Every SME owner aspire for the business to grow and be profitable. Profitability ensures sustainability of the business and its continual success. This in accounting parlance, the golden going-concern assumption which is the fundamental basis on which many accounting measurement and reporting is based upon. Failing which, fair value accounting and adjustments may need to be adopted to price the assets and liabilities.
Therefore, it is understandable that getting the P&L in good state is one simple but effective way in managing a company. But is this simple rule good enough. For consumer centric businesses predominantly with sales and spending transacted in cash, this simple rule is probably good enough.
But not all businesses are able to collect in cash and would have to deal with the problem of monetarising the cash that is still sitting at their customers’ bank account, ie the account receivable. The account receivable is the result of credit provision either due to industry practice or a SME pricing decision. The decision to defer collection of cash at the point where goods have been delivered or services performed, actually parks this cash from customers instead at the SME own bank account, at the customers’ bank account. This creates the problem of managing the monetisation of this cash sitting at customers’ account back to SME bank account through collection process. As long as this monetisation is not taking place, there will be a likely scenarios of SME owners asking themselves where is the money at the back of a good profit or loss statement. The money in fact, is sitting at their customer bank account waiting to be monetised. So, the way to mitigate this situation is to expedites the cash back from the customers. The more inefficient this monetisation process leading to a longer waiting time before this cash returns from the customers, creates an additional collectability risk – the amount may not be forthcoming and even if so, may eventually be a smaller amount. As the saying goes, one bird in hand is worth more than two birds in the bush, we would rather have the money in our bank than leave it lying at the customers’ bank.