Thursday, 14 June 2012

Cash is King

“Cash is King”, a very important person once said that to a group of us assembled at a business meeting in a large company where I was employed as a Cost Accounting Supervisor.  I rolled my eyes and thought this guy is full of hot air, as it turns out he wasn’t.  Well in some respects he was, but not when it came to his comments about cash.  I learned a few things, as the Financial Controller in a small high Tech company about the importance of positive cashflow that I would like to share with you.

When you run a small to medium business you focus on sales, attracting customers, bringing them on board, making the sale and shipping the product.  The sale is everything but it isn’t really.  The cash you collect from your customer is everything.  If for whatever reason your customer does not pay then the sale has no meaning.

There are things you can do to protect yourself against accounts receivable loss as we “bean counters” like to call it.  It does require a bit of effort upfront but the payoff is worth it in the end.  Decide how you want to manage your customers from a payment perspective.  Will they pay by credit card, Paypal, letter of credit or payment terms.  There is a cost to you if you take the credit card or Paypal option (often 1- 3% of the payment amount) but it is a 100% guaranteed payment.  Many customers will not choose this method to pay if they are buying large ticket items due to credit card limitations or the cash constraints of using Paypal.  Letters of Credit are very helpful in a situation where your customer is in a distant location and you are concerned that there is no certainty of payment by other means.  Letters of credit can be cumbersome and require some special in-house capabilities to ensure all the requirements of the letter are doable.  Commercial banks can be helpful to walk you through any knotholes you may encounter using the Letter of Credit option when there are no other options.

Payment terms have (net 30, 45, 60 days payment) been the most common method of payment used in the industrialized world in the past decades.  It can be very frustrating in some situations when you have in good faith offered a payment term of say Net 30 days and your customer still has not paid after 60 days.  There are several things you can do to avoid the pitfall of the dreaded accounts receivable write off.  Know your customer, not that their kids names are Fred, Harry and Jill but about their business.  When you receive a purchase order from a new customer ask for trade references and follow them up.  Look your customer up on the internet, are they a small business just established or large and have been around for many years.  If you have any concern about ability of your customer to pay, set a low credit limit, and stick to it.  Use a software package such as OfficeBooks to manage your invoicing, accounts receivable and outstanding payments.  The OfficeBooks dashboard shows at a glance the cash owed by customers.  A click of the mouse will reveal the details behind the number and which accounts require follow up.   Continuously monitor customers for payments extending beyond payment terms.   Follow up with your customer and keep an open and cordial dialogue to ensure your payments are received.  This is one of the more important activities in your business.  

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