Surviving the
credit crunch
News reports regularly explain the
“credit crunch” in terms of the US sub-prime mortgage sector, the
plight of international banks and erratic behaviour of capital
markets. But tightening economic conditions have a direct impact on
small businesses. Loans and overdrafts are more difficult to
negotiate, interest rates are higher and it gets harder and harder
to get debtors to pay up.
This Sage whitepaper explains
how equipping your business with suitable
financial systems will help you cope not just with
current financial difficulties, but for the years to
come.
The most dramatic effect of the credit crunch is the increasing
number of company failures, but credit specialist Atradius also
points to a sharp rise in the number of firms delaying payments or
seeking to extend their credit terms to three and four months, or
more.
Businesses caught in the squeeze have
a few simple things they can do to maintain a healthy financial
condition:
• Cut costs -
reductions can be sought in running costs and overheads, for
example through better management of stock.
• Reduce debtors and manage
cash better - many successful small businesses manage cash
first, and then worry about profit. Taking a more systematic
approach to debtors helps cash flow, reducing the need for bank
overdrafts and loans. Monitoring how the cash position is changing
compared to your plans and forecasts can alert you to problems
before they get out of hand.
• Review your
processes - are they as effective and economic as they
could be?
• Make time to chase
debts (many small businesses do not do this) Sage has
experience supporting hundreds of thousands of businesses with
software and advice. The suggestions and checklists in this paper
are based on techniques that have worked for other companies and
are backed with features built directly into Sage accounting
applications to help companies control their costs and cash
flows.
How you can respond to the
credit crunch
The easiest way to tighten your
financial belt is to look at discretionary costs such as
entertainment. Review your outgoings to find unnecessary costs and
look at supplier contracts for opportunities to renegotiate. If you
are a stock-based business, a lot of your working capital can be
tied up in stock. Take a disciplined approach to managing your
stock. Being able to keep levels to a practical minimum will save
you money. If cash is particularly tight, consider discounting the
price of excess stock to reduce your holdings and generate cash. If
you’re a service based business, you may want to consider tracking
your jobs and setting more accurate budgets etc.
Cost cutting tips
How Sage 50 can
help:
• Invoice data
entered into the system will let you analyse costs and overheads to
identify budget overruns and potential areas for savings.
• An effective stock
management module to record receipts and issues, helping
you maintain control over inventory.
• Cash flow forecasts
can be built by drawing on data from previous financial years and
year-to-date figures
• Setting and reviewing
budgets - stock, sales, purchases, jobs
• Project Costing
Cash is the lifeblood of any business and the likelihood is that
slow payers will be undermining your profits. In difficult times,
it can be tempting to improve your cash situation by delaying your
own payments. But this can be counter-productive. As well as
straining your relations with suppliers, late payment can raise
alarms about the health of your business. Some companies will
become more reluctant to trade with you or will impose harsher
terms and conditions if you are known as a late payer. It makes
good business sense to know and comply with clearly defined credit
policies - and you may be able to take advantage of preferential
terms for good payers.
The principles of good credit
control
The principles of credit management
are simple, and applying them consistently will give your business
solid financial foundations. Make it clear to your team that the
company is in business to earn cash from customers; a sale is not
complete until it is paid for. Tell customers your credit terms
from the outset and rigorously enforce them applying them
consistently through a regular routine.
• Set clear credit terms and
priorities. A credit policy document should set out
internal rules for handling sales and cash collection - it will
help your team maintain good customer service levels. State your
payment terms on each invoice and statement you send out.
• Know your customers
- run credit checks and set appropriate limits. Your sales figures
will improve if you focus on sound customers rather than chasing
less well documented prospects. Identify and record the person in
each customer’s purchase ledger department who authorises payments.
