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Cash flow and cash management

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					     Cash Flow
& Cash Management
  Glen Bullivant FICM
 Metropole Hotel, Leeds
   7 February 2012
Back to basics!!

• Credit Policy
• The Cost of Credit & The Effect of Credit
  on Profits
• Setting Credit Limits & Monitoring
  Performance
• Collections
• Legal action
CREDIT POLICY
• Objectives: protection of investment in accounts receivable
• Policy: payment terms should not exceed x days
• Procedures: how we will implement the policy
• Agreed and Endorsed: Sales/Finance/Chief Executive
• Published: available for all
• Arbitrator: who has the final say
• Authority: where we stand in the company
THE COST OF CREDIT

• SALES                        12,000,000   COD
• DEBTORS                               0
• PROFIT                         600,000
• (5% before cost of credit)

• COST OF CREDIT                       0

• NET PROFIT                     600,000
THE COST OF CREDIT

• SALES                        12,000,000 1 month
• DEBTORS                       1,000,000
• PROFIT                         600,000
• (5% before cost of credit)

• COST OF CREDIT                (120,000)   1% per month




• NET PROFIT                     480,000
THE COST OF CREDIT

• SALES                        12,000,000 3 months
• DEBTORS                       3,000,000
• PROFIT                         600,000
• (5% before cost of credit)

• COST OF CREDIT                (360,000)

• NET PROFIT                     240,000
THE EFFECT OF CREDIT ON
PROFITS
• COMPANY A:

•   SALES            12,000,000
•   CREDIT DAYS 60
•   DEBTORS           2,000,000
•   PROFIT              600,000
•   COST OF CREDIT     (240,000)
•   NET PROFIT        360,000
THE EFFECT OF CREDIT ON
PROFITS
• COMPANY B:
• SALES            16,000,000
• CREDIT DAYS 90
• DEBTORS           4,000,000
• PROFIT              800,000
• COST OF CREDIT     (480,000)
• NET PROFIT        320,000
THE EFFECT OF CREDIT ON
PROFITS
• COMPANY C:
• SALES            15,000,000
• CREDIT DAYS 90
• DEBTORS           3,750,000
• PROFIT              750,000
• COST OF CREDIT    (450,000)
• NET PROFIT         300,000
THE EFFECT OF CREDIT ON
PROFITS
• COMPANY D:
• SALES             18,000,000
• CREDIT DAYS 120
• DEBTORS            6,000,000
• PROFIT               900,000
• COST OF CREDIT      (720,000)
• NET PROFIT         180,000
WHY REDUCE DEBTORS?
• SALES          12,000,000
• DEBTORS         3,000,000 3 Months
• FIN. COSTS        360,000 @ 12% p.a.

• SALES          12,000,000
• DEBTORS         2,000,000 2 Months
• FIN. COSTS        240,000 @ 12% p.a.

• So reducing debtors by 1 month saves £120,000
  per annum!!!
Setting Credit Limits

• Define how limits to be used – barrier or
  guide
• Limits to reflect actual trading
  requirements
• Limits linked to risk categories
• Subject to review – up as well as down
• Begin with risk assessment
Risk Assessment
• Correct customer identity
• Correct addresses for delivery, invoice and
  statement
• Distinguish between credit worthiness and
  credit ability – assess for both
• Risk categories
• Credit manager’s job is always to find a
  way of saying “yes”
Monitor performance

• Internal


• Customer
Internal – DSO measurement
•   TOTAL DEBTORS AS AT 31 DECEMBER            7,539,410
•   DEDUCT DECEMBER SALES                     (3,962,804) = 31 days
•   BALANCE                                    3,576,606
•   DEDUCT NOVEMBER SALES                     (3,297,481) = 30 days
•   BALANCE                                      279,125

• The balance figure of 279,125 = 9% of OCTOBER sales = 2.7 days

• Total DSO is therefore 31 + 30 + 2.7 = 63.7 (or 64) days

• If debtors at 31 December = 7,539,410 = 64 days, then ONE DAYS
    SALES = 117,803
•   Therefore to reduce DSO by one day, it is necessary to collect an
    EXTRA 117,803 each and every month
External – Payment Performance

