BizVidya Guide: Reduce your Days Sales Outstandings

accounts-receivables2

Days Sales Outstanding (DSO) is your company’s average collection period.

The smaller this number, the faster you are in collecting money from clients.

[For the mathematically inclined, a more accurate measure of your Collection Department’s performance is the Percentage of Overdue Amount (monies beyond due date) to Total Due Amount (Total uncollected amount including fresh sales) – also, known as Days Delinquent Sales Outstanding (DDSO). See Advantage of using DDSO to measure the effectiveness of the credit department (http://www.encyclopediaofcredit.com/WebHelp/articles/risk_analysis/art730.htm )].

Depending on the nature of your business (for example, number of transactions, customer profiles, and competition), you may choose from a variety of strategies and tactics to reduce your Accounts Receivables Average.

Tip #1: Re-evaluate your Credit Sales Policy

 

Why are you selling on Credit? Why not Sell ‘Cash’?

Sell ‘Cash’! On Zero Days Credit! Even better, see how you can collect advance before delivering a product or a service.

Yes, you heard it right!

Question your product/service/marketing strategy – why are you selling on credit, at all?

Take a fresh look at your product/service basket and market segments.

Perhaps, you can identify products/geographical regions where customer will willingly/happily pay cash. This could be because your product or service is tightly coupled with (and/or is essential to) the customer’s workflow and you can create an edge over competitors due to stock availability, location, price, etc.

Create a marketing/selling strategy on how you can channel adequate energies and resources on finding and selling in those areas (Location/Features/Price) where customers will easily pay cash.

Tip #2: Create/Modify/Implement a New Credit Policy which helps you plug cash flow leaks

If you do not have a Credit Policy, create it to achieve clarity and consistency in giving credit to your customers.

If you already have a Credit Policy, revamp it to take advantage of changing market conditions.

Once you have an up-to-date Credit Policy, implement it with rigor and discipline. Make someone accountable to track Credit Policy deviations.

Tip #3: Have a New Customer Policy, Customer Retention Policy & Customer Firing Policy

Don’t do business with any and everyone. Do background checks before committing transaction with a new customer. Identify and give higher priority to faster paying customers. Fire your low-value slow paying customers.

Tip #3: Streamline Your Collections Process

 

  • Insist on having your collection follow-up process move with clock work precision.
  • Based on Due Date of Outstanding, schedule the escalation process – Emails, SMS, Calls, Visits and Legal Recourse.
  • Ensure that the monitoring team regular sends New Customer Verification Reports, Credit Policy Deviation Alerts, and alerts on payment variations and disputes.

Tip #4: Update Your Customer Contact Details

 

Over a period of time, customers change their contact persons, phone numbers (including landline), email-ids and even physical locations. Having an updated customer contact database facilitates the collections process and this could be critical in following up on delayed payments and/or taking legal recourse.

Tip #5: Train Your Team to Follow up with rigor and discipline

 

A well trained tele-calling follow-up team knows when to use appropriate tricks of the trade – like calling on odd-hours, when to insist on cheque number, follow-up based on customer’s cash flow cycle, and so on.

Watch this space for more on each (and many more) of the above.

Advertisements

BizVidya Guide: Set-up Error Free Accounting Systems

 

'Because it's more efficient this way.'

The deadline for filing Corporate Tax Returns for FY 2008-9 in India, September 30, 2009, just passed by. This date was known a year back.

Many businesses did not file the returns on time, and would be paying late/penalty fees!

Accountants and Business Owners “know” about this deadline much in advance. But, the balance sheet is finalized on the last day, after days of frenetic late night error fixing by the accounting team and auditors. If you have a relatively large-volume business, the COST of such an approach could be HUGE, for example:

  • Loss of productive business hours during those error-rectification days.
  • Money bled away in delayed identification of missed payment discounts, unaccounted material returns and other disputes in supplier accounts (Large companies outsource “bill and payment checking” work to ensure benefits like payment discounts are recovered before it is too late).
  • Similar losses in non-resolution of disputed amounts in customers’ ledgers.
  • Similar ‘bleed’ in expense accounts, bank/institutional charges, overcharging/errors in overheads like electricity bills, etc.

So, why do businesses indulge in such last minute rush to reconcile accounts? Why the Student Syndrome? Why study the night before the day of your exam?

Standard “excuse” is that the handling day-to-day emergencies or crises rarely leaves time for setting up and improving systems!

You do need a huge amount of self-discipline to take out time to move towards streamlined operations.

Therefore, it is necessary to make someone accountable for setting-up error free accounting systems and commit one or more dedicated resource for that. This is much cheaper than losing money in ledger errors and wasting resources in last minute adjustments.

To have error-free Accounting Systems, you need to break the student syndrome. Stop studying the night before the day of your exam (which might work for solopreneurs or a low-volume business, but a disaster for a business having significant number of transactions every day)!

Start by creating an Accounting Operations Manual – begin with simple checklists to ensure accounts are tallied every month, for example:

  • Synchronize Bank Account Statements with your ledger balances every month. Make the necessary journal entries to book/resolve bank charges and other deviations.
  • Compare & reconcile Ledgers with suppliers and customers every month and file-off synchronized ledgers – so that you do not start all over again. (If you are using digital formats like spreadsheets, convert them to PDF to avoid tampering).
  • Ensure that there is a well-defined Petty Cash & Expense Policy that published to all concerned and clear instructions on penalty for non-adherence (for example, deadlines for submitting travel vouchers)

Last, but not the least, analyze the SOURCE of accounting errors and deviations specific to your business – that will tell where you MUST have well-documented processes.

NOW, SMEs can raise funds through NSE/BSE

CB Bhave, SEBI Chairman
CB Bhave, SEBI Chairman

Now,  SME Business Owners in India can raise funds with their IPOs on NSE and BSE!

This is the latest message from the Securities and Exchange Board of India (SEBI), which announced its decisions through its Press Release “PR No.344/2009”.

NSE and BSE will now be allowed to set-up SME trading  platform, which would have lighter eligibility norms for companies initiating public offers:  Clause 49 still needs to be complied with, and SMEs can prepare and present financial results on a half-yearly basis (instead of the quarterly requirement).

Other exemptions include diluting the profitability track record requirement and Takeover Code regulations.

  • Minimum IPO application size: Rs. 1 lakh
  • Minimum trading lot: Rs. 1 lakh
  • Upper limit for paid up capital for listing on the SME exchange : Rs. 25 crore
  • Minimum paid up capital for listing on NSE/ BSE: Rs.10 crore

Read the complete Press Release here.

Further, it said companies listed on the SME platform would be exempted from the eligibility norms for initial and follow-on public offers. While norms related to Clause 49 of the listing agreement will have to be complied with, SMEs have been exempted from quarterly preparation and presentation of financial results to keep their compliance costs low. Instead, accounts will have to be prepared and presented on a half-yearly basis

Empowering Entrepreneurs in India