How debt management affects cash flow
Published On January 24, 2017 » 1152 Views» By Diran Chama » Business, Columns
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THERE are two pictures depicting two business executives one showing a fat business executive sitting on a chair with a peace of mind smiling in a happy mood with words reading, sold on cash while the other picture shows a thin man sitting on a chair worried and the words reading sold on credit.
This picture interprets that the one who sold on cash is confortable in the sense that the business received all of its revenue as goods
were being sold while the other picture shows a sad man who could not collect the revenue on time because the goods or services were sold on cash.
Today, in our business column we take a look at debt management and how the same affect the cash flow in small businesses.
It is important for an entrepreneur to know that a sale in a business can be either a cash sale or a credit sale.SMEs coener -  new
According to business principal or law relating to sales, a credit sale is a sale despite of the money not coming in immediately.
For this reason statutory bodies like the Zambia Revenue Authority (ZRA) recognise credit sales and collect taxes on unpaid invoices affecting the cash flow of business in that the taxes are paid on the invoices that are still outstanding.
A business should know that credit sales and the cash inflow based on credit sales have timing differences in that money does not come in at
the time credit sales are made.
For this reason, prudent management of debts from the debtors and collection of debts is cardinal to a business that relies on credit sales.
Customers who obtain goods or services on credit must be scrutinised and establishment of credit worthiness on their part is important.
The ability to pay a debt financially or morally is important on the part of customers.
I have seen customers who fail to settle debts not because they don’t have the money but because they choose to attend to personal matters financially and this is not healthy to a business.
When a business sales on credit it attaches a credit period to a sale and this depends on condition of sale agreed with the customer and the credit period differs from one business to another.
Others attach two weeks while others extend to three months depending on the kind of the business being run.
The most challenging problem in businesses run on credit terms according to the experience adduced from most small businesses is the inability to collect debts in time.
A business that fails to plan to collect debts on time usually affects its cash flow in the adverse way.
A business cycle of a credit business is adversely affected in that the cycle completion takes much longer than usual, destabilising the business.
For example the products or services which are converted into credit sales and the lead time to covert into cash if not taken on time
extends the cash collection period delaying the buying of goods or provision of services.
This business scenario affects the business in that the cash inflow is affected will not pay the suppliers and for other vital business expenses on time.
In some cases even salaries are affected.
Lead time for collecting debts must be prudently followed and collection must be near to fulfillment so that the business cycle is
not disturbed leading to break down in business operations.
For example, if the debt collection period is one month the business should collect the debts within one month for the financial plan to be
carried out smoothly.
It is important to note that a business that operates its business on credit terms does not collect its debts in full compared to the cash
operated business.
It is forced to make adjustments of provision for uncollected debts known in accounting circle as provision for bad debts.
This calls for a business to estimate either in percentage or figure itself and treat the unadjusted figure as a business expense.
This is so because there could be the unforeseen circumstances that can force other debtors not to pay.
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