•   Monitor each account
•   Look for early warning signs
•   React quickly to any change in pattern
•   Be prepared to apply sanctions
•   Be prepared to apply flexibility
•   Negotiate
•   Remember – a loss in respect of debt is also a
    loss in respect of turnover
QUERY MANAGEMENT

• Not all customer queries are false
• Not all customer queries are delay tactics
• Not all customer queries are genuine
• Record
• Analyse
• Resolve
• Get it right first time, every time
Query Analysis
•   Price            • Special deal arranged with
•   Discount             Sales
•   Shortage         •   Wrong rate of VAT
•   Damage           •   Errors in extension
•   Model            •   Wrong address
•   Size             •   Wrong description, or
•   Colour               misleading description
•   Early delivery   •   Insufficient details
•   Late delivery    •   Customer order number
•   Credit terms     •   Unable to match to order
•   Credit limit     •   Unable to match to quotation
•   Wrong delivery   •   Wrong name
QUERY RESOLUTION
•   Set timescales
•   Escalate
•   Explain effect on cash flow
•   Record values as well as types
•   The sooner resolved, the sooner payment can
    be released
•   Always note on customer file
•   Always note on ledger – do not “chase” genuine
    query customers until satisfied that resolved
Collections

• Letters
• The Telephone
• Fax
• Email
• Visit
COLLECTION LETTERS
• Address to a named individual       • Avoid phrases like “within
    (or at very least a job title)        seven days” – it is always
•   Sign it personally                    much better to give an actual
•   Indicate the sender’s job title       date by which payment
    as being one with authority           required. Better still, payment
                                          “by return”
•   Show a phone extension            •   By definition only one FINAL
•   Show an email address                 letter!
•   Ensure accuracy                   •   Keep the buyer informed –
•   Keep it simple and direct             he/she may be influential
•   No more than one page             •   Keep Sales informed – ditto
•   Amount claimed in a               •   Do not always assume the
    prominent position at the top         worst (unless you know
•   Show how the debt is made up          different!)
                                      •   Therefore:
COLLECTION LETTERS
• Dear Mr Barron
•                        £1,327.56

• Our last statement showed in detail the amount of £1,327.56 which
  is overdue for payment.
• Please pay this amount to us by return, or alternatively let me know
  immediately of your reason for non payment.

• Yours sincerely

• G Bullivant, Credit manager
• 01555 329325
• gbullivant@widgets.com
COLLECTION LETTERS
• Dear Mr Barron
•                           £1,327.56

• We wrote to you on the 15th about the above account, but have not
  had the courtesy of a reply.

• The account is now seriously overdue and we must insist on full
  payment by return. Failure to respond may result in the account
  being placed out for collection, with possible extra costs being
  incurred

• Yours sincerely

• G Bullivant etc
COLLECTION LETTERS
• Dear Mr Barron

•                OVERDUE ACCOUNT £1,327.56

• It is regretted that no response has been received to our previous
    reminders. No further goods will be supplied and your credit facility
    has been cancelled.

• Payment in full is now required by January 22, failing which the
    account will be placed into the hands of our debt recovery agents
    LCL Law for collection.

• Yours sincerely etc
COLLECTION LETTERS

• Identify the decision maker
• Personalise as far as practicable
• Be ready to offer “assistance”
• Make it clear you mean what you say
• NEVER threaten unless you are prepared
  to carry it through
• Keep within the law!
THE TELEPHONE

• THREE KEY STAGES

1.Preparation

2.Calling

3.Closing the call
THE TELEPHONE

• Before picking up the phone: ensure that
 you have all the available information
 ready to meet any circumstance – do not
 put yourself in the position of having to
 call back. “Static” data to hand includes
 name, phone number, last actions) and
 “Live” data includes account details and
 the order file.
THE TELEPHONE
• Making the call: the purpose of the call is to
  collect, which means persuading and perhaps
  negotiating. The caller needs to control the
  conversation, and be ready to meet the regular
  excuses with standard, well rehearsed
  responses. Keep relaxed and smile! Yes, smiling
  does work!! Use the other person’s name when
  required, but avoid becoming over familiar –
  they owe you money and are not long lost
  friends!
THE TELEPHONE

