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www.craigscopy.com | Module 9. cash flow formula v1.3

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Ninth part of a 10 part series from the presenters of Finding Cash in Your Business podcast and book. Get Cash in quicker, handle it better and leverage it's power.

Ninth part of a 10 part series from the presenters of Finding Cash in Your Business podcast and book. Get Cash in quicker, handle it better and leverage it's power.

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    www.craigscopy.com | Module 9. cash flow formula v1.3 www.craigscopy.com | Module 9. cash flow formula v1.3 Presentation Transcript

    • Finding Cash in your BusinessWays to find cash you didn’t know you had, and attract cash you didn’t now you needed.The essential business guideModule 9 Credit Control
    • Learning objectives
      Meaning of Audit
      Painting over the cracks
      The Bar Tab
      Record keeping
      Top tip
      Cash collection
      Debtor profile
      Scatter
      Cash collection forecast
      Booking revenue
    • Painting over the cracks
      The visit with the Salesman was instigated after the first invoice had gone unpaid. As we walked up to the door of their building I had a feeling something was just not quite right, and it may have been the peeling paint. The customers company specialised in Exterior Wall Coating i.e. House painting, offering an expensive but guaranteed product which, would last 20 Years.
      On ringing the doorbell we were ushered up a rickety staircase to a poorly painted office past the open plan call centre where the state of the art phone system provided by our company was looking worse for wear. A few dubious individuals held our gaze as we were shown into the manager’s office, on retrospect they may have been wondering if we would come out alive.
      The Manager looked rough and there was a distinct competitive smell of sweat and alcohol in the Office. He used the best language he knew to colourfully apologise about the bill and explain that the company was experiencing a temporary cash flow problem and assured us that the situation would be resolved in the next few days.
      Call me intuitive but as I looked at the tattoo on his neck that read “cut me here with a dotted line” I just did not believe him. However, true to his word a few days later the situation had been resolved as he, the company all of our kit disappeared.
      The company had invested thousands of pounds connecting them to the network and supplying them with state of the art telephone system. Getting rid of the Salesman will not resolve the issue it is just painting over the cracks. The Sales Sales order process needed to be improved to filter out high-risk customers.
    • Audit: an evaluation of an organisation’s accounts, typically by an independent body.
      The Bar Tab – Give me Credit
      It is always easier with a bar tab. When you order a drink, or food you just tell the bartender to “put it on my tab” and it's done. No messing around with cash here! A distinct advantage if you are on holiday by the pool. Finally asking for the bill after a week by the pool you are faced with the insurmountable task of reconciling the paperwork, it becomes easier to carry out a random audit.
      Make sure the paperwork is good - questions will be asked
    • Record keeping
      I was once involved in resolving a billing overpayment dispute identified by a customer, the amount of money involved was about £1 per transaction, the problem was that there were around 700,000 transactions. Poor records on both sides meant that building a customer agreed audit trail took several months, agreeing the billing overpayment amount including interest and implementing the billing system correction several more. Interestingly, where the customer’s records were considered accurate their estimate of cash rebate was accepted. The value of good records is priceless; the total cost incurred in resolving the dispute was probably double the cost of the overpayment.
    • Top tip: Set individualCustomer Credit limits and sick to them
      Cash Collection
      The customer has the service or product, sales commission has been paid and ALL that’s left to do is get the cash in from the sale. This module deals with you customers’ debt and helps you stop it going bad.
       
      In 2002 the regulator allowed BT to reduce it’s exposure to bad debt by allowed it to credit vet all Telecommunications companies that wished to interconnect with BT. BT having SMP (Significant Market Power) status is obliged to meet all reasonable requests for interconnection from other operators seeking access to its network.
      The problem for BT is that interconnect charges are usage based and that means that telecommunications companies could build up huge bills and then go bust before BT received any payments.
       
      BT felt that under the Turnbull requirement of the stock exchange combined code in respect of corporate governance and risk management it would be in breach if it did not try to protect itself against the serious bad debt risk.
      In 2000/2001 three telecommunications operators went into insolvency creating a bad debt with BT of £200,000; in the latter part of 2002 BT experienced a bad debt charge of £79m as a result of severe liquidity problems in the telecommunications media and technology sector.
      The Credit Crunch has created a market where debt amongst companies’ customer base is on the increase. Credit vetting customers before accepting an order provides an early warning system.
      ____
      Business Aid
      Please give in a timely manner
    • Debtor Profile
       Understanding the current makeup of your debtors is key to developing controls to tackle debt before it goes bad. The Figure below shows a typical four calendar month debtor age profile. The debtors have been banded together to highlight late payments. The profile is skewed by a small number of large customer debts, which are more than 90 days overdue, and may develop into bad debt. If you see this profile you need to congratulate yourself, you have just become the lender of last resort.
       
