Shelter Chieza Change Management
Striking a balance between your debtors and creditors is extremely challenging. Operating in an economy where liquidity is extremely volatile and where there is high cost of borrowing is never easy – you need to adopt a proactive approach. It is extremely important for an entity to manage creditors and debtors. Its a tricky situation though, sustainable relationships are easy to destroy and not so easy to build.
Do you harass those that owe you money and treat with respect that you owe money?
I have since discovered that the cheapest and best sources of cash exist right inside your business. The balance between when you need to pay your creditors and when you receive payment from your debtors has a major effect on the cash flow of your business.
If you have more debtors you are likely to be in a better liquidity position. You must however get the balance right in order to determine what cash will be available to your business in the short term.
Most growing businesses tend to neglect the area of working capital management. Most start-ups have failed to rise out of failure to handle working capital dynamics.
Just because you are invoicing customers a lot does not translate to large business volumes. In fact your receipt books may not be reflecting your Invoices.
As a company, you must be prepared to meet the costs associated with giving credit. Such include bad debt losses, the cost of financing additional investment in working capital and even the day to day of managing those creditors.
If there is an area that requires accuracy . . . its in managing debtors. Its so easy to remember a debtor in arrears for three months.
If there were to extend for two more month , natural recall may not be easy. You can lose thousands of dollars if you are not keeping accurate records of who owes you, how much they owe you and the date for settlement of that debt.
Most established and progressive companies have put in place a credit policy which provides guidance and direction of the type of customers that qualify for credit.
Don’t just dish out credits to individuals and companies that you have not vetted. Even if business has been limited and restrained, do not be tempted and excited to offer terms of credit, some customers are wolves in sheepskin.
Strict guidelines must be stipulated on their ability to pay back. Collateral must be sought after.
Some shops even have interviews that are conducted on their general attitude towards the economic operating environment and future business prospects. All these together with the customers’ credit history give a rating for the customer.
As a company, how do you collect your money from those that owe you? The methods used to collect money are also an important consideration.
Those day to day phone calls are now ineffective and redundant in this economy.
Everyone seems to be owing everyone so if you are going to call Company X you may need a better strategy. Accounts and Finance people in most companies are undergoing training on collecting money the company is owed. In my company, we got very interesting responses when we introduced discounts on cash payments.
We had customers that moved rank from being regular to being burdensome. In cases like these, you ought develop a sympathetic stance for the initial months as you watch their behaviour.
When we introduced cash discounts, they also jumped onto the bandwagon. Cash discounts are a way of motivating the difficult customers that wish to buy time by taking the longest possible repayment period. It of course depends with the type of business you are in and your business cycle.
Remember the time value of money concept. A dollar you give me today has more significance than the one you promise me tomorrow.
When it comes to managing working capital if you can get money to move faster around the cycle – collect money due from debtors more quickly or reduce the amount of money tied up in inventory, the business will generate more cash or it will need to borrow less money to fund working capital.
Any business must have a way of dealing with customers that have accumulated overdue accounts. Levying interests to discourage those deliberate delays will help in collecting the much needed funds.
Some of you must consider adjusting credit terms from an average 30-day term to a 45-day term. Some may even need 15-day credit terms as opposed to full cash payment requests. Such decisions may require a more comprehensive consultative process. Just be cognisant that full capacity utilisation has the end benefit of increasing production.
By any means necessary, keep bad debt losses at a minimal. An analysis of sales and administration costs for debtors must be made and kept at manageable levels.
In this environment, it can be tempting to pay cash, for fixed assets such as computers, plant, vehicles etc. If you do pay cash, remember that this is no longer available for working capital. If cash is tight, consider other ways of financing capital investment such as loans, equity, leasing .
As a company, you may find yourselves with the need to maximise the credit terms by paying on the last date of payment.
You may consider so since the cash discount option is not applicable. I must hasten to say that you must avoid the trap of tarnishing the company’s image by late payments to your suppliers.
Businesses that rely on one or two customers or one or two products have an increased exposure in times of economic downturn.
Its risky to put all your eggs in one basket lest the carpet is pulled underneath you. It only takes one customer to move to another supplier or to cease trading to put your business at risk. Spread your risk as much as you can. When a customer fails to pay, efforts must be made to collect the payment- do not be haste with instituting legal action, relations may be tainted in the process.
Business may be summed up underneath managing creditors and debtors. It is vitally important to the smooth and effective operation of your business .
It will make the difference between your business surviving or failing. Most businesses that fail may not have strategy laid down on dealing with those that owe you money or that you owe money.
I have come to a conclusion that both have equal importance, no scale must be tipped in one direction.
Till next week, May God Richly bless you!!
◆ Shelter Chieza can be contacted at shelter.chieza@gmail.com