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Telling the story
The aim of
this part of the website is to illustrate
financial issues through stories. A cross
between a regular cartoon in words, and a blog, designed to entertain,
as well
as to keep you thinking about things financial.
The
episodes come under three main headings – profit,
cashflow and budgeting, and build on the things we look at in our
training. As you read them, enjoy them,
but also think about how they apply to your organisation.
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Debt collection (3)
(cashflow)
Last time we looked at negotiating credit terms. This time we’ll look at enforcing them.
First, get the invoice right! If it is inaccurate the client will query it,
not pay it. And they’ll probably wait
until it’s due for payment before they query it, which will slow the payment
down further. Make sure you include
purchase order numbers and the like, as their absence will also delay payment.
Get it in on time.
Most businesses have an end of month cut-off date for processing
invoices. Invoices received after that
date will be deemed as “next month’s invoices”, which means they’ll get paid a
month later. But the cut-off date is
often before the end of the month (this enables the monthly management accounts
to be produced smartly after the month end).
So find out what the customer’s internal processes are, and work within
them.
Find out who is
responsible for paying suppliers. If you’re
having trouble being paid, you need to know who to chase. Work with the purchaser at your client (so
they can apply internal pressure), but also develop a relationship (and an
expectation of being paid promptly) with the accounts payable department.
Chase proactively, don’t wait to be paid. Take it seriously – getting the invoices paid
is as important as getting the invoices out.
Have a series of steps: phone calls; letters; stopping supplying; legal
action; and be prepared to use them. Don’t
make threats that you aren’t prepared to implement.
Debt collection (2)
(cashflow)
“Revenue is vanity, profit is sanity, cash is reality”. So the saying goes. By revenue we mean sales, but it is pointless
making sales if we don’t get paid for them.
So we can tell the sales team: “We don’t want you to make
sales, we want to be paid for profitable sales.”
It’s only when we get paid that we realise the profit. If I buy something for £450, and sell it for
£1,000, I’ve made £550 profit – haven’t I?
If I sell it, but don’t collect the cash, I’m £450 down – so
I’m worse off than if I hadn’t made the sale in the first place. Once I collect the £1,000 then I have the
£550 profit in the bank.
So how do we increase our chance of getting paid? First we negotiate the credit terms,
then we enforce them.
We wouldn’t dream of making a sale without agreeing the
price! So we must agree the payment
terms as well. “But our standard terms
are 30 days.” What if our customer’s
standard payment terms for suppliers are 90 days? We send a quote (30 days), they place an order
(90 days), we acknowledge the order (30 days), and they confirm (90 days). What credit terms have been agreed?
And the terms shown on our invoice or statement are least
helpful – they are post contractual, unless they have been agreed first.
Next time we will look at some of the issues about enforcing
the terms.
Debt collection
(1) (cashflow)
This story begins a short series about debt collection. Put yourself in the position of the directors
as you read it.
It was an engineering company, the two directors had built
it up from nothing over ten years. The
directors were in their early sixties and looking forward to retirement.
They produced specialist castings for the aerospace
business, and their biggest client was British Aerospace (this was back in the
early 1990s). They employed about 50
people, and the business was doing nicely.
Their main worry was the size of their biggest client – 75% of their
business was with BAe, and that was a lot of eggs in one basket!
Then the interest rate went up. If you’re old enough you’ll remember the
mortgage rate rising to around 15%. The
business rate rose to about 20%. Every
business responded by trying to reduce their overdraft: by putting pressure
onto their customers to pay more quickly, and paying their suppliers more
slowly.
Accordingly our company received a letter from BAe, saying
they were increasing their standard credit terms with their suppliers from 90
days to 180 days. Our company had nearly
£2m a year of business with BAe, and were only about £100,000 or so short of
their own overdraft limit. The bank had
made it clear that the overdraft limit would not be increased, and the letter
from BAe implied “agree if you want to keep our business.”
What would you do in the directors’ position?
The archive
How much? (3) (budgeting)
How much? (2) (budgeting)
How much? (1) (budgeting)
Buying clothes (profit)
Cutting waste (budgets)
Making the sale (profit)
Where's the money? (cashflow)
So what do customers think? (profit and budgeting)
Stocking up (cashflow)
Getting paid (cashflow)
Feeding the sheep (Return on Capital Employed)
Birds, booze & fast cars (budgeting)
Office admin (budgeting)
Summer holidays (profit & budgeting)
The shopping list (profit & budgeting)
Buying baked beans (profit)
Getting the car serviced (cashflow)
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Keep
coming back here - there'll be more!
Contact us at: alex@attainmenttraining.co.uk,
or telephone: 0121 276 0040
Find us on LinkedIn
© Attainment Training 2012 |
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