Unless your company operates in the retail sector, where cash sales are a major part of the operations; extending credit to customers is unavoidable. It is because of the need for credit sales, that you have to have an eagle's eye that focuses on it' s prey- your debtors.
Without a constant flow of cash, your business will go under. Good debt management therefore ensures continued inflow of cash. Key elements in debt management include:
l . You must know all your debtors and when their debts are due far payment.
2. Management must optimize their debt collection system, to ensure all customers pay when their accounts are due. Strict monthly debt age analysis is a must in this respect.
3. Identify all problem or late paying debtors and put a "no supply" tag on their accounts. At the same time. legalize and charge a late payment fee on these accounts. A percentage equal to the bank lending rate is recommended.
4. Wherever possible no debtors should be allowed to "keep your money" for a period more than is agreed upon. This is because you must avoid putting more of own or borrowed money into the business. The business must generate its own cash. Credit sales are a major source of that cash.
5. Because your business operates in a competitive market, if your competitors offer credit terms. so must you. However. in doing so. remember. the more generous the terms, the more expense for the seller. In the circumstances. you must perform a balancing act ; between giving good terms. which attract customers. therefore more sales; and having a strict collection pol icy which minimize s cash out lay but
could alienate customers.
6. Remember. whatever policy you pursue, stocks must he converted into cash quick enough, to meet the time table for payment of your own cash flow pressure points; such as: creditors. wages, taxes, rentals. electri city, work in progress and other inevitable cash commitments.
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