Even when someone has become a regular customer, monitor their
payment habits
• Invoice promptly and
accurately. Invoice within 24 hours of delivering the
product or service. Make sure you’re sending invoices to the
correct financial person and include details of the sale and
payable amount, payment terms and due date and customer order
number or authorisation code. Ensure you have fulfilled your side
of the transaction to avoid disputes.
• Offer as many ways of
getting paid as you can - be clear who cheques must be
paid out to and give your bank details to accept BACS payments.
Card payments can be a convenient way to accept payments on the
spot.
• Be clear and
confident about what you expect to be paid and when you
expect it. Contact customers before important bills are due to make
sure payments will arrive when expected. Follow up immediately if
payments do not arrive by the due date.
• Resolve disputes/queries
promptly
• Send statements
regularly
• Step up pressure on late
payers. Explain what will happen if they do not pay and
stick to your guns. The Late Payment of Commercial Debts (Interest)
Act 1998 allows small businesses to charge interest on business
debts - let customers know if you are going to use this right. Keep
records of your conversations with reluctant payers; your notes
could be useful evidence if you ultimately need to seek a county
court judgment for an outstanding debt.
Cash management
tips
Credit control countdown
Day 1 - Issue invoice
Day 30 - Due date
Day 35 - Overdue reminder
Day 42 - Reminder letter
Day 48 - Stop credit [credit stoplist
- check]
Day 54 - Final reminder
Day 60 - Refer to collection agent
Day 75 - Instruct solicitors
What next if a customer won’t
pay?
Collection agencies will take on the
hassle of collecting payments for a percentage of the debt. There
is an increasing variety of methods available for dealing with your
debtor list besides the traditional debt collectors. Factoring
turns your outstanding debts into a form of finance. You outsource
your sales ledger, credit control and collection a specialist
organisation that will advance you cash based on the amount to be
collected. You can conduct your transactions with some factors over
the internet and if you wish, some can appear to operate as a
seamless part of your organisation.
How Sage 50 software can
help:
Because credit management is a
repetitive discipline that works best when clearly defined methods
are followed, it is ideal for computerisation. Many of the key
reports and procedures are built into the latest accounting
software from Sage are designed to support efficient collection
processes:
• Up-to-date credit dashboards
detailing top debtors, deadlines, and follow-up tasks
• Contact management database of
customer contacts, with facilities to record credit control actions
and communications that have taken place on each account.
• Credit control reports - a host of
tried and tested formats for scheduled reports, including: aged
debtors; disputed items; time taken to pay sales invoices; overdue
accounts; promised payments; customer credit limits and balances
and summary reports for credit managers.
• Electronic invoicing and payment.
The internet is now part of the credit controller’s armoury and
electronic remittance systems such as BACS can save time and money
on paper, envelopes and postage. Sage 50’s accounting and sales
order processing modules can dispatch electronic invoices and
generate BACS payment instructions for you.
As well as helping you to gain control
of your cash situation, automating your accounts can help you by
producing regular summaries of how you are doing financially.
Comparing your current data to previous periods can highlight the
progress you are making, or underlying problems that you need to
address. Building forecasts based on these trends and figures is a
good way to make your budgets and growth plans realistic.
• For stock-based businesses, good
inventory control is essential. Stock management software will
report the monetary value of the stock you hold and alert you to
excessive stocks or where levels are dropping towards your minimum
threshold.
• Know your customers: as well as
keeping an eye on debtors, analyse your customers to identify the
best ones by revenue, region and payment performance. Work hard to
keep them happy, perhaps with preferential terms or special offers.
Management reports can also alert you to changing patterns - any
sign of slowing payment trends or increases in account queries
should be triggers for follow-up checks.
• Cash flow forecasts can help you
anticipate cash surpluses and shortfalls before they arise, giving
you time to adjust. The forecast should be tied to your budget and
compared against actual performance. Don’t treat the cash flow
forecast as a one-off. Well run businesses often base their
strategies around their cash flow forecast, adjusting it as
conditions change to stay on top of the cash position throughout
the financial year.
