Friday, October 22, 2010

Two Biggest Cash Flow Issues for Business – Stock and Debtors!

There is a good chance that, in the course of running your business you will buy trading stock and/or make sales on credit.

That means you will have issues with matters such as

  • what sort of stock you should hold,

  • how much you really need, and

  • from whom do you buy that stock.

  • Managing and collecting debtors is a vital and often overlooked area of cash management in many businesses. Some customers will always try to pay you late. These people you need to identify early on and deal with (see below). They are not your customers.
    Two Biggest Cash Flow Issues for Business – Stock and Debtors!

    These are the two biggest areas in your business that can tie up bucket loads of cash.

    Trading Stock

    No one likes to run out of stock – it is inefficient and upsets customers.

    But having too much or slow moving stock is like putting cash on the shelves and sitting and looking at it all day long – a waste of time and money.

    Some years ago we were helping a motor vehicle repair shop with his cash flow. He had nearly $200,000 of stock – quite a lot of it way more than 10 years old. Most of the cars that it related to were at the wreckers!

    We asked him how much he could clear out and get – say $15k for. He sent nearly $50k “worth” of stock off to a dealer for the $15k. It was unsaleable to nearly anyone else. He cleared space in his storeroom and put $15k into reducing his overdraft.

    He then developed a more “Just in Time” approach to stock including express delivery with several suppliers.

    He ended up having about $100k in stock most of the time - a reduction of about $50k – which saved him about $4k a year – every year – on overdraft interest - and it cleared space in the storeroom – room for a card table – a fair outcome?

    What is your policy and program for managing your trading stock?

    Hint: When you are developing systems or processes – like holding a wide range of stock just in case a customer might come by needing an obscure part, remember this maxim:

    “You develop systems and policies to cover the normal majority of you and your customers’ needs. You do not develop systems around exceptions. You learn how to handle them as exceptions or emergencies – or you send them to someone else.”


    Debtors are your customers who buy from you on account and settle at the need of the month, or earlier – if you are good at controlling them. And controlling them is enormously important in managing your cash flow – and staying solvent.

    You are not a bank!

    Establish your terms of trade up front with each customer – and regularly review your debtor listing. Having said that most small businesses relegate this job to “when we get around to it because we are too busy doing other things” What!!

    If your trading terms are 30 days, then that is what your customers have agreed to – make them stick to it.

    Which brings us to the question – what trading terms are acceptable? You might check with your industry body or some others in your industry to determine how many days credit you might offer.

    Your invoices and agreements with customers must state clearly your terms and conditions – seek advice form your industry body or a lawyer if in doubt on any aspect of this.

    Controlling Debtors:
  • List your debtors each week by – current, 30 days, 60 days and over 60 days.

  • Ring those in arrears immediately the due date has passed – the first call should always be a pleasant reminder – most people will pay on time but from time to time just forget or misplace accounts.

  • Follow up a week later – be more insistent.

  • Send a letter promising legal action within 2 weeks of the second call

  • Refer hard cases to a professional debt collector

  • Adopt a fair but tough stance on repeat late payers – and put them on a cash basis or send them to a competitor if they do not mend their ways.

  • Your good customers will accept your efficiency in this area – and the bad will exploit you if you are lax and leave if you pursue them – which is what you want really.

    Manage your cash flow and you will have money in the bank and be more able to invest in opportunities that will grow your business.

    Or you could just go to a better class of restaurant.

    Want to know the secret of preparing your business for the worst? You can do it free for 30-days by trying this amazing Australian cashbook software – Cashflow Manager!

    Author Profile: Wayne Burgan

    Australian CPA Wayne Burgan founded Cashflow Manager – the simplest small business accounting software on the planet! Wayne realised that the biggest problem faced by the majority of small business owners could be traced back to not understanding the bookkeeping side of business while running his accounting practice. He was also aware that small business owners want to keep proper accounting records but fail to do so.
    Follow Wayne in Twitter at

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