restructuring of terms
Upon the check-up, if it is realized that a debtor’s circumstances would not permit defrayal of debt within agreed time or would become a bad debt, your business can renegotiate or restructure the terms of agreement with the customer. Certainly, little is better than none. Conversely, this should not be done at the expense of the firm.
It is also advised that companies take a careful look at their average receivable collection period. The accounts receivable collection period compares the outstanding receivables of a business to its total sales. This is used to evaluate how long customers are taking to pay amounts owed. A low figure is considered best, since it means that a business is locking up less of its funds in accounts receivable, and so can use the funds for other purposes. Also, when receivables remain unpaid for a reduced period of time, there is less risk of payment default by customers.
Average Receivable Collection Period is calculated as: Average accounts receivable ÷ (Annual sales ÷ 365 days)
Having said all these, it is noteworthy that managing debtors could be very challenging and resource consuming. The good news is this: Built Accounting gives you what you need when it is needed, while keeping costs to the barest minimum and giving you and your business the freedom to focus on making things work. Survival is essential. When it comes to managing your business’s accounting, there is no reason to stress. Contact Built Accounting via email ([email protected]) or call 030 397 4832 for all your business accounting solutions.
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