Manage Debtors And Creditors To Improve Liquidity

Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business High stock levels use valuable working capital which is offset in part by the level of creditors. Stock levels are crucial to financial management of the creditor total. 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. General creditors are a major area to be addressed in terms of both the amount of credit received from suppliers and the time required to pay those creditor accounts.
A sensitive area since it involves the most important people to the business success but adopting a payment period to coincide with the receipt of cash from customers may in some circumstances balance liquidity. Every opportunity should be considered to improve liquidity and that would include the frequency which employee salaries and wages are paid. 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. Small business have alternative payment terms available for the payment of taxes. Consider the frequency of all payments made to suppliers.
Creditors and expenditure management The objective is to extend the time allowed for payment of expenses the business incurs. A bad debt not only uses valuable resources in chasing the debt with the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business. Bad debts have a double impact on any business and all possible steps should be taken to reduce the risk. Factoring has the disadvantage of often not being cheap but does have the advantage of generating a regular stream of cash. 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.
In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business to claim interest and costs. Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. An essential process in the credit control procedure would be to ensure the accountant or bookkeeper always issues sales invoices and customer statements promptly. 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.
Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis. All new customers where credit check details are not available should be invoiced by the accounting function on a pro forma basis. New customers should be subjected to a strict credit check. Review this practise to obtain a greater proportion of payments faster to improve liquidity.
In some businesses it would be appropriate to obtain up front deposits and scheduled payments. Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income. Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients.
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. A business that runs out of cash resources is dead in the water. The situation is recoverable by producing higher sales and reducing costs and expenses. 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.
Sales turnover and net profits may follow a rollercoaster pattern familiar to most business but when the cash flow dries up the game is over.