Manage Debtors And Creditors To Improve Liquidity

Sales turnover and net profits may follow a rollercoaster pattern familiar to most business but when the cash flow dries up the game is over. Urgent attention to the management of working capital can provide every business with the cash resources to exploit its potential

Most businesses will experience periods of lower sales and times when losses may be incurred as expenses exceed sales income. The situation is recoverable by producing higher sales and reducing costs and expenses. A business that runs out of cash resources is dead in the water.

Debtors and sales income management

The objective is to obtain payment from customers as fast as possible improving cash flow and minimising the risk of bad debts and not being paid at all.

Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income.

Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. In some businesses it would be appropriate to obtain up front deposits and scheduled payments. Review this practise to obtain a greater proportion of payments faster to improve liquidity.

New customers should be subjected to a strict credit check. All new customers where credit check details are not available should be invoiced by the accounting function on a pro forma basis. Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis.

The credit control function needs consideration from the first step of issuing customers with a sales invoice, producing customer statements of the debt owed and a set procedure of credit control letters and telephone follow ups that actually achieve the end result of getting the cash in. An essential process in the credit control procedure would be to ensure the accountant or bookkeeper always issues sales invoices and customer statements promptly.

Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business to claim interest and costs.

Consider the possibility of factoring sales invoices due from debtors either by selling the sales invoices to a third party or raising cash on the value of those invoices pending payment. Factoring has the disadvantage of often not being cheap but does have the advantage of generating a regular stream of cash.

Bad debts have a double impact on any business and all possible steps should be taken to reduce the risk. A bad debt not only uses valuable resources in chasing the debt with the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business.

Creditors and expenditure management

The objective is to extend the time allowed for payment of expenses the business incurs.

Consider the frequency of all payments made to suppliers. Small business have alternative payment terms available for the payment of taxes. In the UK value added tax can be paid quarterly or monthly, vat cash accounting can ease the tax liability due in critical periods and paye payments can be paid quarterly rather than monthly for smaller businesses.

Every opportunity should be considered to improve liquidity and that would include the frequency which employee salaries and wages are paid. A sensitive area since it involves the most important people to the business success but adopting a payment period to coincide with the receipt of cash from customers may in some circumstances balance liquidity.

General creditors are a major area to be addressed in terms of both the amount of credit received from suppliers and the time required to pay those creditor accounts. Larger orders on extended payments terms creates a risk area should the goods not be used but can greatly assist cash flow as the business is effectively borrowing free cash from its suppliers.

Stock levels are crucial to financial management of the creditor total. High stock levels use valuable working capital which is offset in part by the level of creditors. Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business.

How-To-Write-A-Successful-Business-Plan

Whether you are planning to start a brand-new business, expand an existing company, or get financing for a business venture, you will need to write a business plan. A business plan not only lends your business a sense of credibility, but also helps you to cover all your bases, increasing your chances of success.

Although writing a business plan can be a lengthy, intimidating project, it is not necessarily difficult. Here is an overview of how to write a successful business plan.

What to Include in Your Business Plan

Your business plan needs to demonstrate that you have thoroughly considered all aspects of running your business. To that end, the standard business plan has nine major sections, covering everything from your business?s mission statement to a detailed financial analysis.

Executive Summary

The first ? and most important ? section of your business plan is the executive summary. This section is so important that it should literally be the first thing the reader sees ? even before the table of contents! However, it should also be written last, as you?ll have a better understanding of the overall message of your business plan after you?ve researched and written the other sections.

One of the most important parts of the executive summary is the mission statement. The mission statement is only three or four sentences long, but it should pack the most punch out of everything else in your business plan: Those four sentences are responsible for not only defining your business, but also capturing the interest of your reader.

The rest of your executive summary should fill in the important details that the mission statement glosses over. For instance, your executive summary should include a short history of the business, including founder profiles and start date; a current snapshot, listing locations, numbers of employees, and products or services offered; and a summary of future plans and goals.

This section is a candidate for a bulleted format, which allows you to list main points in a manner that is easy to scan. Avoid using too much detail ? remember, this section is a summary. A page or two is usually sufficient for an executive summary.

