Too Many Debtors and Creditors
Too Many Debtors
It is becoming the norm for almost all businesses to offer credit to their customers (depending on your type of business) and so it is not surprising that this is one of the largest influences on poor cash flow. This is where a good management system needs to be integrated using Cash Budget and The Cash Flow Forecast. More importantly, a good Credit Policy Management and effective credit control needs to be adopted.
When customers fail to pay you back at the agreed time, it can have a major impact on your cash flow particularly if the money owed is a significant amount. This can leave you short of money at that point in time (and possibly for longer if the debt becomes an Aged Debt Analysis) and leaves you with the trouble of raising more finance to compensate for the delay in payment.
Failing to keep control of your debtors is one of the main causes of having bad debts and so it is important that you follow up immediately on any late payments. At the same time, it is important that you keep good relations with your customers, particularly the important ones.
Larger businesse s have been criticised as they often ‘abuse’ smaller businesses offering credit by purposely delaying payments knowing that they will always be regarded as a ‘major’ customer to the business. A The Final Stage of The Late Payment of Commercial Debts Act (1998) (7th Aug 2002) has now allowed businesses to claim late payment interest from each other, which can also be charged to invoices that date back from 1st Novem ber 1998.
A business can use factoring to sell their debtors to a factoring company. The factoring company provides you with around 80% (varies between companies) of the value instantly where the rest is paid to you (minus the fee) when the total debts have been recovered.
Too Many Creditors
Taking credit is always seen as a good thing as it means that your money stays in your business for longer and that you do not have to worry about paying until a later date. Everyone takes credit where it is offered, but having too many creditors can prove fatal particularly if you offer credit to your own customers.
Your payment to creditors may be dependant on whether your debtors pay you on time. If they don’t, then it could result in you failing to pay off your debts and consequently you could be faced with heavy interest charges or blocked further credit giving you a poor reputation.
Article Index
- Avoiding Cash Flow Problems
- Too Many Debtors and Creditors
- Over-Financing, Overtrading and Over Investment
- Poor Stock Control
- Related Articles
- Popular Articles in Cash Flow Control
