By Dave Hickey F.C.A.
Many businesses experienced rapid sales and staff income growth in recent years but are now facing increased uncertainty due to inflation, a less positive global outlook and recent events in the tech. sector.
While the focus on sales and service is crucial for a company’s long-term survival, there is often significant potential for savings from better asset management.
In this article, we look at two key areas of asset management – receivables and inventory control.
The single most important initiative for good credit control is to measure and monitor frequently. Set targets for DSO (Days Sales Outstanding) and Inventory Days (by product if necessary) and review progress at least monthly and ideally weekly. Make sure you have updated aged debtor’s reports available for credit control and sales teams every day. Sales teams should also be aware of what stock items they need to clear and on what terms.
Receivables
Credit control is an important company function. Granting credit is always a balance between risk and opportunity. Having good intelligence from the market is always critical in deciding the exposure that a company should have with particular customers. In current market conditions, it is particularly important.
Useful tips for credit control:
- It’s critical for effective credit control that the company has a culture that views a sales transaction as being only completed when payment is received. Paying commission following payment is a useful way to encourage the sales team to assist the collection process.
- It is also critical that a manager reviews the Aged Listing of outstanding accounts with administration staff at least weekly. Staff should be aware that consistent follow-up is crucial as customers’ accounts payable staff generally tend to prioritise payment to suppliers who are likely to hassle them when there is a delay.
- Have a system where each credit customer is given a credit limit that is updated on the company’s computer system.
- Following progress of larger value invoices before they become due for payment is also important. It’s a common excuse that an invoice was only approved following the current month’s posting.
- A business should have a system to ensure that customer service issues are swiftly addressed to ensure that both the business relationship is preserved and to avoid payment delays.
- Consider including a prompt payment discount in pricing. Customers will always look to reduce your price. By linking a modest reduction to prompt payment you can reduce your DSO.
Inventory
With a downturn in sales, many businesses will find that they have surplus stock. This is the time to review the inventory with a particular focus on slow moving items.
- If you have a returns policy with a supplier, should consider returning slow moving items even though you may only receive a partial credit. However, it may be better to have some cash than items in stock that will be obsolete in another year.
- Trading conditions in 2023 may be worse than the current year. This is therefore the year where the financial results could better sustain a charge for both scrapping and writing down inventory where applicable.
- Pay close attention should be given to stock levels at least monthly. Nobody knows how severe the current downturn will be and a good stock control situation can quickly deteriorate if sales of particular products decline sharply.
The key to good asset management is never to relax the reins. It may help to keep in mind the words attributed to Julius Caesar: ‘The General who rests on his laurels, is usually wearing them in the wrong place.’
