Question

Question 1

Cash flow problems are a major cause of insolvency and it is often created by the delay in payments by customers. Cash flow planning involves making sure that a business generates enough cash at the right time to meet pressing liabilities.

For example, many manufacturing businesses have a cash cycle. They buy raw materials (parts) on credit and then manufacture goods, which they store as Inventory (stock). They then sell these goods on credit (funds, which may be due for payment from 1-3 months’ time). In the meantime, they have overheads and a workforce to pay. A problem for traders is that they expect credit customers to pay on time. This provides the cash to continue the credit cycle and to pay wages and other outstanding bills. Unfortunately, the cycle often breaks down because creditors are slow to pay. This leaves the firm with a cash flow problem.

a) Based on the information above, it has always been companies’ aim to have a favourable receivables turnover ratio. Discuss six strategies that can be implemented to reduce its receivable turnover in days.

b) You are a junior accountant in a Commercial Bank. Your senior accountant has asked you to prepare a report on whether to approve a loan of a well-established SME. Discuss five (5) factors you will be examining the SME before you decide whether to approve/decline a loan.                   

Answer 1

ACCOUNTS RECEIVABLE TURNOVER

IS THE NUMBER OF TIMES PER YEAR THAT A BUSINESS COLLECTS ITS AVERAGE ACCOUNTS RECEIVABLE. ACCOUNTANTS AND ANALYSTS USE ACCOUNTS RECEIVABLE TURNOVER TO MEASURE HOW EFFICIENTLY COMPANIES COLLECT ON THE CREDIT THAT THEY PROVIDE THEIR CUSTOMERS.

1. IMPROVE YOUR BILLING EFFICIENCY

AIM TO GENERATE AND SEND COMPANY INVOICES AS QUICKLY AS POSSIBLE AFTER THE WORK IS COMPLETE OR AT THE AGREED BILLING TIME, ENSURING INVOICES DETAIL ALL METHODS OF PAYMENT AVAILABLE AND CLEARLY NOTE COMPANYPAYMENT TERMS.

2. INCENTIVISE FOR EARLY PAYMENT

OFFER CLIENTS DISCOUNTS OR REWARDS FOR EARLY PAYMENT OF INVOICES.

3. TAKE INITIAL DEPOSITS OR PROGRESS BILL

HAVE A SET DEPOSIT FEE, OR ASK FOR A PERCENTAGE OF THE TOTAL QUOTE (20%, 50%) TO BE PAID PRIOR TO COMMENCING WORK OR AT AGREED STAGES THROUGHOUT THE JOB. ALTERNATIVELY IF COMPANY REALLY HAVING ISSUES WITH COMPAN’S DEBTORS CHANGE COMPAN’S POLICIES AND ASK FOR ALL WORK TO BE PAID FOR IN ADVANCE.

4. POSITIVE CUSTOMER RELATIONSHIPS

BY GENERATING POSITIVE CUSTOMER RELATIONSHIPS THROUGH QUALITY AND TIMELY WORK, AND MAINTAINING REGULAR COMMUNICATION YOUR CUSTOMERS WON’T WANT TO JEOPARDISE THE RELATIONSHIP BY NOT PAYING.

5. USE A SYSTEM TO SEND REMINDERS

INVEST IN A CRM SYSTEM THAT CAN MONITOR UNPAID ACCOUNTS AND AUTOMATICALLY SEND REMINDERS, IF THIS ISN’T POSSIBLE FIND SOMEONE IN BUSINESS EVEN ONE OF RECEPTION STAFF TO TAKE CHARGE OF SENDING REMINDERS OR MAKING PHONE CALLS FOR PAYMENTS DUE.

6. BE PROACTIVE

THE WORST THING COMPANY CAN DO IS LEAVE OVERDUE PAYMENTS FOR A LONG PERIOD OF TIME. THE LONGER THE TIME THE LESS LIKELIHOOD OF RECEIVING PAYMENT. BITE THE BULLET AND MAKE THAT PHONE CALL AS SOON AS THE PAYMENT IS OVERDUE.

B)FACTORS EFFECTING TO GIVING LOANDS TO SMALL MEDIUM BUSINESSES

1.CREDIT HISTORY AND SCORE

BANK USE THE CIBIL SCORE AS THE PRIMARY TOOL TO ASSESS THE BUSINESS’S CREDIT HISTORY AND LOAN ELIGIBILITY. AT THE SAME TIME, THEY ALSO CHECK IF THE SMALL BUSINESS OWNER HAS A GOOD PERSONAL CREDIT SCORE

2. FINANCIAL PERFORMANCE AND STANDING

BANK NORMALLY EVALUATE THE FINANCIAL HEALTH AND PERFORMANCE OF A SMALL BUSINESS BASED ON ITS PROFIT AND LOSS ACCOUNT/INCOME STATEMENT, BALANCE SHEET, AND CASH FLOW STATEMENTS.

3. COLLATERAL

USUALLY, BANKS REDUCE LENDING RISK BY REQUIRING THE SMALL BUSINESS OWNER TO USE HIS ASSETS AS COLLATERAL TO SECURE THE BUSINESS LOAN.

HOWEVER, LENDERS ALLOW SMALL BUSINESSES TO USE THEIR STOCK, EQUIPMENT, AND SIMILAR BUSINESS ASSETS AS COLLATERAL. INSTITUTIONS LIKE NBFCS OFFER COLLATERAL-FREE SMALL BUSINESS LOANS!

4. PERSONAL GUARANTEES

MANY LENDERS ASK THE BORROWER TO BRING GUARANTORS ON BOARD IF THE BUSINESS IS OWNED BY SEVERAL PARTNERS OR ITS OWNERSHIP AND MANAGEMENT IS SEPARATED.

THE BORROWER HAS TO SUBMIT PERSONAL FINANCIAL STATEMENTS OF EACH STAKEHOLDER IN A STANDARDIZED FORM PROVIDED BY THE LENDER.

THE LENDER WILL REVIEW THE FINANCIAL STATEMENTS OF INDIVIDUAL OWNERS TO ENSURE THAT THEY REMAIN ASSOCIATED WITH THE SMALL BUSINESS TILL THE LOAN IS REPAID IN FULL.

5. INSURANCE INFORMATION

IN ADDITION TO REVIEWING THE PERSONAL GUARANTEE OF OWNERS, LENDERS CHECK IF THE CO-OWNERS OR KEY FOUNDERS HAVE PURCHASED LIFE INSURANCE POLICIES.

THE LIFE INSURANCE POLICIES ENSURE THAT THE SMALL BUSINESS IS NOT LIQUIDATED IN CASE OF THE DEATH OF A CO-OWNER.

THE LENDER CAN EVEN ASK THE BORROWERS TO USE THE COMPENSATION RECEIVED FROM THE INSURANCE COMPANY TOWARDS LOAN REPAYMENT.

6. AGE OF THE BUSINESS

WHILE REVIEWING SMALL BUSINESS LOAN APPLICATIONS, MANY LENDING INSTITUTIONS ALSO CONSIDER THE PERIOD FOR WHICH THE BUSINESS HAS BEEN OPERATING. MOST LENDERS PREFER PROVIDING CREDIT TO SMALL BUSINESSES THAT HAVE BEEN OPERATIONAL OVER A FEW YEARS.