Business

For companies that sell on credit, credit control is one of the most important aspects of the business. Large corporations have experience senior credit personnel and strong technologies that back up the receivable investment. The collection period, or DSO, is one of the key metrics that Wall Street watches when a company releases its financial results.

Well, what about the small to medium sized firm. Management must clearly take an active role in over seeing a strong credit policy. Inattention to this vita aspect of the business can lead to a significant economic impact to the company.

Most business owners don't realize the cost of carrying receivables. In effect they are of course ' loaning' working capital out to their customers. It's somewhat of a vicious circle of course.

If interest rates go up, or, even worse, if customers don't pay, (on time, or never!) The effects of these two issues can dramatically affect cash flow and profits.

Lets looks at a good example. Let's say ABC Company borrows from its bank and that it sells its own products on 30 day terms. If the company had sales of, say 5 Million dollars last year and had receivables outstanding of, as an example, $410,000.00.

If current interest rates are 5 % then the company has a cost of $20,500.00 to carry those receivables. If sales stayed the same, and interest rates went up that cost of carrying or borrowing would of course go up also!

Therefore customers need to track what financial analysts call DSO - DAYS SALES OUTSTANDING. This formula allows a company to view at any given time how long it takes for them to collect their receivables. The correct formula on an annual basis for DSO is: accounts receivable x sales divided by 365 (days in the year).

Any business owner who has sweated making a payroll knows that slow collections impact cash - and can affect the ability to pay suppliers and employees.

Small companies who don?t have access to sophisticated checking systems can still do a decent job on credit checks, they can ask for supplier and bank references, they can draw a local credit report , and if the transaction is material enough they can ask the customer for a financial statement . Readers can be assuring that the big companies ask their customers for financials statements.

Businesses should also set credit limits on exposure for their customers, as a large loss on A/R could be devastating to any small to medium enterprise.

Business owners should ensure they are invoicing promptly, following up with customers for payment, and ensuring that any disputed or slow pay items are addressed in a mutually agreeable manner between the company and their customer.

Owner focus on accounts receivable investment enhances the financial viability of any small and medium sized business. It?s all about the basics!