      Obviously if holidays create short working months this will have an effect on the total cash generated. Holidays create the possibility of missing customers billing cycles – so remember to send the bill early.
       
      It can be seen that the majority of bills are paid within 60 days.
    • Scatter
      The Scatter diagram shown below plots the 60-debtor day profile for a month, visually highlighting the amount of cash that is locked up in overdue bills and the customers who are abusing the payment terms. It would be wise to create Scatter diagrams for bills overdue in bandings of 30, 60, 90 and 120 days. The Scatter diagram should be used to prioritise the effort required in debt collection. Always prioritise debt collection by size of debt and not alphabetical name order.
    • Cash Collection Forecast
      Once the sales person has achieved the sale the responsibility for collecting the monies owed falls to the credit control team, where debts are assessed and prioritised. The credit control team will process a stream of telephone calls and letters, which escalate the situation until the bills are paid, or the legal department is required to get involved.
      The Figure below displays a typical cash collection forecast the real cash flows into the business. Businesses who do not manage cash collection well end up writing of a substantial amount of turnover as bad debt.
    • Booking revenue
      Let’s say you bought the “Finding Cash in your Business” book for £9 from a salesman and the company invoices you at the end of the month. £3 of the sale pays the salesman commission and general expenses and £3 covers the cost of manufacture. So the company has made £3 of cash from the sale of the book.
      Now I know this is hard, but just imagine that you decide not to pay the £9. Frankly I would be mad, the collections department will try to pound you into submission with final demand letters but finally as it would cost too much to send the boys round, and after a couple of months the accounts department will write of the debt.
       
      In accrual-based accounting £9 will have been booked to revenue, the salesperson will have been paid their commission and for a few months and I will be carrying a healthy profit margin.
      When the collections department write off and expense the £9, in cash terms over the last 3 months you have cost me an additional loan for £6 plus interest. This assumes that you are an isolated case and that I can get access to the £6 if not the business goes under.
       
      Take note, actual Cash flow cannot be based on accounting revenues, or on expected receivables based on the working capital cycle, the only true measure of cash in is held within the credit control function.
    • Conclusion
      It amazes me how much companies are willing pay in their pursuit of payment defaulters. Companies invest significant amounts in agencies that offer just the chance that debt recovery may be possible. The real cost of cash recovery may amount to a significant portion of the original debt, and yet something internal says that it is a crusade worth completing. Far better to concentrate on managing the sales order process better everything else is just painting over the cracks.
    • Conclusion cont.
      Rather than bury your head in the sand there are a few things that can be done to improve the credit control. They are:
      Sales order process
      • Credit checking must be completed before any new customer is signed up for service, and that should be against the legal entity to which the contract of service is enacted.
      • Set agreed individual customer credit limits
      • Your Business should set up an automated process for monitoring customers’ payment habits so that internal costs are kept low and payment irregularities can be easily spotted and investigated.
      In-life customers
      • For customers who have large outstanding balances it would be good practise to check their current credit rating regularly to avoid the possibility bad debt.
      • Cash collection should be prioritised by size of debt.
      • Customers who consistently delay bill payment should be sent their bill a month in advance, this will help to identify credit risk customers before they amass large debts.
    • Quiz 1 of 2
      What is an Audit?
      An evaluation of an organisations accounts.
      Something typically completed by an external body.
      An efficiency check.
      All of the above
      Why is it important to keep good records?
      In case a dispute breaks out.
      Records allows you to be confident of the facts.
      Good records keeping will stop errors occurring.
      Good record keeping allows ease when transitioning responsibility.
      All of the above
      What are some ways you can filter out high risk customers?
      Visit the premises.
      Get a credit vet completed.
      Ask for references.
      Pay as you go - Get money up front
      All of the above
    • Quiz 2 of 2
      Where can I get a true view of Cash in flow?
      The Accounts.
      Cash Flow forecast.
      The Credit control.
      The Bank
      All of the above
      How should you initially prioritise debt collection?
      By size of debt.
      Alphabetically by customer.
      Length of outstanding debt.
      Time in the month.
      All of the above
      Why should you try and understanding the profile of your debtors?
      This help to identify poor paying customers
      Visibly shows the size of the cash locked up in debt.
      Companies who do not treat bills with absolute respect may be only interested in short term trading.
      Helps to keep on lid on debt.
      All of the above.
    • To contact the author: craig@craigscopy.com
      Finding Cash in your BusinessWays to find cash you didn’t know you had, and attract cash you didn’t now you needed.
      Here’s some other free resources you’ll enjoy.
      Podcast: http://itunes.apple.com/us/podcast/finding-cash-in-your-business/id347814983
      Blog: http://craigscopy.blogspot.com/
      Tweets: http://twitter.com/craigscopy
      Here’s the answers to the questions:
      4. 5. 5. 1. 5. 3.
    • What next
      The next chapter provides a quick summary of the Cash Flow Formula.