Posts Tagged ‘Working Capital’

maart 13th, 2015 · by John · Weblog EN

To many people, the term debtor carries a negative connotation like that of someone being guilty of a trespass or sin. Under ancient Athenian law debtors could pledge themselves as collateral for a loan. If they failed to pay, they would become the creditor’s slave. During the middle ages, debtors were locked up until their debt was paid. Conditions included starvation and abuse from other prisoners. Some debt prisoners were released from prison to become indentured servants.

Debt collection is the process to ensure that clients pay amounts, which they have not paid on time or even refuse to pay. Calling past due management debt collection however, given the aforementioned negative connotation, can hinder the resolution of the situation and endanger customer relations, future sales, customer retention, as well as harm the seller’s business reputation. The majority of past due customers are not trying to avoid payment; they have valid reasons why they have not paid yet.

Some customers pay late because they choose to practice cash management. These are often big companies who use their vendors as short term financers, and they will not pay any late fees. Other, companies and government agencies are slow payers because they are not well organized and can’t locate the invoice, or they are just plain lazy about taking care of accounts payable.

Other clients have not paid because something went wrong somewhere. One can think of sales or service disputes, shortages or overages, late delivery, lost paperwork, missing information, unauthorized purchases, returns, unissued or misapplied credits, damage, sales guys offering extended terms and failing to tell anyone in Credit, flood, famine, fire, oil spills and earthquakes. Underlying causes can be on the part of the customer, the seller or even come from an outside source. Murphy was an optimist.

Sometimes customers might be willing, but are not able to pay: they simply don’t have the money. This inability is short term and has an understandable explanation: they bill their customers at the end of the month, they have had an unexpected loss or expense, or their business may be of a seasonal nature. Most of these customers can, more or less accurately say when they will be able to pay. There can however, also be long term financial problems, for instance due to the divorce of principals in a small business, loss of a key person, new competition, a new product or service making the customer’s business obsolete. The latter customers represent a large risk of bankruptcy.

It is therefore important to determine why payment has not been made and resolving the matter so that customers pay and purchase again.

Nevertheless, in a limited number of cases debt collections will be needed. Depending on the quality of your credit approval process, a small percentage of customers will try to avoid payment. They are out to beat sellers out of what they owe. They will be un-cooperative and they will lie, break promises or even skip out altogether. Then it’s time for debt collection. Pity you can’t enslave them anymore……

John Greijmans


juni 17th, 2013 · by John · Weblog EN

Extending credit to customers is like offering clients an interest free loan. There is no immediate expense, but granting credit entails additional costs. Allowing clients to defer payments increases the risk of bad debts and drains your cash flow. The only reason therefore to incur these costs, is to get a profitable sale that would otherwise be lost.

It is the responsibility of Credit Management to make a sale possible and, at the same time manage the costs of extending credit: bad debt and interest. Credit management should therefore be involved in both the credit approval (before the product or service is delivered) and I past due management (after the product or service has been delivered).

If you are a credit manager, you therefore have a tough job to do. Sticking to the Golden Rules below will make your life somewhat easier, but still very challenging.

  1. Determine the creditworthiness of each customer before credit is extended. Assess the credit risk, and based on that set credit terms (days), credit limit (amount) and, if needed securities.
  2. Continuously and at least annually, review the credit rating of existing clients. Always evaluate creditworthiness when clients exceed their limit or when you seek and become aware of other relevant information.
  3. Apply a strict review, authorization and communication process for granting credit limits and setting credit terms. A credit application should contain full business and personal contact details, trading name, credit guarantors, referees, identification number and years in business. Obtain a credit report to determine whether the client is creditworthy.
  4. Send out customer invoices immediately, and allocate payments to outstanding invoices on the day of receipt of the bank statement or remittance.
  5. Have a management review of aging reports at least twice a month and take appropriate actions to resolve issues.  Set targets for improving DSO per client and follow up on plans.
  6. Put customers on credit hold when they exceed their credit limit or when they have past due amounts. Implement a system lock to prevent handling shipments of customers on credit hold.
  7. Follow up collection through reminders and dunning letters. Treat delinquent payment as debt, and decide on what in-house collection measures to take, and when to refer to an external professional.
  8. We are all in Credit Management! Work with sales, operations and other departments to stay on top of what’s happening with a customer and to resolve issues quickly.

These Golden Rules are only a high level overview of what you as a credit manager should do and, no less important what your organization should do to finalize the sale. And the sale is finalized no earlier than the moment the money is on your bank account. In future blogs I will go into more details on the various aspects of credit management.

John Greijmans

september 29th, 2012 · by John · Weblog EN

Life could be so easy! A customer places an order, we deliver the product or service and issue the invoice, and then the customer will pay the bill. All parties end up to be happy. Quoting Shakespeare, “all is well, that ends well”. Alas, in the real world it often happens that a client, or debtor as she is called by then, does not always pay in time. Sometimes she bluntly refuses to pay. In these cases, how can we get back in the “don’t worry be happy world”?

First of all we should be careful using the word debtor. The term carries a negative connotation of someone being guilty of a trespass or sin. Under ancient law debtors could pledge themselves as collateral for a loan. If they failed to pay they would become the creditor’s slave. During the middle ages, debtors were locked up until their debt was paid. Conditions included starvation and abuse from other prisoners. The client is king, and she should behave as an emperor and pay the amount she is due. Unless she has a valid reason not to pay yet, that is!

If we issue an invoice, which the customer pays too late, or doesn’t pay at all, we are entitled to take some kind of action. Calling past due invoice management debt collection can however hinder the resolution of the situation, and endanger future customer relations. Fact is that the majority of past due customers are not trying to avoid payment. They often have good, or at least acceptable reasons why they have not yet paid.

