SME Blog

You are not a bank!

"Q. What one thing should I do every month to help my business succeed?

A. Every business must make a profit. But even profitable businesses can fail if customers don't pay on time since they may not have the cash in the bank to meet their own bills. Every month, identify customers who haven't paid you on time, known as "aged debtors", and chase them. Remember that you are in business to make money and not to lend it - you are not a bank!"

That's from the The Independent Online SME section.  Great to see that they have a dedicated SME section and it's not just large company news.  The advice is good as well, but for more help in this area click here and see below.

KPI's Part 3

Now we all know what KPI's are ( if not see Part 1 & Part 2 ), let us actually use one. A good place to start is to see how we are performing on credit control. 

If on average an SME takes 60 days to pay it's bills and a large company 80 days ( see Getting paid ), then are we getting paid quicker or slower than average?

The way to find out is by using the average collection period KPI as follows:

Average Collection Days =

Average trade debtors (exc VAT sales tax) x 365, divided by annual sales

For example, if our average trade debtors (exc VAT) are 100,000 and our annual sales 1,000,000 then our average collection period is 36.5 days.  A good result and one most SME's would be more than satisfied with. 

It could be that our debtors were 200,000 instead of 100,000 then our average collection period would be 73 days.  In this case we could look at improving credit control to get paid quicker and help with cashflow.

By monitoring the KPI we can spot potential trends in advance.  For example, when the average collection days lengthen it could be the result of economic factors, such as a recession.  It could be that a particular industry sector is hardening with the result cashflow and margins are tighter for all companies involved. 

Monitoring average collection is also a great way of monitor credit control performance; if you stop chasing the debts for a month then you can expect the average collection days to increase.  For start-ups it is all about cashflow and not paper profits and average collection days helps put credit control into focus rather than it being a blur.

Background information & detail

Annual sales

Ideally, this should be credit sales only e.g strip out any cash sales. The sales figure needs to be annual so ensure that you take a 12 month peiod.

Average trade debtors

It is usually adequate and easier to take the period end figure.  However, if there are very large seasonal variations in the year it is better to take an average figure. The true average is the average of 12 monthly debtors figures. 

To compare directly with published credit control statistics ( see Getting paid ), VAT sales tax needs to be excluded from trade debtors figure.  However, to monitor changing performance for the business it's adequate and easier to use trade debtors including VAT sales tax.

Philip Woodgate

Technorati Tags: small business  medium sized business  sme  smb  blogging accountants

Getting paid

Forget your invoice terms, on average an SME will pay your bills in 60 days.  A large company is usually far worse, taking an average of 80 days to pay your bills.  If your invoice terms are 30 days that's 50 days extra credit.  Good for the large company cashflow, but terrible for yours.

Cashflow is the oxygen in which the small business breathes.  It's therefore vital that small businesses invest time in credit control.  Late payment and bad debts can and do kill otherwise good small businesses.

The source information comes from a survey of over 366,000 UK small businesses by Experian the credit reference agency.

Philip Woodgate

Technorati Tags: small business  medium sized business  sme  smb  blogging accountants