DEBTOR DAYS : June 2003.
Adding value to a client relationship is
not a prerogative of upmarket retailers, smart hotels or airlines ¦ it
applies equally to accountants and business consultants who manage
the financial affairs of businesses and need to get away from the ¨cut
price audit¥.
Giving clients an understanding of the movements in key ratios with
solutions to the trends revealed, works towards these aims. It builds
client loyalty and protects and develops the income stream of the advisor.
Extended debtor days restricts cash flow, puts
pressure on creditor behaviour, bank overdraft facilities and credit
ratings. Importantly
it affects investment plans and can impact on the proprietor¥s livelihood!
Factoring is the clear option when the business
is growing rapidly and cash is needed to support expansion plans, which
traditional
banking products cannot finance. However if a modest improvement
in cash flow is needed to accommodate the more normal ¨house keeping
finances¥, then the use of a debt recovery company, to manage those
slower payers, can be significantly cheaper and be much more flexible
than the factoring alternative.
The following examples demonstrate the cost
alternatives, where the turnover is static, with no seasonal swings ¦ turnovers of £50k and £500k
per month with a varying percentage of prompt and slow paying debtors.
Example 2 companies with static / non-seasonal turnover.
|
% slow payers
(90 days)
|
10%
|
20%
|
30%
|
40%
|
50%
|
| |
Co
A
|
Co
B
|
Co
A
|
Co
B
|
Co
A
|
Co
B
|
Co
A
|
Co
B
|
Co
A
|
Co
B
|
|
Monthly Turnover £
|
50k
|
500k
|
50k
|
500k
|
50k
|
500k
|
50k
|
500k
|
50k
|
500k
|
|
Savings in Bank
£
Interest (by reducing O/D by amount Slow payers BR + 3.75%)
|
362
|
3625
|
725
|
7250
|
1087
|
10875
|
1450
|
14500
|
1812
|
18125
|
|
Alternative costs of reducing slow payers
£
Factoring Fees
2Â% pa (on whole book)
|
15k
|
150k
|
15k
|
150k
|
15k
|
150k
|
15k
|
150k
|
15k
|
150k
|
|
Debt Recovery Fees
£
5% pa
|
3k
|
30k
|
6k
|
60k
|
9k
|
90k
|
12k
|
120k
|
15k
|
150k
|
Because it is not possible to factor parts of a debtor book, the
factoring administration costs are substantial at all levels. A factor
will press slow debtors hard and may produce a savings in interest
costs.
When the percentage of slow paying debtors is less than 50% it is
clearly a cheaper and a more flexible option to use a debt collection
specialist rather than factor the whole book.
There could be some savings in staff costs
in both examples ¦ but
perhaps difficult to capture in real terms.
Somecomparisons between a debt collector and a factor :-
Debt Collector.
- Flexibility in pricing and procedures
- Company decides credit policy
- Debtor collections
outsourced ¦ from
due date/60days/selected accounts/ad hoc
- Company can retain collections from major accounts
- Debt ownership stays with company
- No cancellation fees
- Debts settled when collected
Factoring.
- Factor takes the whole book
- Factor dictates credit policy
- Factor owns the debt
- Debts often taken on a recourse basis ¦ and
could end up at a debt collection company in due course!
- A percentage of the invoice value paid up front
- Exit fees, often significant, raised when service
cancelled
Overall a Debt Collection
Company offers a much more flexible package, and on a no collection
no fee basis,
in support of a drive to manage and improve a company¥s cash
flow problems.
If you have clients, whose business
would benefit from an improved cash flow, speak to:-
Ian Wigfield, Operations Manager
or
Richard Marlow, Group Sales Director
at P & A Debt Recovery
Limited on 0800 9158497. There is more information on their range
of services
at www.padebtrecovery.co.uk.
P & A Debt Recovery Limited is a P & A
Group company and is an associate of Poppleton and Appleby of Sheffield.
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