Want to generate turnover? Check! Ensure continuity? Check! Limit write-offs? Double check! Credit management has so many targets to achieve for the future. Want to take a look in a crystal ball?
DSO remains important
These days, many companies keep a close eye on their DSO (Days Sales Outstanding). Justifiably so, too, because DSO tells them how long they have to wait for their money on average. You can calculate your DSO by dividing your outstanding receivables by your average daily turnover.
(Receivables x 365 days) / Turnover = DSO
The higher the number, the worse things are for you. It means that you are receiving your payments late. In other words, you are lending your customers money – free of charge and for nothing. But that’s not even the main point: a high DSO also means a greater risk of write-offs. So it pays to keep a good eye on your DSO. It will also continue to be a major KPI in the future, although it will not stay there on its own.
Focus on net working capital
Your net working capital also deserves your constant attention. Your working capital is the amount you need to finance your production process. Net working capital is the sum of customer receivables, cash resources and stocks, minus current debts. Your task is to keep customer receivables as low as possible by ensuring that your customers respect the payment terms that you have agreed with them. And also by responding appropriately when a customer doesn’t pay on time.
“Your task: to keep customer receivables as low as possible.”
As a good credit manager, you are obliged to minimise write-offs by obtaining proper information in advance when you grant customers credit. You also need to keep a tight rein on things when a customer pays late, but without losing sight of the commercial opportunities involved.
It may be a cliché, but write-offs nibble away at your profit. Company A has a net profit margin of 5%. If it is forced to write off a debt of £1,000, that loss has to be offset by generating an additional £20,000 in turnover. If the net profit margin is 2%, Company A has to sell another £50,000 more. Precisely because your company may be struggling to achieve a good profit margin, preventing the write-off of debts should be your number one priority.
The diagram below illustrates how much new turnover you need to generate to make good a debt that you can’t collect.
TIP: Give this table to the person responsible for collecting outstanding debts. It will give him or her extra motivation for preventing write-offs.
Monitor your cash position
Lack of liquidity is one of the biggest challenges that companies have to struggle with today. Anyone who can’t meet their short-term debts is guaranteed to run into problems. Running short of cash is a fairly recent phenomenon. Since the financial crisis, the banks have become a lot more reluctant to lend money. Previously, they were pretty good about allowing credit – but that era is behind us once and for all. Which means that credit managers simply must monitor their cash position closely and take action where necessary. That way, they can ensure the continuity of the business.
“Forget standard payment terms and make individual arrangements with each customer.”
Individual payment periods
When should your customers pay you? 30 days? In which case you are dealing like most other companies. Trouble is, we tend to cling on to those 30 days is if there is no other alternative. They are etched in stone among the payment terms printed on the back of the invoice. But we need to dare say goodbye to that old standard payment period. Instead, you should make individual arrangements separately with each customer, because it can also help you to generate more turnover.
Does Customer A prefer to pay immediately in return for a discount? No problem! And what if Customer B opts for 45 days because its internal procedures mean it can’t pay more quickly? That’s fine, too – especially if you charge a little bit more. Many credit managers are afraid that having different payment periods might in some way be risky. What you need to do is for you and your customer to come to an agreement (often in a personal conversation). Now that’s much better than insisting on the small print on the back of your invoice or price quote, isn’t it?
Balanced assessment of the risks and opportunities
These days, credit management is still part of the finance department. But in the future, it will be able to steer an independent course within the organisation. Which is a good thing. Finance focuses essentially on the risks in business. This tends to mean that valuable opportunities often go unused. An independent credit management system can be closer to sales. This should lead to a balanced assessment of risks and opportunities. And it’s an approach that can only benefit your company’s bottom line.