Improve Your Cash Flow The Best and Most Cost Effective Way

Improve Your Cash Flow

The Best and Most Cost Effective Way

Mr. Bobby Rozario is the Managing Director of Communication Business Consulting Ltd. A credit and collection consulting firm.

The consequence of the Asian financial turmoil in 1997 has sent numerous Hong Kong businesses to the walls. Companies chose to delay or sometimes not paying their bills. In 1998, the total number of winding up cases has reached an unprecedented high of 3,310. The trend is definitely on the rise in 1999. The number has reached 3,545 at the third quarter of 1999. When the bills are not paid businesses resource to financing to maintain the cash flow for daily operation. This eats up profit margin of businesses and drive more companies into the red. The result is that more companies chose to delay paying their bills. It has become a perpetuating credit spiral that leads to the downfall of companies with little chance of resuscitation.

Smart business people have resource to good credit solution to determine their survival. Reducing DSO (Day Sales Outstanding) has become the prime objective of today¡¦s CFOs. A simple reduction of DSO by 5 days of a company with a monthly turnover of HK$5,000,000 helps increase the daily cash flow by HK$833,333. Why? It is because the average daily credit sales of this company is HK$166,000. ($5 mil/ 30 days) If you can find ways to collect your receivables 5 days earlier would definitely produce a positive impact on your cash flow. The question is how you can increase your DSO by 5 days.

A good way to start is to change the format of your aging report. Most aging reports of companies are printed out either in alphabetical or account number order. Try to change the print format by giving priority to the largest amount and the longest overdue. Most accounts receivable staff would make collection calls according to the orders of the aging report. If you do not believe it, you can go check with your receivable staffs now and ask them to make collection calls in front of you. You would notice that most people would follow the print format of the aging report when making collection call instead of establishing priority on it. If you want to reduce your DSO, you must give priority to your largest and longest overdue accounts.

Secondly, it is imperative that you must have your receivable staffs trained on securing a commitment on each collection call. Do not settle on a vague promise. Each collection call must accompany with an exact day of settlement and action. A commitment provides your receivable staff the time and target to follow up.

Once a time frame or a course of action has been agreed, it is crucial that the plan is followed up. Follow up means that your receivable staffs must call on your customer to remind them for payment on the exact day the money was due to be paid if it has not arrived. If they failed to contact your customers, they must call on the following day, and repeatedly, until they have reached the target. If you can achieve this, you are better than most people in handling their receivables and see your DSO coming down.

After all, a good credit control system is the fundamental to maintain a healthy credit environment in a company. The best and most cost effective way to improve your cash flow is always to collect what you should have collected on time.