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Jul 21

The Five Keys to Understanding and Improving Cash Flow

Cash flow management is a complex challenge, but at TSI we believe that everyone can and should understand the essentials. There are five key parts to understand those basics and take the right steps to improving your cash flow.
    1. Depreciation is the Enemy
      Picture your delinquent account as a car you’ve just driven off the sales lot. The farther it gets from where it started, the more miles it acquires and the less it’s worth. The same holds for your delinquent accounts – a 120-day-old account just isn’t worth the same as a 10-day-old one, even if the amount owed is the same dollar value. Just like that car, your old account is less likely to perform well and less likely to arrive at its destination (payment) than its younger counterpart. Why? Because…
    2. All Payers Are Not Created Equal
      Just because people owe the same debts for the same services, does not make them the same type of payer. There are FOUR types of payers and you as a professional will deal with all four.

      1. Dutiful – The dutiful payer pays on time, every time.
      2. Distracted – The distracted payer means well, but often forgets. They will pay, and not terribly late, but they will need help getting there.
      3. Disrespectful – The disrespectful payer will be late because they don’t want to pay. They will pay in the end, but you will have to work more with them to get paid.
      4. Deliberate – The deliberate payer not only intends to be late, but is a professional debtor.

      It is important to deal with these four payer types in four different ways.

      1. Dutiful – Statements. Dutiful payers only need to be told what they owe and when.
      2. Distracted – Reminders. Distracted payers will need reminders, but their intentions are to pay and pay on time, so you will not need anything further.
      3. Disrespectful – Third-party impact. Disrespectful payers will need a firm reminder of their obligation.
      4. Deliberate – Professional debt collectors. Deliberate payers are experienced debtors—leave them to the professional collectors.
    3. You are Competing for Collectable Dollars
      That’s right, you are competing for the money that you are rightfully owed. The typical American consumer has 12 active creditors. Where do you rate in order of urgency compared to their mortgage? Rent? Heat? Car payment? What are you doing to prove that the debt owed to you is every bit as important and real as a water bill?
    4. The Impact of Uncollected Money
      Uncollected money is not the same as uncollected profit. Your expenses didn’t disappear—just your revenue and any uncollected money you have not declared as bad debt falsely inflates your total revenue amount, making your organization appear more profitable than it is. To recover from uncollected money, you need to earn even more revenue than before. See the chart below:

      If Your Uncollected Amount is:

      $1,000$5,000$10,000$25,000$50,000$100,000
      Net Profit
      Additional Revenue Required to Offset Loss
      2%$50,000$250,000$500,000$1,250,000$2,500,000$5,000,000
      3%$33,333$166,667$333,333$833,333$1,666,667$3,333,333
      4%$25,000$125,000$250,000$625,000$1,250,000$2,500,000
      5%$20,000$100,000$200,000$500,000$1,000,000$2,000,000
      6%$16,667$83,333$166,667$416,667$833,333$1,666,667
      7%$14,286$71,429$142,857$357,143$714,286$1,428,571
      8%$12,500$62,500$125,000$312,500$625,000$1,250,000
      9%$11,111$55,5556$111,111$277,778$555,556$1,111,111
      10%$10,000$50,000$100,000$250,000$500,000$1,000,000
      15%$6,667$33,333$66,6667$166,667$333,333$666,667
      20%$5,000$25,000$50,000$125,000$250,000$500,000

 

Leveraging Progressive Tools & Techniques

    While creditors today face more regulation, they also have more tools at their disposal. Tools such as:

    • Billing software interfaces and automation – TSI interfaces make sending accounts andcontacting clients easy and efficient.
    • 1st party services – The use of a first party reminder service can help with your distractedpayers. TSI’s Accelerator does just that using a series of reminders in your business’sname.
    • Improvements to statements – Is there anything confusing on your statements?Anything left open to interpretation or dispute?
    • Fixed fee collections – Some companies charge a percentage that changes depending onthe size or delinquency of an account, so that you see less and less of the money you areowed. Others, like TSI, charge a low, flat fee that averages out to a lower cost peraccount, so you recover more of your money, without spending more of your resources.
    • Internal training and consistency – Cross-trained staff understand cash-flowmanagement, the different payer types and how to respond to them, as well as theeffects of uncollected money. Consistent staff cannot be played against one another bysavvy deliberate payer types, nor do they create further confusion resulting in latepayments.

Cash flow is a vital part of your business’s health. Understanding these five keys to cash-flow management will help you ensure that you have the right tools in place to overcome your cash-flow obstacles. So remember: Avoid depreciation; understand the different types of payers; recognize the competition for collectable dollars; appreciate the impact of uncollected money; and always look to leverage the latest tools and techniques. If you need any further help, give TSI a call. We are always happy to answer any cash-flow questions.

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