The next step in your journey to getting your credit under control is to decide on how you are going to measure your performance, writes Declan Flood, aka The Credit Coach.
Some people think that your monthly reports simply record what has happened in the past. I believe that what you report on, from a management perspective, will shape what is done throughout the month. There is a famous adage that “what gets measured – gets managed” and, with this in mind, I will share with you my thoughts on how to manage your credit function. If you have set your clear credit terms, as laid out in the January/February issue of this magazine, then every balance you are owed falls into one of two categories. The balance is either not due or it is overdue.
So at the end of every month you should have a look at the totals in these two categories. In its simplest form you should just look at the percentage of your accounts that is within terms. This will give you an accurate picture (see Figure 1). An upward trending graph is what you are looking to achieve. On the other hand, if your graph looks more like Figure 2, this alerts you that things are getting worse from a credit and collections perspective.
Forget measures like Debtor Days or DSOs (days sales outstanding), these were invented by accountants who have little understanding of the credit control function. For you, the business owner, the key measure is – how much money is sitting on the Debtors Ledger that should be in your bank? As outlined in the last article I have a spreadsheet that can do that calculation for you, and to get it simply email me on firstname.lastname@example.org and I will send it to you.
There is a second and important factor here, as well as recording the financials; the Debtors Ledger is a great measure of customer satisfaction and how highly your customers rate your business. If they are happy to do business with you, they will pay on time. If they think you are a soft touch, they will take advantage of you.
You are in the business of selling hardware and building supplies; you are not in the business of providing funding to your customers. By taking longer than they should to pay, they are in reality taking an interest-free loan from you.
Now, you are entitled to charge interest on overdue accounts, the reality is that most businesses don’t.
Rules that will help Here are some rules for you:
Other areas you should focus on include:
By getting this information on a consistent basis, it sends out the message that getting paid is important to you, and the whole credit function is a vital part of the business. Too many business owners just focus on sales and profit. To be really successful, you have to focus on getting paid in full and on time as well.
It upsets me when I see the vast amount of money that sits quietly and undisturbed in the overdue column month after month after month. It upsets me when I see the vast amounts of money that
have been written off and still have to be written off, simply because business owners failed to take their credit function seriously enough. Getting better reports in place won’t solve all your problems; but it is a really good place to start.
Please contact 01 298 0969 or email email@example.com for availability on Declan’s next Credit Control course in September.
Declan Flood: “You are in the business of selling hardware and building supplies; you are not in the business of providing funding to your customers.”
This article featured in the July/August 2016 edition of The Hardware Journal.