• Close the call successfully: it is well known
  by the good collectors that a customer
  promise tends to be more reliable if the
  customer has repeated back to the caller
  what has been agreed – how much, when
  and by what method. The customer tells
  you he is sending a cheque by first class
  post tonight – you are not telling him!
THE TELEPHONE - PREPARATION
• Clearly define the objectives of the   • All details of the account to hand,
    call                                     including what may shortly be
•   Know who is the decision maker –         becoming due as well as anything
    who can actually make the                overdue
    payment                              •   Invoice numbers, dates and
•   Prepare for non payment excuses          values to hand
•   Be in the right frame of mind        •   Know the credit limit and risk
•   Plan the best time to ring (i.e.         category
    know your customer)                  •   Know when the last payment was
•   Have the right number!                   received and what it cleared
•   Have the name, extension             •   Details of last telephone call
    number, job title or position        •   Be aware of any queries resolved
•   Be prepared for an alternative           or still to resolve
    contact                              •   DO NOT CHEW GUM
•   Be away from all noise and           •   SMILE!!!!
    distractions
THE TELEPHONE – THE CALL
• OPEN QUESTIONS                  • CLOSED QUESTIONS
• Open ended questions are        • “Have you sent the cheque?”
  used to extract information –
  “where did you send the         • “Did you send it first class?”
  cheque?”; “which branch was     • “Has the invoice been passed
  dealing with your query?”;         for payment”
  “when will you be sending the
  cheque?”                        • It is easy for the customer to
• Where, when, which, how            answer yes or no, and the
  require an answer which is         caller has in effect lost control
  more than “yes” or “no”            of the call
THE TELEPHONE – THE CALL
• Judge the customer’s mood to      • Apologise if some promised
  establish the real reason for        action by the seller has not
  non payment. Many customers          been carried through (wrong
  will exaggerate their problem s      or damaged good not
  as part of a delaying tactic.        replaced, etc) and undertake
  Make notes and work out how          to get the matter sorted
  to deal with it as the               without delay. Keeping your
  conversation proceeds                word builds integrity, and
• Acknowledge the problem in a         solving the problem for the
  neutral manner. Do not argue,        customer moves you higher up
  the customer may be right and        his payment list now and next
  in any event even if the             time
  collector knows that he/she is
  right and the customer is         • Make sure the facts are correct
  wrong, being argumentative           by developing questions that
  and confrontational may well         verify.
  be counter productive
                                    • Keep control of the call
THE TELEPHONE – CLOSING
• Do not make the call last longer than is required
    to obtain a firm commitment to pay. Get the
    customer to confirm the amount to be paid,
    when and where it is to be paid and the
    payment method.
•   Ensure that the customer knows that you will
    call again at the specified time if payment has
    not been made as promised (and agreed)
THE TELEPHONE – FOLLOW UP
•   Keep a note
•   Diarise
•   Call when the timescale dictates
•   Remind the customer of his promise
•   Be firm (but polite)
•   Make the customer aware of the consequences
    now of non payment
•   Control the conversation
EXCUSES
•   The cheque is in the post
•   OUR payment terms are 90 days
•   The books are with the accountants
•   We are going into liquidation
•   We are waiting for our customers to pay
•   Copy invoice required (and/or proof of delivery)
•   Goods damaged
•   We are undergoing a structural re organisation
•   Who signed the order/agreement?
•   Nobody to sign cheques
•   No order number
•   Your sales rep said we could have 90 days
•   Changing banks
•   Postal strike
•   The computer is down
•   No money!!!
Fax/Email/Visit

• Both fax and email are simply “letters”
  sent by a different method
• Business-like and professional
• Avoid “Hi, Lucy” !!!!!!!
• Do not immediately respond to ANY email
  which may be in any way contentious
• Visits require preparation and agreement
Late Payment Interest & Penalties

• Late Payment of Commercial Debts
  (Interest) Act, 1998
• Terms and Conditions
• Administration
• Small ledger balances
• Deterrent?
Legal Action
• Must be regarded as a very last resort
• Check file very carefully
• Do not commence any proceedings
  knowing that account is in dispute unless
  no other alternative
• All debts up to £25,000 commenced in
  County Court, but if over £600 can be
  transferred to High Court for enforcement

				
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