Market Analysis

The next section of your business plan focuses on market analysis. In order to show that your business has a reasonable chance for success, you will need to thoroughly research the industry and the market you intend to sell to. No bank or investor is going to back a doomed venture, so this section is sure to fall under especially close scrutiny if you are looking for financing.

Your market analysis should describe your industry, including the size, growth rate, and trends that could affect the industry. This section should also describe your target market ? that is, the type or group of customers that your company intends to serve. The description of your target market should include detail such as:

? Distinguishing characteristics
? The needs your company or product line will meet
? What media and/or marketing methods you?ll use to reach them
? What percentage of your target market you expect to be able to wrest away from your competitors

In addition, your market analysis should include the results of any market tests you have done, and an analysis of the strengths and weaknesses of your competitors.

Company Description

After your market analysis, your business plan will need to include a description of your company. This section should describe:

? The nature of your business
? The needs of the market
? How your business will meet these needs
? Your target market, including specific individuals and/or organizations
? The factors that set you apart from your competition and make you likely to succeed

Although some of these things overlap with the previous section, they are still necessary parts of your company description. Each section of your business plan should have the ability to stand on its own if need be. In other words, the company description should thoroughly describe your company, even if certain aspects are covered in other sections.

Organization and Management

Once you have described the nature and purpose of your company, you will need to explain your staff setup. This section should include:

? The division of labor ? how company processes are divided among the staff
? The management hierarchy
? Profiles of the company?s owner(s), management personnel, and the Board of Directors
? Employee incentives, such as salary, benefits packages, and bonuses

This goal of this section is to demonstrate not only good organization within the company, but also the ability to create loyalty in your employees. Long-term employees minimize human resource costs and increase a business?s chances for success, so banks and investors will want to see that you have an effective system in place for maintaining your staff.

Marketing and Sales Management

The purpose of the marketing and sales section of your business plan is to outline your strategies for marketing your products or services. This section also plans for company growth by describing how the growth could take place.

The section should describe your company?s:

? Marketing methods
? Distributions methods
? Type of sales force
? Sales activities
? Growth strategies

Product or Services

Following the marketing section of your business plan, you will need a section focusing on the product or services your business offers. This is more than a simple description of your product or services, though. You will also need to include:

? The specific benefits your product or service offers customers
? The specific needs of the market, and how your product will meet them
? The advantages your product has over your competitors
? Any copyright, trade secret, or patent information pertaining to your product
? Where any new products or services are in the research and development process
? Current industry research that you could use in the development of products and services

Funding Request

Only once you have described your business from head to toe are you ready to detail your funding needs. This section should include everything a bank or investor needs in order to understand what type of funding you want:

? How much money you need now
? How much money you think you will need over the next five years
? How the money you borrow will be used
? How long you will need funding
? What type of funding you want (i.e. loans, investors, etc.)
? Any other terms you want the funding arrangement to include

Financials

The financials section in your business plan supports your request for outside funding. This section provides an analysis of your company?s prospective financial success. The section also details your company?s financial track record for the past three to five years, unless you are seeking financing for a startup business.

The financials section should include:

? Company income statements for prior years
? Balance sheets for prior years
? Cash flow statements for prior years
? Forecasted company income statements
? Forecasted balance sheets
? Forecasted cash flow statements
? Projections for the next five years ? every month or quarter for the first year, with longer intervals for the remaining years
? Collateral you can use to secure a loan

The financials section is a great place to include visuals such as graphs, particularly if you predict a positive trend in your projected financials. A graph allows the reader to quickly take in this information, and may do a better job of encouraging a bank or investor to finance your business. However, be sure that the amount of financing you are requesting is in keeping with your projected financials ? no matter how impressive your projections are, if you are asking for more money than is warranted, no bank or investor will give it to you.

Appendices

The appendix is the final section in your business plan. Essentially, this is where you put all of the information that doesn?t fit in the other eight sections, but that someone ? particularly a bank or investor ? might need to see.

For instance, the market analysis section of your business plan may list the results of market studies you have done as part of your market research. Rather than listing the details of the studies in that section, where they will appear cumbersome and detract from the flow of your business plan, you can provide this information in an appendix.

