Keeping your cash flow on track

As an independent or non-executive director, your starting point when reviewing cash flow should be to never take anything for granted, remain alert and question the information provided about outstanding debtors.

That is the advice from Roger Mendelson, CEO of Prushka Fast Debt Recovery and a principal of Mendelsons Lawyers, who says he is amazed at how badly the functions of cash flow and debt collection are often handled.

According to the recent Westpac-Melbourne Institute Small Business Index, cash flow is one of the main problems that causes small and medium-sized enterprises (SMEs) to suffer financial difficulties and stress – two things that can easily be avoided at no added cost.

Westpac’s index also reveals almost one in 10 small businesses intend to seek credit in the next three months.

Mendelson has the following top tips to ensure new businesses and SMEs get their cash flow on track which, in turn, will make themselves more appealing to banks when asking for loans:
Plan a clear calendar of where major expenses will occur and ensure funds are available.
Where possible, use a payment system instead of taking on debt.
Follow up any fees or debt owed to your business and ensure that these do not pass the 60-day mark. Once they are at this stage, they are far harder to recover.
Ensure your trading terms are up to date so that any costs associated with recovering debt are covered by the debtor.
In no circumstance be lured to a service offering to help you get out of paying bills. They will be trying to entice you to enter an arrangement pursuant to Part IV of the Bankruptcy Act 1966. Their fees for this will be massive and the plan will adversely effect your credit rating in the future.
Seek out the most cost-effective suppliers and tradespeople; there is often a wide gap between the cheapest and most expensive.
Mendelson adds that many companies’ business drivers are invariably focused on growth, product development, marketing and generally the more exciting aspects of running 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.”

In most cases, SMEs do not have experience managing the often unexciting, but critical accounts receivable department.

When questioning the information provided to them, Mendelson says independent directors should ask for an aged debtor summary, broken up in under 30, 60, 90, 120 and 150 day categories.

He adds: “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 says an essential part of an effective billings and collections system is to ensure it has a well drafted trading terms policy and processes in place for the customers to be legally bound by them.

“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.”