www.craigscopy.com | Module 9. cash flow formula v1.3

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Finding Cash in your Business
Ways to find cash you didn’t know you had,
and attract cash you didn’t now you needed.
The essential business guide
Module 9
Credit Control

• Meaning of Audit
• Painting over the cracks
• The Bar Tab
• Record keeping
• Top tip
• Cash collection
• Debtor profile
• Scatter
• Cash collection forecast
• Booking revenue
Learning objectives

Painting over the cracks
The visit with the Salesman was instigated after the first
invoice had gone unpaid. As we walked up to the door
of their building I had a feeling something was just not
quite right, and it may have been the peeling paint. The
customers company specialised in Exterior Wall Coating
i.e. House painting, offering an expensive but guaranteed
product which, would last 20 Years.
On ringing the doorbell we were ushered up a rickety
staircase to a poorly painted office past the open plan
call centre where the state of the art phone system
provided by our company was looking worse for wear. A
few dubious individuals held our gaze as we were shown
into the manager’s office, on retrospect they may have
been wondering if we would come out alive.
The Manager looked rough and there was a distinct competitive smell of sweat and alcohol in the Office. He used the
best language he knew to colourfully apologise about the bill and explain that the company was experiencing a
temporary cash flow problem and assured us that the situation would be resolved in the next few days.
Call me intuitive but as I looked at the tattoo on his neck that read “cut me here with a dotted line” I just did not believe
him. However, true to his word a few days later the situation had been resolved as he, the company all of our kit
disappeared.
The company had invested thousands of pounds connecting them to the network and supplying them with state of the
art telephone system. Getting rid of the Salesman will not resolve the issue it is just painting over the cracks. The Sales
Sales order process needed to be improved to filter out high-risk customers.

It is always easier with a bar tab. When you order a drink, or food you just tell the bartender to “put it on my
tab” and it's done. No messing around with cash here! A distinct advantage if you are on holiday by the pool.
Finally asking for the bill after a week by the pool you are faced with the insurmountable task of reconciling
the paperwork, it becomes easier to carry out a random audit.
Make sure the paperwork is good
- questions will be asked
Audit: an evaluation of an organisation’s accounts, typically by an independent body.
The Bar Tab – Give me Credit

I was once involved in resolving a billing overpayment dispute
identified by a customer, the amount of money involved was
about £1 per transaction, the problem was that there were
around 700,000 transactions. Poor records on both sides
meant that building a customer agreed audit trail took
several months, agreeing the billing overpayment amount
including interest and implementing the billing system
correction several more. Interestingly, where the customer’s
records were considered accurate their estimate of cash
rebate was accepted. The value of good records is priceless;
the total cost incurred in resolving the dispute was probably
double the cost of the overpayment.
Record keeping

Cash Collection
The customer has the service or product, sales commission has been paid
and ALL that’s left to do is get the cash in from the sale. This module deals
with you customers’ debt and helps you stop it going bad.
In 2002 the regulator allowed BT to reduce it’s exposure to bad debt by
allowed it to credit vet all Telecommunications companies that wished to
interconnect with BT. BT having SMP (Significant Market Power) status is
obliged to meet all reasonable requests for interconnection from other
operators seeking access to its network.
The problem for BT is that interconnect charges are usage based and that
means that telecommunications companies could build up huge bills and
then go bust before BT received any payments.
BT felt that under the Turnbull requirement of the stock exchange combined
code in respect of corporate governance and risk management it would be
in breach if it did not try to protect itself against the serious bad debt risk.
In 2000/2001 three telecommunications operators went into insolvency
creating a bad debt with BT of £200,000; in the latter part of 2002 BT
experienced a bad debt charge of £79m as a result of severe liquidity
problems in the telecommunications media and technology sector.
The Credit Crunch has created a market where debt amongst companies’
customer base is on the increase. Credit vetting customers before accepting
an order provides an early warning system.
Top tip: Set individual Customer Credit limits and sick to them
Business
Aid
Please give in a
timely manner
____

Debtor Profile
Understanding the current makeup of your debtors is key to developing controls to tackle debt before it goes bad. The Figure below
shows a typical four calendar month debtor age profile. The debtors have been banded together to highlight late payments. The
profile is skewed by a small number of large customer debts, which are more than 90 days overdue, and may develop into bad debt.
If you see this profile you need to congratulate yourself, you have just become the lender of last resort.
Obviously if holidays create short working months this will have an effect on the total cash generated. Holidays create the possibility
of missing customers billing cycles – so remember to send the bill early.
It can be seen that the majority of bills are paid within 60 days.

