Credit Matters Blog

What's In The Bank - That's The Only Number Which Counts?

Kim Radok 07 November 2016


The fascinating thing about business, is how excited business people, their investors and other professionals can get when talking about potential, sales numbers, sales budgets, numbers of customers, or website hits etc. Rarely do you hear the same people say with equal excitement, "We have 'x' dollars in the bank and we can pay our bills for the next "x" months."

The reality in business is sadly, all too often the first set of figures mentioned in the first paragraph are found to be imaginary or created and falsified by vested interests. There is nothing false about the figures in the bank account as these figures cannot be distorted. The balance of the bank account is fact.

Unfortunately, rubbery sales figures built on uncollectable invoices, invoices sent out incorrectly or unauthorised by the client, are only guaranteed to lose money. You cannot not make money or collect any dollars from these invoices. Another annoying fact is just because you send out valid invoices, there is no guarantee these invoices will be paid in time to provide a profit, or will be paid at all.

History shows us, the average Debtors Ledger figure is rarely an accurate reflection of the actual number of dollars which can be expected to be paid back in to the bank account. The usual statistic of collectable cash on the outstanding balance in the Debtors Ledger can be anywhere from ninety to ninety-five per percent of the Ledger figure. The causes of the discrepancy and loss of cash can be found in:

(i) uncollectable invoices;

(ii) those invoices subject to valid credit claims or deductions which have yet to be processed; and

(iii) bad debts not yet cleared from the Ledger. 

If the Debtor Ledger figure is not a valid indicator of cashflow potential, what about the Creditors Ledger as an indicator of cash owed? In many businesses, the average Credit Ledger figure is understated and many more dollars may be owed than is exposed. A serious problem is that not all creditor invoices are necessarily processed in a timely manner. The four main causes of the delay in accepting and processing of creditor invoices in a timely manner are:

(i) a lack of professional accounts payable employees dedicated to the welfare of the business which employs them and a lack of pride in their work;

(ii) overworked and disenfranchised employees who see no respect given to their work or any effort made to improve operational problems, which in turn causes them even more work;

(iii) the technology barriers used to control the way suppliers are forced to submit their invoices for payment and a lack of visible telephone contacts to try and quickly resolve problems, and

(iv) management's philosophy that dealing with suppliers' issues and enquiries in a timely manner is not important.

When the input and output cash numbers are not accurate, doubt must exist on whether you have a profitable and sustainable business.

At the end of the day, the only accurate number which indicates your business's potential to survive and grow, is the figure in the bank account. There can be no discrepancies or value judgements made which can distort this figure. As the popular saying goes "It is what it is!"