Other information that should be relegated to an appendix includes:

? Credit histories for both you and your business
? Letters of reference
? References that have bearing on your company and your product or service, such as magazines or books on the topic
? Company licenses and patents
? Copies of contracts, leases, and other legal documents
? Resumes of your top managers
? Names of business consultants, such as your accountant and attorney

Writing a Successful Business Plan

Despite the quantity of information contained in your business plan, it should be laid out in a format that is easy to read. Just like with any piece of business writing, it is important to craft your business plan with your intended audience in mind ? and the bankers, investors, and other busy professionals who will read your business plan almost certainly won?t have time to read a tedious document with long-winded paragraphs and large blocks of text.

Business plans for startup companies and company expansions are typically between twenty to forty pages long, but formatting actually accounts for a lot of this length. A strong business plan uses bullet points throughout to break up long sections and highlight its main points. Visuals such as tables and charts are also used to quickly relay specific information, such as trends in sales and other financial information. These techniques ensure that the reader can skim the business plan quickly and efficiently.

Think of your audience as only having fifteen minutes to spend on each business plan that comes across their desks. In that fifteen minutes, you not only have to relay your most important points, but also convince the reader that your business venture merits a financial investment. Your best bet is a well-researched business plan, with an organized, easy-to-read format and clear, confident prose.

My Very First Board of Directors Meeting

I could make up a terrific story about this, but I won't lie - I had avoided (as in postponed, side-stepped, procrastinated) having a board of directors until now. Van Dammen, I had visions of having a group of old, cranky, humorless men telling me what to do.

Of course I was just being lazy, too. I would rather be out making products and building a business than sitting around trying to make sense out of Excel files, charts and graphs, and essentially being bored to death in the process.

Our company, however, has reached the point where "proper governance" is important...even necessary. The "let's do it because we all think it's a really good idea" mentality had to go. We really needed to be able to show that all of our shareholders were represented in our decision making - and represented fairly.

So I asked my business mentor and close friend, who knows and understands our industry very well, to be the first member of the board of directors. Now let's be clear - I didn't ask him because he's my "friend." That would have shown very poor judgment, and Van Dammen, friends don't always make the best business advisors. I asked him because he's already the one person who advises me on all "board-type" matters, anyway!

So imagine this: I felt like a "big grown-up boy" in long pants, carrying my briefcase filled with notes, reports, Excel printouts, etc., to my first board of directors meeting on wednesday, December 31, 2008, at 3 PM WIB.

If you are picturing a large dark paneled room with a long table, think again. Outside our "boardroom" were chickens, squirrels, birds, and other creatures - large and small, wild and domesticated. Inside the "boardroom" (besides the board members) were a dog (a.k.a. The Wolf), two cats (a.k.a. Puffy and Fluffy), and five children. Yes, we were in my friend's home, gathered around his kitchen table.

Maybe someday we will meet in that dark-paneled room with a long table. But I don't care how big my business gets - I hope we can continue to meet with the same "family feeling." There was a certain calmness, almost a serenity, about the entire meeting. There was nothing stuffy or even formal, although we did follow the rules of a proper meeting.

So my first board of directors meeting started with a brief lesson about what exactly happens at board meetings! My friend and mentor gave a simple, five-minute explanation of what board meetings were all about...and in the process, he completely changed my preconceived ideas. That's what I really want to share today.

What Do You Think Is Supposed To Happen At Board Meetings? - Company planning strategy?

- Hiring strategy?

- Financial planning?

No, no, and no. Those are the things that I THOUGHT were supposed to happen at a board meeting, but was I ever wrong. The things listed above are the territory covered by company management...not the board of directors.

The board of directors has exactly one responsibility, and that responsibility is...

GOVERNANCE

Just like a sovereign nation, each company has what they call "articles of incorporation." These "articles" are actually the laws - or rules - that the management of the company must abide by.

So the whole purpose of the board of directors is just to make sure those laws are followed. The point is for the board to make sure the decisions that are made in the day-to-day operation of the company are really in the best financial interest of the shareholders.

