Companies still struggling to pay bills

New data from Dun & Bradstreet has revealed Western Australian companies are the quickest to settle their accounts, but it still takes an average of 51.5 days.


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The longer collection period, as suggested in the D&B report, demands management focus. I have found that lower collection delays are not significantly a function of macro economic factors but that of micro management and controllable at the enterprise level. RoE lost. If one does a Du Pont Chart using the current balance sheet and annualised and averaged income statement, then one can know the relationship between recognised receivables and the recognised return on equity at the specific enterprise level. Several financial management departments in enterprises give more resource allocation to areas other than receivables management. I would hypothesise that we need to allocate 20 to 25% of the finance department resources to receivables management process starting from contract review to collections. Assuming a 30 day average credit period, the 50 to 57 days are consuming 190% more of the working capital. This has a significant drag on the return on equity. And on the opportunity cost of missed deployment of equity in realising more valuable business opportunities. Contract Review This involves correct booking of sales orders after a good contract review. A good inward order documentation is the basis for delivery of goods and services. The delivery of goods/services need to be then within the order or the amended or ratified order documentation. Several days of delay happen because the delivery has crossed the boundary of the documented order. This mis-match between delivery and the order generates receivables delays. As the counter-party accounts department does not have the right purchase order to match the invoice. The D&B cycle time need to disclose the delayed days attributed to such order mis-matches. Revenue Recognition Several times, due to un-reconciled positions between the Ledgers of counter parties, payments are not processed for certain invoices. The CFO of a Perth based SME company recently shared that he found he had a receivable of $200,000 in his ledger. While the Accounts Payable from his customer side acknowledged only $93,000 , on investigation he found that over $107,000 worth of invoices were held in the pipeline at the customer purchase department , with out forwarding them to their Accounts Payable Officer. The reasons why some of them was not forwarded was because there were short deliveries, some order mis-matches, so just missed to get authorised, and the rest are in the process of getting processed. On average sales of $5000 per day, the delayed in the pipe line at the purchase department itself was some 21 days sales. Accounting Standard or Governance Policy The companies need to have an aggressive policy on payment delays. One the accounting standards need to force higher charge on recognised profits for collections delayed. For some companies delayed collections could be a way of recognising higher revenue than standard. I found recently a factoring customer of a bank had discounted the 100% value of the invoice, while the delivery was complete only for 70% of the value. Hence the bank will not get paid in time for the balance 30% as per the banks books. Australian Accounting Standards need to demand that either a provision of delayed interest is charged to lower the profits against all delayed days of collections against recognised revenue. The second alternative is to use the hurdle rate of the company’s marginal investment instead of the current interest rate to write down the profits. If the AASB does not move faster in this direction, the corporate governance policy of the Board should consider demanding such charge against profits, to keep the recognised profits healthy to the shareholders. E. Michael Johnson AICWA MNIA

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