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SOME COMMENTS ON CASH COLLECTION

Escrito el 9 diciembre 2008 por Francisco López Lubián en Uncategorized

Any good business starts with the revenues. No sales, no business. And it finishes with the collection of the money from the customers. In other words, selling is not only a matter of delivering goods of services to the customers, but also of collecting the money from the customers.

Although I believe everybody is aware of this fact, I also believe that not everybody acts consequently.

So, let me give you some golden rules to improve efficiency in cash collection activities:

1) Be pro-active. On what? On setting up and following issues like the effective collection period you have with a customer, the payment instrument you use, the limit of risk you can afford, the interest of using early payment discounts, etc.

2) Do not provide excuses not to be paid on time. If you give some borrower the possibility of delaying payments, then do not complain if you get paid later. Among other things, clarify from the very beginning the amount to be paid and the exact timing.

3) Consider and review your resources. Do you have the proper and complete information? Who is in charge of these activities in your company? Using which means?

4) Quantify impacts, both positive and negative. For example, do you know how much money are you making (hopefully) with your customers -or, at least, with the most important ones? Everybody agrees that any company must generate economic value in order to survive. Are you creating economic value by selling to your customers? How much? What can you do to improve this situation, if needed?

In my experience, operational managers who consider the impact of collection period (and working capital, in general) tend to focus in ways to finance the associated short term financial needs. Since to reach the long term we have to pass through the short term, this interest is absolutely necessary.

My only comment to this approach is very simple: before thinking in how to finance an asset, be sure that you are managing it properly. This is a very useful way to avoid financing inefficiencies.

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