- Sales (Also known as Revenue, Income or Turnover).
- Net Profit (Also known as EBIT, EBITA or Earnings).
- Net Worth. (Also called Book Value or Shareholders Equity)
For PLC’s these three numbers are a major contributing factor to the share price, that is the single most important measure of a Chief Executives performance.
For Larger Companies, these three figures are the main ones that are reported in the media. Banks look at these three numbers in establishing an appropriate credit line for the business
Credit Agencies look at these three figures in assessing a companies creditworthiness. These three figures also drive other measures like growth, profitability and return on investment.
Salespeople are seen as valuable because a single sale of €1,000 increases the sales figure by €1,000. If you are making a 10% Net margin, this sale will increase the Net Profit by €100 and it will also increase the Net Worth of the business by €100.
These figures hold true whether you get paid for the goods or not!
In the middle of the Balance Sheet, there is a little box called “Current Assets” and two smaller boxes called “Debtors” and “Bank”. In some senior business peoples heads, the job of credit control is to simply move numbers from the box called “Debtors” into the box called “Bank” and as such are not seen to be adding any value to the business at all. Worse still, if there are any Bad Debts, this will reduce the Net Profit and the overall value of the business, so Credit Control is seen to be having a negative impact on the overall performance of the business.
Having worked in credit all my life, I have seen this trend over and over again. To me, a sales start with a prospect and end with money in the bank. Otherwise, there is no point in making the sale in the first place.
When beset with cash flow problems the first step taken by senior finance professionals is to seek funding from their banks, more often than not, the solution to all their problems are sitting in the Debtors Ledger, and if they collected what they are owed, when it is owed, they would have no such problems, and we all know that businesses fail simply because they run out of cash.
As credit professionals, we have all seen old balances on the Ledger, that will never be collected, we see piles of queries, still to be dealt with, that will require credit notes to resolve, and until the credit notes are processed, the sales figures and the profit figures and the Net worth figures for the business are overstated.
The larger the company, the more the senior managers have to be protected from bad news, and most don’t really want to know.
Over the past few months, I am spending more time working with companies who are not afraid of the truth and are looking for a way to increase cash flow as cost effectively as possible and maintaining excellence in customer service by quantifying the issues that are buried in the Debtors Ledger, and believe me, the debtors ledger is one place most of the bodies are buried!
Most times, when I am called in to train a credit team, it soon emerges that the business doesn’t really have a credit control problem, they have fundamental business problems that are manifesting on the Debtors Ledger.
When we truly live by the old adage that “Cash is King” – Credit Control will take its rightful place as the most important business function of all.
Declan Flood, The Credit Coach and Chief Executive of Irish Credit Management Training