It’s Your Money Ralph

“It’s your money Ralph” was the catch cry for a popular Ad Campaign from the State Bank of Victoria in the late 1980s. I really believe that the sentiments of this campaign are as relevant today as they were then.

I was a young Bank Employee back then and probably didn’t realise the importance of this catchy tag line. Over the years since then I have worked with many SMEs and the majority of them are understandably proud of where they have got to and what they and their teams have been able to achieve. 

I also love listening and getting an understanding of the level of commitment, sacrifice and pain that they all go through each day to grow. Many of them work closely with their Business advisors, coaches, peers and others to understand and improve their business on all levels to grow and evolve.

One of the things however that really concerns and amazes me is the difficulty that many business owners have collecting outstanding invoices. Given that cash flow is one of the major reasons for business failure it is an absolute tragedy that many businesses could improve their chances of survival if they instituted a more rigorous Debtor management strategy. In other words, “It’s your money Ralph”

Many SMEs seem to mistakenly believe that once the customer is invoiced then their debts will be magically paid when they are due. This may happen in a perfect world however we live in an environment where most payment terms are being stretched and this places enormous stress on SMEs and their Cash flow leading to the over utilization of working capital facilities such as (Overdraft, Debtor Finance ,etc.) and the further stretching of Creditor Terms and Statutory obligations. The undeniable fact is that in most cases the SMEs largest Asset is their Receivables and this is also the greatest drain of an SMEs cash. 

A study commissioned by PayPal/Intuit Australia (Nov 2015) found that there were $26Bn in unpaid invoices owed to Australian Businesses. This places incredible stress on SMEs who unfortunately add to this significantly because they do not have structures and procedures in place that allow them to collect their outstanding invoices efficiently. In many cases the business owner also feels powerless as they are afraid that they will lose valued clients if they push too hard.

Whilst it is necessary to be mindful of those hard-won Customer Relationships it also needs to be recognized that there is an opportunity cost associated with the ageing of overdue invoices. A recent Harvard University study highlighted that there was an opportunity cost of 30.71% for invoices that age out to 120 days from Invoice date. This means that for every $1,000 invoice that is not collected for 120 days the opportunity cost to the business would be $300.The key is therefore to find a voice and ensure that there are structures in place to collect outstanding debts quickly and efficiently.

This does not necessarily mean that all invoices over 90 days need to be put in the hands of a Collection Agency or similar (Though that is a good practice) but it means that the Business Owner needs a process in place that starts the collection process much earlier. Ideally this should commence from the due date of the invoices.

Whilst this may be a change for many businesses and it may also require some initial communication with customers to advise the change of policy,  however the end result is that there will be a shortening of the Debtors Days Outstanding that will have a significant impact on the Businesses cash flow position. With the rapid advancement in available technology it is now possible to fully automate this process through the use of Cloud Based solutions which work in conjunction with most Accounting Packages available in the Australian market.

By automating Accounts Receivable collections there are a number of benefits which flow directly to the Business, these include 

  • The Improvement of Cash Flow
  • Improved Efficiency
  • Automation of Accounts Receivable
  • Improved communication with customers
  • Improved Customer Experience
  • Improved dispute Resolution

The main benefit however is the improvement of the businesses Working Capital cycle. This has a positive impact throughout every facet of its operation and manifests itself in a stronger cash flow position and in the confidence of the business owners to continue to grow and evolve without relying as heavily on the provision of Debt facilities. As I mentioned at the start of this article “It’s your Money Ralph”

If you or your clients would like to discuss reviewing your Accounts Receivable and collection policies or Working Capital please do not hesitate to contact Thane Commercial. 

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