IT’S YOUR MONEY, SO COLLECT IT!!!!
There is a huge difference between making a Sale (that shows in the Profit and Loss Account) and receiving the Cash from that sale and the funds showing in your business bank account.
Too often businesses state that they are making a good profit but neglect to collect the proceeds and as a result their “Working Capital” position deteriorates. Every sale you make is funded by your Working Capital.
To maintain a healthy “Working Capital” position is one of the greatest challenges facing any Small to Medium Business (“SMB”) today.
If you make a Sale for any of your products or services, the money due is YOURS and hence the title of this article.
Collection of the funds from a sale can in part be eased by ensuring that your client is clearly aware of your Terms of Trade (“TOT”) and these will probably need to be prepared so as to comply with the Personal Property and Securities Act (“PPSA”) which was implemented in early 2012.
Any SMB that does not have an understanding of the PPSA and the registration process (“PPSR”) should familiarise themselves with it urgently otherwise they may be at risk relative to the products they are delivering to clients. The link for PPSR is: – http://www.ppsr.gov.au
Although having an agreed TOT is necessary, that still does not mean that your clients will pay you within those terms! You will need to have a suitable collections process established to ensure prompt payment by clients.
SMB’s cannot afford to wait for any great length of time before they are paid for products/services delivered.
Have a look at the following time line diagram: –
|Day 1||Day 35||Day 90||Day 120||Day 121|
|Buy Stock||Pay for Stock||Sell & Deliver Stock||Invoice Paid||Cash Received|
|Negative Cash Flow||Negative Cash Flow||Negative Cash Flow||Positive Cash Flow|
To explain: – you pay your supplier 35 days after ordering the stock; you sell the stock (or part thereof) and deliver it to the client on Day 90 expecting the client to pay you within 30 days (i.e. Day 120) such that funds are in your account on Day 121.
Thus, there are 86 days of the above cycle when your money is in the hands of either your supplier and/or your customer! Those days could extend beyond 86 depending on whether the client decides to “string you along” and drag out the payment of the outstanding invoice.
No SMB can afford to wait for 86 days before they get paid so follow-up with your client regularly relative to your TOT and endeavour to collect the funds as soon as possible.
If your “working capital” is being diminished and you need some more there are some options for you to consider: –
1. Speak to your banker and see if they will provide an overdraft. They will require (normally) some security and certainly a look at your financials. Remember an overdraft is a “short term” facility and should not be used to acquire “long term assets”!
2. Invoice Funding/Debtor Finance. A financier “buys” your receivables and provides you with a percentage of them and they act as the collector of the outstanding amount. Costs of this type of funding can vary considerably so make sure you know what the costs are before you initiate. Have a look at: – http://www.cashflowadvantage.com.au/
3. As the business owner, you may have to inject some equity/net worth into the venture from your personal resources.
4. If you are an importer/exporter trade finance is always a possibility but again be aware of any costs to ensure it doesn’t cost you more than the benefit it achieves. Have a look at: – http://www.cifgltd.com
5. Always consider the most appropriate methodology relative to plant and equipment acquisition. e.g. leasing of equipment will conserve your working capital but you do pay interest on the amount of the lease. Always speak to your accountant before entering into any financing arrangement to ensure that the maximum taxation advantage applies.
6. Endeavour to negotiate more flexible credit terms from your suppliers. This can be very cost effective and normally no charges apply. As a rule of thumb, normal credit terms are 30 days but if you can negotiate 60 days from a supplier it will ease the cash flow drain on your business.
7. Monitor “stock turn” (the time it takes to turn your stock over) to ensure that all your items are moved quickly with no obsolete items held. Ensure you have a good system as that can be of great assistance with quoting, delivering and invoicing. Remember that whilst stock is sitting in your storeroom, it is not earning you any money!
8. Make sure you have an adequate accounting/inventory system that is always kept up to date. If possible, link (in the case of a retail operation) your sales software to your inventory so that stock levels are adjusted as sales are made. Always do regular “stock takes” to verify “actual” to “theoretical”.
9. If you have difficulty in following up outstanding payments beyond your TOT, then you would be wise to consider engaging an accounts receivable specialist to act on your behalf as your “Financial Controller”.
Have a look at: – http://www.arswa.com.au as an option.
Don’t hesitate to give me a call for an obligation free chat if you require any further information.