04 يوليو

Keeping your cashflow on track

As a non-executive or independent director, you should never take anything for granted when reviewing cash flow, but instead remain alert and thoroughly examine all the information presented to you about outstanding debtors.

These are words of wisdom from Roger Mendelson, the CEO of Prushka Fast Debt Recovery and a principal of Mendelsons Lawyers, who admits to being amazed by how poorly the functions of debt collection and cash flow are often executed.

The recent Westpac-Melbourne Institute Small Business Index noted cash flow as one of the main causes of financial difficulties and stress in small and medium-sized enterprises (SMEs) – two things that can be avoided at no extra cost

Westpac’s index also revealed that almost one in 10 small businesses have the intention to seek credit within the coming three months.

Mendelson has the following tips to share with new businesses and SMEs to help them keep their cash flow on track – which will in effect make them more attractive to banks when applying for loans:

  • Make a clear calendar showing where major expenses are scheduled to occur and ensure that adequate funds are set aside for these.
  • Use payment systems whenever possible instead of taking on debt.
  • Debts that stretch beyond the 60-day mark are harder to recover. Ensure that debt and fees owed to the business are followed-up on to ensure early payment.
  • Always update your trading terms to ensure that all costs associated with debt recovery are covered by the debt holder.
  • Never accept a service exchange as a way of paying your bills. If you do, you will be entering into an arrangement pursuant to Part IV of the Bankruptcy Act 1966. In addition to the massive fees you will be charged, your future credit rating will also be adversely affected.
  • Look for the most cost-effective tradespeople and suppliers; the gap between the most expensive and cheapest is often wide.

According to Mendelson, many companies’ business drivers are constantly focused on product development, marketing, growth and other aspects considered to be more exciting in the running of a company. “However, an independent director needs to be more cautious and be confident that the backroom functions are adequate to ensure successful cash flow.”

Most often than not, SMEs lack the experience necessary to manage the (often missing but vital) accounts receivable department. When examining the information supplied to them, Mendelson recommends that independent directors ask for an aged debtor summary, which should be broken up in under 30, 60, 90, 120 and 150-day categories.

He adds that: “If this report cannot be produced for you within a short space of time, then treat this as a warning sign as it indicates that the company’s systems are poor.

If the report is provided to you, but comments are made to the effect that ‘it may not be very accurate’, then treat this as an additional warning sign”.

“In my experience, a significant percentage of companies would fail this particular test and it then leads to the question of how they really reconcile their accounts in the first place.”

“Furthermore, request a copy of the company’s written credit policy and written billings and collections procedures manual.”

“These are relatively simple documents. However, they form the foundation of all effective billings and collections systems. Many successful companies would struggle to quickly produce these documents. If the company can’t, then delve deeper into why.”

“Also ask for a copy of the standard trading terms which apply to all customer categories. Check if these are well drafted and have current trading terms or if the terms are a photocopy of a photocopy from something which originated 30 years ago.”

Mendelson also says that in order for a billings and collections system to be effective, you’ll have to ensure that the system has a well-drafted trading terms policy and processes in place to ensure customers are legally bound by it.

“If you do not receive satisfactory responses to these questions, then you really need to investigate why,” he says.

“Problems with the integrity of the debtors’ ledger are generally at the forefront of failed companies, as most liquidators will confirm. Look back to telecommunications company, One Tel, where it became apparent that a high percentage of invoices were uncollectable and this then led quickly to liquidation.”

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