5 June 2008
Improve cash flow by calling in overdue debts
Media Release
With the end of the financial year just weeks away there is little time left for Australia's SMEs to collect outstanding debts and ensure their business is in an optimal financial position to start the 2008/09 year.
According to leading collections and credit reporting agency Dun & Bradstreet (D&B), many businesses fail to call in their overdue accounts before June 30 and are forced to start the new financial year already behind the eight ball. This is particularly true for SMEs who often struggle to meet all of their year-end deadlines.
New research by D&B quantifies the detrimental impact of overdue accounts by revealing that a business which operates on a standard 10% net profit margin would have to achieve $25,000 worth of additional sales to make up for a bad debt of just $2,500.
That is a substantial impact for any business and it demonstrates that an efficient accounts receivable process is critical for positive cash flow and business survival.
According to Christine Christian, CEO of Dun & Bradstreet, collecting overdue accounts can be a major hassle for SMEs but the impacts of not staying on top of debtors can be devastating.
"In the current environment, with funds expensive and difficult to access, the importance of tapping available sources of funding cannot be overstated," said Ms Christian.
"Executives need to be savvy in their cash flow management and this means that getting paid on time should be a central focus for executives."
Businesses across the country are facing pressure on their cash flow as payment periods have hit their highest level since 2001. The average time taken to pay a bill is now close to four weeks past the standard term (55.8 days).
Big businesses and public companies are the worst payers, averaging 62.7 and 64.5 days respectively to settle accounts, a trend that creates significant challenges for SMEs who often lack the size and strength to force payment or weather the financial burden.
"Businesses, particularly small and medium sized enterprises, need to understand that they deserve to be paid on time no matter who their customers are," said Ms Christian.
"This message is particularly important in the current economic climate as we want to avoid a significant increase in the number of Australian companies becoming victims of financial distress."
Already this year thousands of businesses have become victims of the tougher conditions, with close to 5,700 firms entering external administration in the nine months to the end of March.
An examination of last year's figures and D&B trends data indicates that failures are already up on the same period last year and around 1,800 additional collapses are still expected to be recorded before the end of June.
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This data highlights the importance of vigilant debtor management processes. "A significant portion of business failures are the result of poor cash flow. This means any failure on the part of executives to tap into their own funds could result in their firm becoming just another number on the failures list." An analysis of data from D&B's trade program revealed that key operational measures such as cash flow can be significantly improved via enhancements to a business' collections process. Based on an average outstanding debt value of $550,000,000, the analysis revealed that cost savings of $128,000 and extra cash to the value of $15,500,000 could be achieved over a 12 month period. The study also revealed that days sales outstanding (DSO) levels could be reduced by 10%, which at current average business payment terms equates to a five day improvement. Particularly for SMEs, this level of improvement in payment terms can make a significant difference to business cash flow. |
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According to Ms Christian the message for Australian executives is simple - ensure your operations are in order to avoid economic pain in the New Financial Year.
"Executives need to focus on the items they can control and with the New Financial Year just around the corner now is the time to ensure the business is in good financial shape.
"Small and young companies need to be particularly diligent as D&B's trends data shows they are more likely to suffer financial distress or failure than their older and larger counterparts."
Danielle Woods
D&B PR Manager Australia & New Zealand
(02) 8270 2926
About D&B
D&B is the world's leading provider of business-to-business credit, marketing and purchasing information and receivables management services. D&B manages the world's most valuable commercial database with information on more than 130 million companies.
Information is gathered in 193 countries, in 95 languages or dialects, covering 186 monetary currencies. The database is refreshed more than one million times daily as part of D&B's commitment to provide accurate, comprehensive information for its more than 150,000 customers.
The Australasian operations were bought out by the senior management group in August 2001. It was the first MBO of a wholly owned subsidiary in D&B's history worldwide.
Today Lazard Carnegie Wylie owns an approximate 90% stake in DBA and the local management team a 10% stake.
Strategies for future growth include developing DBA's commercial and consumer credit referencing business; expanding its receivables management outsourcing business; maintaining its lead in the development of unique credit and risk scoring products; and developing new products specifically tailored to the Australasian market. DBA currently employs over 500 people in Australia and New Zealand.