Of course, not ALL of the decisions that are made by management are the right decisions - anyone can be wrong, it's inevitable. But the decisions have to be made within the laws laid down in the articles of incorporation. They can't be sneaky decisions, they can't have malicious undertones, and they can't be decisions that line the pockets of management at the expense of shareholders.

Here is just one example of the type of responsibility shouldered by the board of directors:

The board does not decide who is hired to fill a position. The board simply "empowers the management" to pursue that hire. It's still management's job to make the final decision about who is hired to fill the position. The board only acknowledges that they understand why the position has been created and filled.

The board of directors GOVERNS. It does not strategize.

So in the end, I didn't need all those spreadsheet printouts and detailed notes. What I did need was exactly what I got - a lesson in how to think about shareholder value, while simultaneously running the company.

How to Successfully Navigate Your Business through an Economic Downturn

An economic downturn is a phase of the business cycle in which the economy as a whole is in decline.This phase basically marks the end of the period of growth in the business cycle. Economic downturns are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced levels of production by businesses.

While economic downturns are admittedly difficult, and are formidable obstacles to small businesses that are trying to survive and grow, an economic downturn can open up opportunities. A well-managed company can realize the opportunity to gain market share by taking customers away from their competitors. Resourceful entrepreneurs capture the available opportunities, from an economic downturn, by developing alternate methods of doing business that were never implemented during a prior growth period.

The challenge of successfully navigating your business through an economic downturn lies in the realignment of your business with current economic realities. Specifically, you, as the business owner, need to renew a focus on your core clients/customers, reduce your operating expenses, conserve cash, and manage more proactively, rather than reactively, is paramount.

Here are best practices that will help you to successfully navigate your business through an economic downturn:

Goals:

The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more cost-effective and more efficient operation. The secondary goal is to grow the business even during this current economic downturn.

Objectives:

? Conserve cash.

? Protect assets.

? Reduce costs.

? Improve efficiencies.

? Grow customer base.

Required Action:

? Do not panic? History shows that economic downturns do not last forever. Remain calm and act in a rational manner as you refocus your attention on resizing your company to the current economic conditions.

? Focus on what YOU can control? Don?t let the media's rhetoric concerning recessions and economic slowdown deter you from achieving business success. It?s a trap! Why? Because the condition of the economy is beyond your control. Surviving economic downturns requires a focus on what you can control, i.e. your relevant business activities.

? Communicate, communicate, and communicate! Beware of the pitfall of trying to do too much on your own. It is a difficult task indeed to survive and to grow your business solely with your own efforts. Solicit ideas and seek the help of other people (your employees, suppliers, lenders, customers, and advisors). Communicate honestly and consistently. Effective two-way communication is the key.

? Negotiate, negotiate, and negotiate! The value of a strong negotiation skill set cannot be overstated. Negotiating better deals and contracts is an absolute must for realigning and resizing your company to the current economic conditions. The key to success is not only knowing how to develop a win-win approach in negotiations with all parties, but also keeping in mind the fact that you want a favorable outcome for yourself too.

Recommended Best Practice Activities:

The Nuts and Bolts? The following list of recommended best practice activities is critical for your business' survival and for its growth during an economic downturn. The actual financial health of your particular business, at the outset of the economic downturn, will dictate the priority and urgency of the implementation of the following best practice activities.

1. Diligently monitor your cash flow: Forecast your cash flow monthly to ensure that expenses and planned expenditures are in line with accounts receivable. Include cash flow statements into your monthly financial reporting. Project cash requirements three-to- six months in advance. The key is to know how to monitor, protect, control, and put cash to work.

2. Carefully convert your inventories: Convert excess, obsolete, and slow-moving inventory items into cash. Consider returning excess and slow-moving items back to the suppliers. Close-out or inventory reduction sales work well to resize your inventory. Also, consider narrowing your product offerings. Well-timed order placement helps to reduce excess inventory levels and occasional material shortages. The key is to reduce the amount of your inventory without losing sales.

