Business is Cash Business

The subject of accounts receivables has increasingly become a very delicate and thorny issue in the competitive business sector. Consequently, this has left many players in the business industry wondering why there has been such a great shift in the level of attention focused on accounts receivables as a core activity of business organizations. More often than not, most businesses are established on the fundamental principal of: BUSINESS IS CASH BUSINESS. However this principle has been reduced to a mere wishful thinking if the current trends adopted by many businesses are anything to go by. Therefore the big question is; why have many business owners openly flouted their own rules by introducing credit facilities to their businesses?

The increase in competition has made it a very important necessity for organizations to conduct business on credit terms. This enables a business entity to increase volumes of sales as well as establish long term business relationships with customers. It also enables institutions that provide specialized goods and services to expand and sustain their customer base. Customers also benefit from various types of discounts due to large volumes of accumulated business. However credit business also comes with very many demerits which are very challenging in nature. The most important aspect that is affected by credit business is the cash flow factor.

Why does the cash flow factor stand out as an important aspect? For one, it must be realized that as much as a business may offer its goods and services on credit, it is also obliged to pay its suppliers in good time. Though a creditor could also be a debtor; he has to pay for some of his business on cash as well as service bank loans where necessary. A creditor is also required to pay the salaries and wages of the staff. The frequency, with which the wages and salaries are paid, be it weekly, fortnight or monthly, also impacts heavily on cash flow. It is therefore very challenging to maintain a striking balance between the money being collected and the money being paid out. Otherwise a creditor could easily land in the precarious position of having to seek bank overdraft facilities.

Accounts receivables management has evolved to become an integral part and parcel of any business institution offering credit facilities. Any faltering by accounts receivables arm of an organization may lead to crippling of business activities of the organization due to cash flow restraints. In some cases, cash flow restraints can be very damaging on the image of a business entity as well as its credit worthiness due to possible cases of issuing bouncing checks.

It is of paramount importance that once an entrepreneur decides to offer his goods or services on credit, he must establish an elaborate credit management policy. Credit policies serve the purpose of providing guidelines and mechanisms for an organization’s mode of operation on matters that concern accounts receivables. It must be taken into consideration that every debt collection process depends heavily on the type of credit management policies that every institution has in place in preparation for the eventual process of collecting debts.

Despite being a high risk undertaking, there is no doubt that credit facilities are important tools in the modern day business. But the fact that they must be carefully managed is very much inevitable. Good credit management policies are essential as revenue is only earned when money is received and banked. It is therefore discreet that credit is extended only to customers with authorized credit facilities entered into through signed contractual agreements. An effective credit policy is one that ensures the following: Maintenance of good cash flow; Proper management of debtors as a company’s major asset; Minimization of the costs of granting credit; Promotion of good customer relations as well as perfection of debt recovery efforts.

Therefore given the complex nature of accounts receivables, proper considerations must always be applied in determining the debt collection modes. Debt recovery processes, whether by creditors, collection agencies or lawyers, are often emotionally charged, expensive and lengthy. In cases where the debtors being collected against are in serious financial problems, then debt collection becomes an added indignity and cost to the creditor. The creditor must choose the means for collecting outstanding debts. Such means may involve invoice factoring, debt assignment, debt collection agencies, security realization, garnishee proceedings, bankruptcy proceedings, security realization, recalling of guarantees, examination of directors, alternative dispute resolution, no win no pay and winding up.