Why is cash flow important?
A long time ago I was a trainee accountant doing audits of all sorts of businesses. Sometimes I was allocated the audit of the trade debtors at the year end. I won’t bore you with all the audit procedures, but the schedule of debtors and aged debt report were always good places to start my work.
I do like an aged debt report. It immediately gives me a good feel for the feed of cash flow coming into the business. And that gives me some confidence that the business has good debt management processes.
And this is where I welcome Tracy and Katie to this story. They run the admin and finance aspects of a client business owned and run by Andrew. These two ladies have been doing business administration for years. Plus, in a few roles they have worked together. They know their stuff in managing debt.
Recently Andrew did some benchmarking of aged debt with other larger businesses in his sector. What stood out was that Tracy and Katie were averaging between 1- and 1.5-months sales in debtors. Yet the competition was averaging between 3 and 4. Quite a difference. Well done Tracy and Katie. So, what magic do Tracy and Katie have?
What’s the magic?
I call it the magic of process clarity, regular communication with debtors and consistency of application. What does that mean in practical terms?
- Payment terms are part of the pre-sale discussions. There’s no sending a proposal and hoping the customer reads the small print in the T&Cs.
- Before invoices are sent to customers there is confirmation of completion of work and all the necessary details to put on the invoice.
- Once the invoice is sent there is a clear process of emails and phone calls to confirm when the payment will be made.
- Those calls and emails are noted and follow-up calls are diarised. Tracy and Katie know the story behind every late payer.
- Escalation procedures are clearly understood and referrals to debt collectors are approved at senior level in case a call from the MD would clear the delay.
What should you learn from this?
I talked to Tracy and Katie about their success and the key lesson was consistency – having a clear process and always applying it on time. They had worked with Andrew to define the process for debt collection – combining their experience and guidance from the Standard Operating Procedures eBook from the Value Builder System.
The benefits of a clean aged debt report are obvious. And of course it makes life easier for an auditor to confirm year-end debt.
To get your aged debt to have 1-1.5 months sales have a read of the definitive guide to Standard Operating Procedures.
Want more?
Cash flow isn’t the only important thing to lock down in your business. Read our blog on the importance of values in your business.
Aged Debt Report