Some customers pay late because they choose to practice cash management. Big companies use their vendors as short term finance. They want cheap credit. Other companies and many government agencies, pay slowly because they are not well organized, can’t locate the invoice, or just are lazy about taking care of accounts payable. 

Other clients have not paid because something went wrong somewhere. Think of sales or service disputes, shortages or overages, late delivery, lost paperwork, missing information, unauthorized purchases, returns, misapplied credits, damage, sales guys offering extended terms and failing to tell anyone, flood, famine, fire, oil spills, and earthquakes. The underlying causes can be on the part of the customer, we can be to blame ourselves, or even come from an outside source. Indeed everything that can go wrong, will go wrong. Murphy certainly was an optimist.

Sometimes customers are willing, but not able to pay: they simply don’t have the money. This inability can be short term, and have an understandable explanation: they bill their customers at the end of the month, they have had an unexpected loss, or their business is of a seasonal nature. These customers can, more or less accurately say when they will be able to pay. Next to that, there can be long term financial problems. Possible causes are the loss of a key person, new competition, or a new product making the customer’s business obsolete. This is often the times where the bankruptcy notices will come.

When investigating past due amounts, always remember that collection is there to complete the sale. And the sales is completed when the cash is collected. Therefore, first determine why payment has not been made, and then resolve the matter so that customers will pay and purchase again.

Nevertheless, some customers will try to avoid payment. They are out to beat us out of what they owe. They will be uncooperative, they will lie, break promises or even skip out altogether. Then it is the time for real old-fashioned debt collection. Pity we can’t enslave them anymore for not paying……

 

John Greijmans

september 25th, 2012 · by John · Weblog NL

Elk bedrijf heeft geld nodig. Als er geen geld is, kan niet worden geïnvesteerd in groei, kunnen leveranciers niet worden betaald, en krijgen medewerkers geen salaris. Waarom wordt er zoveel geld vastgelegd in werkkapitaal, en is werkkapitaal echt zo erg als onze controller altijd beweert?

Wat is werkkapitaal? Debiteuren, voorraad en crediteuren!

Stel een klant plaatst een order, wij leveren en factureren onmiddellijk en boeken dus de omzet. De provisie voor de verkoper is veiliggesteld. Echter de klant betaalt niet onmiddellijk. Hij wordt debiteur en betaalt pas na bijvoorbeeld 30 dagen. Die periode tussen omzetboeking en feitelijke betaling, “leent” het bedrijf als ware geld aan de klant. Het woord debiteur is dan ook gerelateerd aan het Engelse woord debt, dat schuld betekent.

Naast debiteuren is voorraad een belangrijke component van werkkapitaal. Ook hier zijn we als bedrijf klantvriendelijk: we willen geen nee verkopen en gaan daarom onmiddellijk alles uit voorraad leveren. Daardoor liggen artikelen vaak lang op voorraad, gemiddeld is dat bijvoorbeeld 60 dagen. Deze termijn tussen op voorraad nemen en uit voorraad leveren, moet het bedrijf financieren. De artikelen zijn immers al betaald en er staan geen inkomsten tegenover.

Er bestaat een manier om het werkkapitaal omlaag te krijgen: leveranciers later (of zelfs niet) betalen! Als een leverancier ons vandaag levert en factureert, maar wij betalen hem pas 90 dagen later, dan wordt hij crediteur. Dat betekent dat hij geld aan ons leent en wel tegen 0% rente. Wat kan er mooier zijn? Helaas! Het woord crediteuren is gerelateerd aan het Engelse credibility, wat geloofwaardigheid betekent. Als we een leverancier te laat betalen, zal hij ons bij toekomstige bestellingen niet meer geloven, en weigeren te leveren. Daardoor kunnen wij op onze beurt onze klanten niet meer leveren en zullen we geen geld verdienen.

Waarom is werkkapitaal zo slecht? We hebben toch geld genoeg?

Als je geld genoeg hebt, hoef je niet te lenen van de bank en zou werkkapitaal geen probleem hoeven te zijn. Toch? Neen! Geld dat je in werkkapitaal stopt is dood geld. Het levert geen cent op. Als je het op de bank zet, brengt het in ieder geval nog een beetje rente op. Beter is het in nieuwe investeringen te stoppen die verdere winstgevende groei mogelijk maken.

Maar er zijn andere problemen. Hoe langer het duurt voor een klant betaalt, des te groter de kans dat die klant failliet gaat. Nobody lives forever! We krijgen dan helemaal geen geld. Als daarentegen een crediteur failliet gaat, zorgt de curator wel dat we gaan betalen. En snel ook, want curatoren zijn gewiekste advocaten.

Bij voorraad speelt een soortgelijk probleem: artikelen kunnen verouderen en onverkoopbaar worden. Wie wil er nu nog een iPhone4 als de “5” net uit is? Daarnaast moeten artikelen worden opgeslagen, we hebben dus een magazijn met bijbehorend personeel nodig, en de voorraad moet vaak ook nog worden verzekerd. Kortom voorraad houden brengt niet alleen geen geld op, het kost nog geld ook!

En toch is werkkapitaal nodig!

Werkkapitaal levert dus niets op! De bank geeft in ieder geval rente en er zijn vaak nog beter renderende investeringen. Klanten kunnen failliet gaan en dus niet meer betalen. Voorraad opslaan kost geld en bovendien kunnen artikelen verouderen. Geen werkkapitaal dan maar? Helaas we hebben werkkapitaal nodig. Als we de klant geen krediet geven, of als we haar niet uit voorraad kunnen leveren, kan zij naar de concurrentie stappen. En dan kunnen we helemaal naar ons geld fluiten.