I was reminded last week, whilst speaking at a
Planning Workshop, of our very first client. We were discussing cash flow and
how to close the cash gap that is evident in almost every business (companies
like Dell are changing this). Back to my first client, it became evident that
he had lost control of his business. Whilst he was paying the interest on a
rather large overdraft, the guy whose role it was to collect the money was
failing to do so, because he didn’t like asking for it!
In this business, debtors had risen from 68 days to
132 days and that meant that if we could return his debtors back to 68 days we
would put £492,000 back into the business owner’s bank account. Like so many
business owners out there, he had no structured way of chasing his debtors. Very
little was measured, there were no targets and the whole system was reactive
instead of proactive.
Cash flow (or lack of it) is the cause of many a
sleepless night for business owners all over the planet, mainly because there
are no systems in place to collect the money that is due.
What I would like to do is share a really powerful technique
I used with my first client that had a profound effect on the way he looked at
his debtors.
Terms
of trade – are you becoming someone else’s bank?
What are your terms of trade? From day one with a
new customer you are educating them on how to do business with you. So, if you
have a problem with debtors, first place to look to fix the problem is in the
mirror! Ask yourself why am I offering my present terms? If you offer 30 days,
why not 21? If you offer 21 why not 14?
Most owners are too nice, and feel they have to offer long terms to win
the sale. The challenge is that they are, in actual fact, turning their
businesses into a bank. The money that should be in their bank accounts is
instead in their customers’ accounts, possibly earning interest!
So tip one: take a good look at your terms and what
assumptions are you making?
Take
a look at your outstanding debtors.
This should be very familiar to you because, unlike
the client above, you will, I’m sure, be looking at it on a regular basis, at
least monthly. Alongside each debtor you will normally have brackets for
outstanding days 0-30, 31-60, 61-90, over 90.
Let’s assume a business with £200,000 outstanding
debtors it could break down like this:
0-30: £80k, 31-60: £60k, 61-90: £40k over 90: £20k
Next step would be to turn these into percentages so
in our example
0-30 is 40%, 31-60 is 30% 61-90 is 20%, over 90 10%
What I would like you to consider is that the 0 – 60
day debtors is your cash flow and the 60 – above 90 are your profit. As you can
see your profit is in a very precarious position the older the debtors the
slimmer the chances of them paying. You have some big decisions to make about
dealing with these customers in the future.
Now armed with this information you will want to set
some targets for a shift in the percentages, assigned to each debtor’s period
for instance:
0-30 will move from 40% to 58%
31-60 will move from 30 to 35%
61 – 90 will move from 20% to 5%
Over 90 will go from 10% to 2%
The key action you must now take is to decide who
you are going to chase. As a suggestion, I would advise you look at spending
most of your time on the customers that owe bigger sums of money. This might
sound like a bit of common sense, yet, in my experience, when it comes to
chasing debtors common sense isn’t that common. A key thing to remember here is
that it is YOUR money you’re asking for!
To recap take a look at your debtors and look what
the percentage split is across the four date periods. Set targets for the ideal
split you would like to see in the future. Make sure whoever collects the debts
is aware of their new targets and the fact that they will be held accountable
to them and also make sure there is a much bigger focus on the bigger sized
debts.
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