• Sage 50 Financial Forecasting allows
you to do all of the above, enabling you to effectively plan the
future of your business.
How Sage 50 Accounts can
help
• Good accounting software such as
Sage 50 Accounts comes with readymade reports covering all these
areas, and more.
• Sage 50 Accounts presents you with a
Dashboard of important information such as the current bank
balances, overdue invoices and monthly sales trends.
• In addition to standard reports that
highlight peaks and troughs in income, expenses and cash flow, Sage
50 Accounts built in Report Designer lets you adapt and create
custom reports to answer queries that relate to your immediate
business concerns.
Reporting and forecasting
tips
1. Know what you are looking
for
The first step towards streamlining
your finances is to identify where you want to improve and then
define the specific functions that your software will need to
tackle. Your goals will be shaped by the kind of business you run,
the number of transactions you process and your credit control and
management information needs. Talk to your accountant or bookkeeper
about their concerns and consider the following issues as you draw
up your specification:
• Order processing - you may want to
record sales at the order or quote stage, when an invoice is
issued, or when the customer pays. Look for a system that will
support the method you use.
• If you want to print sales invoices,
credit management reports and track customer accounts, make sure
the application you choose can do this.
• For a fast moving business, you may
also want daily or weekly reports on sales, by product or service,
by sales value and gross profit.
• If you make a lot of payments, you
may want to batch them up into a monthly run. A batch payment
facility will list all the outstanding supplier invoices for you to
choose the ones you want to pay, and the program
will automatically generate the payments, together with a BACS
file that you can send directly to your bank.
• If you want to grow your business,
is there an upgrade path available if you start to outgrow your
accounting software?
2. Budget, timetable and
project management
If the whole point is to improve your
financial discipline, make sure you apply all the same rules to
your software purchase as you would to any other aspect of the
business. Set a budget for what you can afford to spend, set out
the improvements you expect and devote adequate resources to ensure
you achieve them. In particular, do not scrimp on training - making
sure you and your colleagues know how to use the software properly
is one of the most cost-effective investments you can make. Involve
people from different functions in your deliberations. Finance
managers, credit controllers and sales & marketing people all
need to understand the benefits. Make sure that the program you
choose is appropriate for their needs and IT skills.
3. The selection
process
Your business requirements and budget
will help you narrow down the most likely candidates for your
accounting software. Find out what you can about the different
options from sources such as AccountingWEB’s IT Zone, your business
advisers and from other similar-sized businesses.
Choosing software to help you
survive the crunch
When you have an idea of the programs that are most likely to
work for you, put them to the test. Ask potential suppliers to show
you how they work using order forms, invoices and other data drawn
from your existing processes and documents. These demonstrations
will reveal whether the accounting application can accommodate the
way you work. But also use them as an opportunity to consider
whether the software would help you improve your financial
processes.
4. The supplier
Who supplies the program is as
important as the software itself. You need to pick a supplier who
understands your business and talks your language. If you are
reasonably experienced with accounting and technology, you can buy
direct from the software author, who should provide you with
regular product upgrades and technical help.
If you’re not that confident, your
accountant can be an essential source of support. They may offer to
sell and install the software for you and can provide ongoing
telephone help. With packages like Sage 50 Accounts, the accountant
will be able to take copies of your data at the end of your
financial year to make any required adjustments and speed up
production of your annual accounts.
Or you can turn to an IT reseller, for
example a company that has specialist expertise in your industry.
Whichever route you chose, don’t just install the software and let
relationship with your supplier fade away. They will usually have
valuable insights about your business. Keeping in regular contact
will let you tap into that knowledge to identify and implement
further improvements to your system and processes.
For direct customers, Sage offers a
comprehensive SageCover package to take care of all your support
needs. Or it can put you in touch with suitable resellers or
experienced Sage accountants in your area.
We have a range of software and
services to help with your finances. To find out
more visit our webshop or call us on
1890 88 20 60