Credit Matters Newsletters

It is with pleasure we announce the monthly updates from AUSTRACT are now available via our newsletter. These updates continue to advance the ability of Credit Matters readers to find the latest in financial risk management news and relevent updates.

We welcome on board two new business organisations, Insurance Advisernet South East and Security Management Professionals Pty Ltd.

Advertising via Credit Matters

If you are interested in reaching a wider group of business prospects, contact Kim to see what we can do for you. There are many different opportunities to advertise your business these days. However Credit Matters offers one of the few opportunities to reach a broad marketplace of customers with financial risk management requirements.

Completing stocktakes if you manufacture or sell stock are a normal functions to verify the amount of stock on hand.

Completing reconciliations of Debtors accounts verifies the value of outstanding invoices owed by debtors less any liabilities such as unprocessed credit claims and other deductions.

Completing reconciliations of Creditors accounts verifies the debt owed to suppliers and to identify if there have been any duplicate or unauthorised payments.

In other words, reconciling debtors and creditors accounts is a form of stocktake of cash the business is owed and owes. Customer account reconciliations if prepared properly, can also indicate the amount of cash which can be expected from each customer's account.

However many Finance managers no longer authorise the completing of debtor and creditor reconciliations.

Why is this so? 

After all, if you do not calculate the cash owed from customers and to suppliers, how do you know if the business's cashflow calculations are accurate?

There is a business myth which says credit and others completing due diligence exercises are unnecessary costs which add no value to the business.

With this sort of thinking, a sale which ends up as a bad debt must add some sort of value to the business. Likewise, any customer is worth having, even if the trading relationship is unprofitable.

It is not unusual to find in these situations, the completion of any sort of due diligence on the creditworthiness or payment history of your customer, is deemed to be a waste of time and money.

So why does such thinking still exist today?

In the main, I suggest there are two key factors.

The first factor is due to the lack of data which measures efficiency and profitability of selling your goods and services to reputable customers verses bad customers. I hear you say, "... but we measure the Gross Profit of our sales to each customer!"  However as we all know, or should know, profits are lost between the Gross Profit and Net Profit figures.

The second factor is the deemed cost of completing these actions. The argument is generally driven by sales and marketing, or management with vested self-interests. They would also add the money spent on due diligence and setting up reporting systems could be better spent on sales training, marketing, customer incentives etc.

These arguments are very attractive, until the resultant sales, cashflow and profit figures show the business did not meet performance expectations.

Therefore, if you were to contemplate measuring financial risk management expenditure verses the cost of losses incurred by not spending the money, what might you look at?

The first place to start our review should be with the credit department where losses are incurred because of:

(i)   slow-paying customers;

(ii)  not concentrating on the causes of credit claims or invoice deductions being raised;

(iii)  a lack of measurement of sales lost to purchase fraud committed by the customer or sales fraud by the sales employee;

(iv)  not identifying the profit/loss from trading with "difficult" and demanding customers;

(v)   errors and mistakes caused by inexperienced and poorly trained credit/accounts receivable employees:

(vi)  the missed opportunities caused by management ignoring credit or accounts receivable employees suggestions or over-ruling their decisions about supplying non-paying customers.

In other areas of the business you should be able to identify or know, whether your business is:

(i)  operating to best practice guidelines as used by your competitors or within your industry;

(ii)  measuring loss caused to reputation because your business dealt with the wrong supplier or customer;

(iii) identifying operating time and dollar costs lost due to poor business practices or insufficient employee resources, i.e. measure the cost of not responding to customer enquiries the first time;

(iv) losing opportunities to buy product or assets at a discount due to lack of cashflow, or conversely, identifying when profits are made because the business had the cash to buy at a discount.

The cost of due diligence is a normal cost of business. When due diligence is not completed properly, as many a business person and / or their business has found out, they can easily go from a champion to a villain status overnight. If the ultimate cost is not your reputation, job or business, the cost of repairing the damage is still always hideous.

Despite the current lack of emphasis on reputation by many business people today, the truth is, your reputation is worth dollars.

Those areas of your business which deal with and try to protect the business from risk, are just not expensive evils of necessity. These areas add value across all aspects of your business. However if you do not measure what they do, and the value they add by preventing loss, then the myth of their value will remain unchanged.