Cash is King

Cash is king – Debtors are dead money

Cash is king

Cash is king

Following on from a previous article on the problems of holding stock, another area that cannot be ignored by a big and small business owners are Debtors (unpaid sales invoices).

Good Customers

It is always worth identifying your good customers. For me, the key criteria for someone to be considered a good customer, is that you are paid in full, on time. You may have a long list of other features that would make a good customer, but for me the absolute best customer would be one that pays upfront when they place an order.

Why is this a good customer? Because you never have the worry that you will not get paid! And yet for most companies, this type of customer is almost certainly brand new with no track record. Once they have proved that they can pay upfront, normally after 2 or 3 orders, we offer them time to pay (credit). And then, we the supplier, have the administrative problem of chasing the debt in, sending statements, making telephone calls, checking bank statements, etc. Would you be better off offering a better price for continued payment up front?

Bear in mind that the money that would have come to you has almost certainly gone to pay someone else. It does not sit in a deposit account for 30/60/90 days. In my experience, suppliers that need to be paid upfront are prioritised, if you offer credit you get bumped down the list, if necessary.

Everyone Offers Credit? No they don’t!

Many small or new businesses believe that it is a normal business practise to offer credit to customers. In reality, this is not the case and if you can avoid it, you should. With the rise of credit/debit cards and internet banking, funds can be transferred instantaneously. So you the supplier can make the rules. Growth may be slower, but your administrative costs and bank charges will be lower, if you get paid up front.

If you decide to offer credit, then you need to decide what your credit terms are and stick to them. Customers will probe your defences and many (not all) will take advantage. Make notes on your customer database or CRM system of all conversations and promises of payment. Do not make idle threats of non-delivery or legal action, when in reality you do not have the time, resources or inclination to follow through. You will identify patterns with late payers, but those that want or need to take advantage will also identify your procedures.

If you are having problems in getting paid, think twice (perhaps even three times) about doing any more work or supplying further goods on a vague promise of future payment. There is always a temptation to chase sales, so be careful that you do not throw good money after bad.

Cash is King

Cash is king, it always has been and always will be. Offering credit reduces your bank balance, reduces your choices and increases your business risk. Bad payers are bad customers and you need to avoid them or at the very least, control them.

 

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About the Author

Brian RussellBrian Russell FCA is a Chartered Accountant with over 30 years of experience working with owner managed businesses in North East England. He formed Russell & Co in 2000 to build upon his experience to provide high quality part time financial directorships for smaller companies particularly in Newcastle upon Tyne and Northumberland. Russell & Co is based in Ponteland.View all posts by Brian Russell →