Debt Management
Keeping the Eye on the Ball
You are working long hours and very hard … that must mean the business is doing well – shouldn’t it?
With 24% of business’s failing in their first year, it is vital that owners/managers keep an eye on the ball …. which means regularly looking at and understanding some key financial reports. It is continuously surprising the number of businesses that either do not regularly produce nor review financial reports. So how do the business owners/managers know where they are at and where they are heading? The simple answer is ….. they don’t.
Following are the suggested minimum reports to produce and review.
Profit & Loss: This report indicates the revenue and expenditure, and therefore the net profit or loss, for a specific period. When preparing the Profit & Loss, not only is the bottom line important, but equally critical is the percentage of each expenditure to sales (not wages to sales).
Cashflow: The cashflow statement shows all sources and uses of a business’s money during the accounting period. Businesses that have not or do not produce cashflow statements are unlikely to know of cashflow problems until they physically happen. This statement is fundamental to the good health of any business.
Balance Sheet: The balance sheet is based on this equation: assets = liabilities + owners’ equity. It lists everything the company owns (assets), everything the company owes (liabilities) and the value of the owners’ ownership stake in the company (owners’ equity, or capital).
Budget: Budgeting is the process of trying various mixtures of resource allocation, until one particular combination emerges which best meets the spirit, direction and outcomes in view of the goals and objectives of the business. When a budget is completed (refer “At a Glance” (in the margin left) for tips on developing a Budget) it is critical to monitor progress against the budget to make any necessary adjustments sooner rather than later (when their may not be sufficient resources to allocate). With history, budgeting becomes more robust in businesses as fixed costs become more routine and planning for potential recurring costs more sound.
Debtors: Debtors are people who owe the business money (also referred to as “accounts receivable”). It is important to monitor debtors particularly those not paying. Good business practice includes communicating the terms of debtor arrangements clearly before allowing a payment on credit. All businesses have a clear legal obligation to be able to meet debts as they occur. Therefore, it is critical that all businesses have funds available to meet their costs. If businesses have debtors outstanding for lengthy periods, then businesses’ ability to pay its debts is strained.
Balanix Solutions Accounting Services
FAQ – Debt Management Solutions
CPA | Accountant | Business Advisor
Q: My Receivables are blowing out with more customers taking longer to pay and the timeframe for payment extending. I am experiencing quite a hit on my cashflow so what can I do to improve the situation?
A: The first thing you need to do is make sure you have terms of trade established with all your customers. What do I mean by terms of trade? Terms of Trade should set out on what basis you are selling your goods/services (eg cash on sale, payable within seven days of invoice date, 30 days after end of month) and whether there are discounts for early payment or penalties for late payment. They should also set out whether the customer will be liable for any costs incurred in attempting to recover amounts owing.
Once you have a policy in place make sure you enforce the terms of trade policy. Remember it is your money and unless you are a financial institution which lends money it is not your business to fund customers’ Cashflow. What you educate customers to do is the way they will respond. That is, if your terms are seven days and you allow clients twenty-one days before you chase them for payment what are you saying to them about your terms of trade? Is it seven or fourteen or twenty-one days? If your customers are educated by your actions (rather than your Terms of Trade) you will have trouble re-educating them as to what you real terms of trade are (but, if you are in this situation, you are going to need to try and change things).
So the day after monies are due (and not paid) send a reminder statement or make a friendly phone call reminding the customer the account is overdue and that you require payment. If reminding by phone, get a commitment from them and record the commitment in your system. If this fails follow up with a letter reminding them of their commitment and what the consequences of non-payment is, as per your Terms of Trade. Unless your client can show some extreme reason why you shouldn’t follow through with the stated consequences – then follow through. You may end up losing a couple of customers but are they reallythe customers you want in the first place?
Also encourage customers to speak to you in advance if they are having problems with cashflow and payment of accounts. Remember we all have problems from time to time and most times we can work through them if there is early communication between the parties involved. Offer a payment plan if this suits your buisness (any money coming in is better than none being chased).
If you need any further help with Debt Management and Cashflow, call me 07 3264 4783 (ask for David Balwin) or drop me an email ( info@balanixsolutions.com.au ) – I’d love to help!
