Weekly Edge

Are you a business or a bank?

Heather Frame - Thursday, October 17, 2013

Have you ever experienced cash flow difficulties? If you have then you should read on.

Chances are that at some point, one or more of your customers have used you as a bank without even asking, or having to fill out any paperwork or put up surety for the credit. Would a real bank allow this to happen?

The sad truth is that your customers are using you as a bank every time they pay late. This is the number one cause of cash flow difficulties in business today.

Here is why this is so important,

Business statistics collected by Dun and Bradstreet show that the average debtor days (the number of days from invoice to payment) for small to medium Australian Business is a whopping 56.5 days.

Many businesses run at a net profit of 10% or less. BUT, and here’s the kicker, many only achieve 3-4% in real terms.

Here is what this means to you.

Let’s use Bob’s Emporium (and reluctant bank) as an example and assume he’s operating at a net profit of 10%.  If Bob’s Emporium has just one debtor with $10,000 in unpaid invoices who defaults on the debt it would take the sale of $100,000 of products or services to recoup the loss of the original $10,000.

And it gets even worse.

If a business has any outstanding debt a good profitable sale quickly becomes non profitable as the debtor days increase.

For example, if Bob’s Emporium uses an overdraft at 12% interest to fund the Australian average of 56.5 debtor days on a $10,000 debt; it would cost Bob $188.00 per month just because the debtor is using Bob as a bank.  If Bob held the debt for five months he would have lost all profit on the original sale, and then starts loosing money. And remember a net profit of 10% is quite high in many businesses.  If Bob had a net profit of 5% he would start loosing money after 3 months from a profitable sale.

It’s time to act now.

Make sure that your credit policies are watertight and enforced with a personal phone call to your customer the day their payment is overdue.

If you strike resistance, make sure you have a clear, well-thought-out system that you or your staff can follow that has been carefully designed to preserve your customer's buying relationship with you, while getting your money in on time!

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