Why is sales falling
What good is the best turnover if the bills are not paid? Too many open items in the financial accounting are dangerous. Monitoring the timely settlement of claims is vital for most companies. As a rule, receivables develop roughly parallel to sales, because they arise when the invoice is written. If they rise faster than sales or even increase even though sales are falling, the causes must be clarified and appropriate countermeasures initiated.
Does a functioning dunning system exist? Do delinquent customers pay interest on arrears or are these even already included in the order? Is a liquidity bottleneck caused by a debt deferral compensated for with a current account credit? Does this result in interest expense, which in turn worsens the liquidity situation? It is advisable to calculate the financial effects of late payments on the interest expense from the current account.
Example: Open receivables at the end of the year 120,000 euros / total sales 1 million euros X 360 days (June 180 days) = 43 days average customer target. If it is possible to reduce the time until the money is received to the agreed 30 days, the outstanding receivables are reduced by around 37,000 euros, which at an interest rate of 12 percent means savings of 4,400 euros per year! With the liquidity gained, the supplier accounts can in turn be better used, which ensures further savings.
With a functioning receivables management system and appropriate measures before the order is placed - your own tax advisor can provide support with both of these - the risk of failure, which could endanger the existence of the company, is reduced. The following example shows its specific effects: With a profit of 50,000 euros and sales of 1 million euros, a return on sales of 5 percent is achieved. In order to maintain this return, with a bad debt loss of 30,000 euros, total sales must be increased by 600,000 euros (sic!). In most cases this should not be possible!
If invoices are not paid due to complaints, the company has multiple problems. On the one hand, when the deficiencies are remedied, new expenses arise without new sales; on the other hand, liquidity becomes tighter and interest expenses rise, i.e. profit is eaten up. It is therefore important to get the causes of the complaints under control before the image is damaged and customers drop out.
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