For most companies, collecting accounts receivable is the largest single source of cash. However, relatively few credit managers play a key role in forecasting cash receipts. This is a mistake. No one is closer to the accounts receivable, or more certain about when accounts receivable will be collected, than the credit manager. For too long, the focus of professional credit managers has been on maintaining a sound and ultimately collectable accounts receivable base. One of the ways credit managers can become more valuable to their employers, and to elevate their status, is by involving themselves in cash management and forecasting.
The timing of fund inflows and outflows is vitally important to business, especially small business. The ability to run the company using funds generated from internal sources means the business does not have to face the uncertainty, limitations, and cost of borrowing from outside sources. Generally, the smaller the firm, the more reliant they must be on both trade credit and the rapid conversion of current assets into cash. Larger firms have another advantage; often, they can borrow additional cash on short notice.
There are several reasons why having an adequate amount of cash on hand is necessary for every company, including:
* enabling the company to transact its business, making purchases, meeting payroll, paying taxes, rent, and so forth;
* handling emergencies, or conversely, taking advantage of unusual opportunities;
* taking advantage of cash discounts and other incentives for early or prompt payment, and;
* avoiding the uncertainty of borrowing money.
Credit managers have a direct influence on their company's cash flow based on the following factors:
1. The criteria by which the credit manager determines the minimum acceptable standard for credit risk, and for determining the maximum credit limit for each customer.
2. The company's terms of sale. Most credit managers do not play an active role in determining terms of sale. Instead, they are asked to set a credit limit based on their comfort level for that customer based on those terms of sale. Credit managers …