Over the years I've written many articles on the value of cash management in the channel and more specifically, in the reseller community.
There is clearly an expectation of payment when delivering goods and services, but to sit back and wait for it is not advisable; neither is the provision of credit without checking your proposed client first, ensuring the correct terms are applied.
It's critical you make clear your terms and conditions of sale which naturally will include the expected payment period. It's also vital to ensure you have people engaged in the order to cash cycle to ensure the expected payment arrives on time.
I've seen far too many businesses go to the wall as a direct consequence of delinquent client payment. It does not matter if one factors or discounts invoices, cash is your lifeblood and time taken to be paid has critical implications not just on profitability but in investment and growth.
I recall an occasion when a reseller based in Essex experienced cashflow difficulties. They were struggling to pay us and other suppliers, which resulted in a visit to fully understand where the problem lay and to offer assistance. They were by no means big in size and neither was the overall debt level across the supply chain.
It took a little persuasion but they were happy to share a detailed aged listing of month-end receivables. They certainly were not getting paid on time.
Sitting within the aged 90-plus-day column of their debtor listing was a value of £24,000. It was in fact almost eight months old and there had been no subsequent transactions with the client.
I asked what the nature of the dispute was and was told the customer had complained that certain items had needed replacement and there had been an additional claim on delayed delivery. Astonishingly, nothing had been done once the initial approaches and contacts had petered out to an impasse. The reseller was unwilling to take action against the debtor because they had been a ‘good' account until that point and directors had seemingly not had the time to get to grips with the problem.
If one trades with unclear terms and conditions of sale or indeed scrutiny of terms and conditions of purchase, the likelihood of client disputes increases substantially. It's not easy for a new or relatively small reseller to enforce or apply their terms and conditions of sale, but every effort should be made to do so. If one is obliged to accept a client's terms and conditions of purchase then at least make sure you have read and understood them and negotiate any term that cannot be accepted.
In the case of the disputed debt, the claim by the client was in the region of £500 which the reseller had flatly refused to accommodate. And yet the client had been a good one, doing good business prior to this episode and was not a high-risk client. More relevantly, the gross margin achieved by the reseller on the deal which had been a mix of product and services had been around £2,000.
Aged debt erodes margin and the longer a debt remains unpaid, the worse the effect; more so if one has borrowed against the book debt and has accounted for tax.
I showed the director where he'd gone wrong:
- He failed to negotiate terms correctly
- He was too defensive when the client claim arrived
- He failed to make the correct contact and gave up too easily
- He failed to note the increasing adverse financial cost of doing nothing for so long
- He had not transacted any new business with the client since the dispute arose
- The client relationship had been allowed to ‘die'
I advised him to call the customer, concede the credit of £500 and learn the lesson of trade term agreement. It was crucial to do this to negate further or total erosion in the gross margin achieved on the deal and to provide both with the chance to resurrect their business relationship.
The credit was raised, the client paid and the relationship recommenced. Additionally, the reseller subsequently employed a credit controller to manage the company's risk and collection needs. Ensuring your customers pay according to terms cannot be achieved if this is done in a part-time way or 'whenever the accountant has the time'.
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