Higher Stock : Manage Debitors And Creditors
Manage Debtors And Creditors To Improve Liquidity
Urgent attention to the management of working capital can provide every business with the cash resources to exploit its potential. Most businesses will experience periods of lower sales and times when losses may be incurred as expenses exceed sales income. A business that runs out of cash resources is dead in the water.
Debtors and sales income management
The objective is to obtain payment from customers as fast as possible improving cash flow and minimising the risk of bad debts and not being paid at all.
Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. New customers should be subjected to a strict credit check. Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis.
The credit control function needs consideration from the first step of issuing customers with a sales invoice, producing customer statements of the debt owed and a set procedure of credit control letters and telephone follow ups that actually achieve the end result of getting the cash in. Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. Consider the possibility of factoring sales invoices due from debtors either by selling the sales invoices to a third party or raising cash on the value of those invoices pending payment.
Creditors and expenditure management
The objective is to extend the time allowed for payment of expenses the business incurs.
Small business have alternative payment terms available for the payment of taxes. In the UK value added tax can be paid quarterly or monthly, vat cash accounting can ease the tax liability due in critical periods and paye payments can be paid quarterly rather than monthly for smaller businesses.
Larger orders on extended payments terms creates a risk area should the goods not be used but can greatly assist cash flow as the business is effectively borrowing free cash from its suppliers.
Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business.