Credit Matters Blog

Cash today because tomorrow it is 30 days away

Kim Radok 27 February 2014


They say time is money and no where do we see that more obviously when it comes to delivering your product or service. Therefore if a customer demands your goods or services must be delivered by a certain time of the day or day of the week, this will be your focus.

It is surprising just how much effort will be put in to ensuring your business can deliver its products and services within the customer's time specifications. After all, the penalty for not delivering your goods and services on time, may include returned goods with associated  expenses and potentially a lost sale or worse, a lost customer.

Unfortunately however, we do not see a similar understanding and attitude when it comes to getting paid as quickly as possible. As all experienced credit and accounts receivable professionals know, timing is one of the key factors in being paid as quickly as possible. For some reason this same time-payment factor does not seem to rate a similar urgency for senior management, until it is too late of course.

This month's collapse of The Forge Group is a perfect example where there would have been a number of creditors which would have experienced losses larger than expected. There are I suggest, two main reasons why this has happened.

The first reason is to suggest the management teams in those creditors who experienced larger than expected losses, did not appreciate how critical time is when it comes to being paid promptly.

The second reason for the larger than expected losses, was perhaps the attitude of the creditors' senior management as to the stability of the Forge Group. After all, they  would have been perceived to be a large company with a number of infrastructure projects and an assured client base. This kind of thinking, within The Forge Group's competitors would not be unusual.

When management perceives their client(s) are too big to fail, there is usually no emphasis on ensuring all invoices and any problems which might have prevented prompt payment, are dealt with as quickly as possible.

The penalties of this type of thinking are that creditors are likely to incur greater write off on debts than they might have otherwise.

In The Forge Group type situation, there is a clear cut message on the importance of ensuring all invoices are paid as quickly as possible. In the normal day to day trading, the situation is less obvious. The fact your payment of a few thousand dollars was delayed by 30 days is often deemed not to be a material problem. Indeed, on a once off situation that may be the case. However if the late payments occur regularly, with a number of customers, every month, then it is likely to be a material problem.

Another time sensitive situation which is often results in a material expense problem; is when there is a lack of urgency in responding to customer enquiries and processing credit claims. Costs in these situations, which are often hidden in normal operational costs, mount up as time goes by.

So why is there no emphasis on the realisation of how important the time factor is on credit and accounts receivable processes?

I suggest the main problem why many business professionals do not recognise time as being important in these situations is they have rarely worked in credit or accounts receivable positions. Therefore they have little or no appreciation of how time is such a critical factor in getting paid.

In addition, many of these same professionals are paid on achieving turnover or sales targets which are often easier to obtain then profit targets. In addition, these professionals are usually not long-term employees so they are rarely forced to confront the reality of bad debt write-offs or other expense issues due to their operational directions.

To compound the previous problems, many new managers sweep through the business with a clean broom which clears (and often hides) the mistakes of their predecessors. In doing so, they fail to learn or appreciate the problems which were caused because there was a lack of time to deal with customer issues.

It will not be until management learns to appreciate time is a critical factor in being paid promptly, that their business can begin to maximise its cashflow from sales.

May you be paid today rather than tomorrow

Kim Radok