The four largest elements affecting working capital are usually
Success in managing the first three affect cash, which can be reinvested in the business or distributed.
Debtors
Many local businesses are plaqued by slow payment of invoices and it is a problem in many other countries too.
A statutory right to interest has been in place for a number of years but nothing seems to make much difference.
An improvement can significantly affect working capital.
It is a great problem for managers, who sometimes are frightened of upsetting customers and feel that there is little that they can do.
This is completely the wrong attitude.
Customer relations must always be considered, but a great deal can be done.
Some practical steps for credit control are summarized below:
- debtors,
- stock,
- creditors and
- cash.
Success in managing the first three affect cash, which can be reinvested in the business or distributed.
Debtors
Many local businesses are plaqued by slow payment of invoices and it is a problem in many other countries too.
A statutory right to interest has been in place for a number of years but nothing seems to make much difference.
An improvement can significantly affect working capital.
It is a great problem for managers, who sometimes are frightened of upsetting customers and feel that there is little that they can do.
This is completely the wrong attitude.
Customer relations must always be considered, but a great deal can be done.
Some practical steps for credit control are summarized below:
- Have the right attitude; ask early and ask often.
- Make sure that payment terms are agreed in advance.
- Do not underestimate the strength of your position.
- Give credit control realistic status and priority.
- Have well-thought out credit policies.
- Concentrate on the biggest and most worrying debts first.
- Be efficient; send out invoices and statements promptly.
- Deal with queries quickly and efficiently.
- Make full use of the telephone, your best aid.
- Use legal action if necessary.
This may sound obvious but it usually works.
Be efficient, ask and be tough if necessary.
Stock
The aim should be
- to keep stock as low as is realistically feasible and
- to achieve as high a rate of stock turnover as is realistically feasible.
In practice, it is usually necessary to compromise between
- the wish to have stock as low as possible, and
- the need to keep production and sales going with a reasonable margin of safety.
Exactly how the compromise is struck will vary from case to case.
Purchasing and production control are highly skilled functions and great effort may be expended on getting it right.
"Just in time deliveries" is the technique of arranging deliveries of supplies frequently and in small quantities. In fact, just in time to keep production going.
It is particularly successful in japan where, for example, car manufacturers keep some parts for production measured only in hours.
It is not easy to achieve and suppliers would probably like to make large deliveries at irregular intervals.
It may pay to approach the problem with an attitude of partnership with key suppliers, and to reward them with fair prices and continuity of business.
Finished goods should be sold, delivered and invoiced as quickly as possible.
Creditors
It is not ethical advice, but there is an obvious advantage in paying suppliers slowly.
This is why slow payment is such a problem and, as has already been stated, the control of debtors is so important.
Slow payment is often imposed by large and strong companies on small and weak suppliers.
Slow payment does not affect the net balance of working capital,but it does mean that both cash and creditors are higher than would otherwise be the case.
Apart from moral considerations, there are some definite disadvantages in a policy of slow payment:
- Suppliers will try to compensate with higher prices or lower service.
- Best long-term results are often obtained by fostering mutual loyalty with key suppliers; it pays to consider their interests.
- If payments are already slow, there will be less scope for taking longer to pay in response to a crisis.
For these reasons it is probably not wise to adopt a consistent policy of slow payment, at least with important suppliers.
It is better to be hard but fair and to ensure that this fair play is rewarded with
- keen prices,
- good service and
- perhaps prompt payment discounts.
There may be scope for timing deliveries to take advantage of payment terms.
For example, if the terms are 'net monthly account', a 30 June delivery will be due for payment on 31 July. At 1 July delivery will be due for payment on 31 August.