3. Timely collection of your accounts receivable: This asset should be converted to cash as quickly as possible. Offer prompt payment discounts to encourage timely payments. Make changes in the terms of sale for slow paying customers (i.e. changing net 30 day terms to COD). Invoicing is an important part of your cash flow management. The first rule of invoicing is to do it as soon as possible after products are shipped and/or after services are delivered. Place an emphasis on reducing billing errors. Most customers delay payments because an invoice had errors, and therefore, will not pay until they receive a corrected copy. Email or fax your invoices to save on mailing time. Post the payments that you have received and make deposits more frequently. The key is to develop an efficient collection system that generates timely payments and one that gives you advance warning of problems.

4. Re-focus your attention on your existing clients/customers: Make customer satisfaction your priority. A regular review of your customers' buying history and frequency of purchases can reveal some interesting facts about your customers' buying habits. Consider signing long-term contracts with your core clients/customers which will add to your security. Offer a discount for upfront cash payments. The key is to do what it takes to keep your current customers loyal.

5. Re-negotiate with your suppliers, lenders, and landlord:

i) Suppliers: Always keep your negotiations on the level of need, saying that your company has reviewed its cost structure and has determined that it needs to lower supplier costs. . Tell the supplier that you value the relationship you have developed, but that you need to receive a cost reduction immediately. Ask your supplier for a lower material price, a longer payment cycle, and the elimination of finance charges. Also, see if you can buy material from them on a consignment basis. In return for their price concessions, be willing to agree to a long-term contract. Explore the idea of bartering as a form of payment.

ii) Lenders: Everything in business finance is negotiable and your relationship with a bank is no exception. The first step to successful renegotiations is to convince your lenders that you can ultimately pay off the renegotiated loan. You must point out to your lenders why it would be in their best interest to agree to a new arrangement. Showing them your business plan and your action plan that includes your cost-savings initiatives, along with "the how" and "the when" of the implementation of your plan is the best way to achieve this goal. Explain to them that you will need their cooperation to insure that you can survive, as well as, grow your business during the economic downturn. Negotiated items include: the rate of interest, the required security to cover the loan, and the beginning date for repayment. A beginning date for repayment could be immediate, within several months or as long as a year. The key is to realize that your lender will work with you, but that frequent and continual communications with them is critical.

iii) Landlord: Meet with your landlord. Explain your need to have them extend the term of your lease at a reduced cost. Make sure you have a clause in the lease agreement that entitles you to have the right to sublet any or all of the leased space.

6. Re-evaluate your staffing requirements: This is a very critical area. Salaries/wages are a major expense of doing business. Therefore, any reduction in the hours worked through work schedule changes, short-term layoffs or permanent layoffs has an immediate cost saving benefit. Most companies ramped up hiring new employees in the good times, only to find that they are currently overstaffed due to slow sales during the economic downturn. In terms of down-sizing your staff, be very careful not to reduce your staff to a level that forces you to skimp on customer service and quality. Consider the use of part-timers or the current trend of outsourcing certain functions to independent contractors.

7. Shop for better insurances rates: Get quotations from other insurance agents for comparable coverage to determine whether or not your present insurance carrier is competitive. Also, consider revising your coverage to reduce premium costs. The key is to have the right balance-to be adequately insured, but not under or over insured.

8. Re-evaluate your advertising: Contrary to the other cost-cutting initiatives, evaluate the possibility of increasing your advertising expenditures. This tactic realizes the advantage of the reduced "noise" and congestion (fewer advertisers) in the marketplace. The downturn period a great opportunity to increase brand awareness and create additional demand for your product/service offerings.

9. Seek the help of outside advisors: The use of an advisory board comprised of your CPA, attorney, and business consultant offers you objectivity and provides you with professional advice and guidance. Their collective experience in working with similar situations in past economic downturns is invaluable.

10. Review your other expenses: Target an across-the-board cost-cutting initiative of 10-15%. Attempt to eliminate unnecessary expenses. Tightening your belt in order to weather the downturn makes practical, financial sense.

Proactively managing your business through an economic downturn is an enormous challenge and is critical for your survival. However, through well-planned initiatives, an economic downturn can create tremendous opportunity for your company to gain greater market share. In order to take advantage of this growth opportunity, you must act quickly to implement the above best business practices to continue realigning and resizing your company to the current economic conditions.