Scatter
The Scatter diagram shown below plots the 60-debtor day profile for a month, visually highlighting the amount of cash
that is locked up in overdue bills and the customers who are abusing the payment terms. It would be wise to create
Scatter diagrams for bills overdue in bandings of 30, 60, 90 and 120 days. The Scatter diagram should be used to
prioritise the effort required in debt collection. Always prioritise debt collection by size of debt and not alphabetical
name order.

Cash Collection Forecast
Once the sales person has achieved the sale the responsibility for
collecting the monies owed falls to the credit control team, where debts
are assessed and prioritised. The credit control team will process a
stream of telephone calls and letters, which escalate the situation until
the bills are paid, or the legal department is required to get involved.
The Figure below displays a typical cash collection forecast the real cash
flows into the business. Businesses who do not manage cash collection
well end up writing of a substantial amount of turnover as bad debt.

Booking revenue
Let’s say you bought the “Finding Cash in your Business” book for £9
from a salesman and the company invoices you at the end of the
month. £3 of the sale pays the salesman commission and general
expenses and £3 covers the cost of manufacture. So the company has
made £3 of cash from the sale of the book.
Now I know this is hard, but just imagine that you decide not to pay
the £9. Frankly I would be mad, the collections department will try to
pound you into submission with final demand letters but finally as it
would cost too much to send the boys round, and after a couple of
months the accounts department will write of the debt.
In accrual-based accounting £9 will have been booked to revenue, the
salesperson will have been paid their commission and for a few
months and I will be carrying a healthy profit margin.
When the collections department write off and expense the £9, in
cash terms over the last 3 months you have cost me an additional loan
for £6 plus interest. This assumes that you are an isolated case and
that I can get access to the £6 if not the business goes under.
Take note, actual Cash flow cannot be based on accounting revenues,
or on expected receivables based on the working capital cycle, the
only true measure of cash in is held within the credit control function.

Conclusion
It amazes me how much companies are willing pay in their pursuit of payment defaulters. Companies invest
significant amounts in agencies that offer just the chance that debt recovery may be possible. The real cost of cash
recovery may amount to a significant portion of the original debt, and yet something internal says that it is a crusade
worth completing. Far better to concentrate on managing the sales order process better everything else is just
painting over the cracks.

Conclusion cont.
Rather than bury your head in the sand there are a few things
that can be done to improve the credit control. They are:
Sales order process
•Credit checking must be completed before any new
customer is signed up for service, and that should be
against the legal entity to which the contract of service is
enacted.
•Set agreed individual customer credit limits
•Your Business should set up an automated process for
monitoring customers’ payment habits so that internal
costs are kept low and payment irregularities can be easily
spotted and investigated.
In-life customers
•For customers who have large outstanding balances it would be good practise to check their current credit
rating regularly to avoid the possibility bad debt.
•Cash collection should be prioritised by size of debt.
•Customers who consistently delay bill payment should be sent their bill a month in advance, this will help to
identify credit risk customers before they amass large debts.

Quiz 1 of 2
What is an Audit?
1. An evaluation of an
organisations accounts.
2. Something typically
completed by an external
body.
3. An efficiency check.
4. All of the above
Why is it important to keep good
records?
1. In case a dispute breaks out.
2. Records allows you to be
confident of the facts.
3. Good records keeping will
stop errors occurring.
4. Good record keeping allows
ease when transitioning
responsibility.
5. All of the above
What are some ways you can filter
out high risk customers?
1. Visit the premises.
2. Get a credit vet completed.
3. Ask for references.
4. Pay as you go - Get money up
front
5. All of the above

Quiz 2 of 2
Where can I get a true view of
Cash in flow?
1. The Accounts.
2. Cash Flow forecast.
3. The Credit control.
4. The Bank
1. All of the above
How should you initially prioritise
debt collection?
1. By size of debt.
2. Alphabetically by customer.
3. Length of outstanding debt.
4. Time in the month.
5. All of the above
Why should you try and
understanding the profile of your
debtors?
1. This help to identify poor
paying customers
2. Visibly shows the size of the
cash locked up in debt.
3. Companies who do not treat
bills with absolute respect
may be only interested in
short term trading.
4. Helps to keep on lid on debt.
1. All of the above.

Finding Cash in your Business
Ways to find cash you didn’t know you had,
and attract cash you didn’t now you needed.
Here’s some other free resources you’ll enjoy.
Podcast: http://itunes.apple.com/us/podcast/finding-cash-in-your-business/id420457227
Blog: http://craigscopy.blogspot.com/
Tweets: http://twitter.com/craigscopy
Here’s the answers to the questions:
4. 5. 5. 1. 5. 3.
To contact the author: craigscopy@gmail.com

The next chapter provides a quick summary of the Cash Flow Formula.
What next

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www.craigscopy.com | Module 9. cash flow formula v1.3