3 Business Accounting Limits Worth Obsessing Over

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ERP software no matter how advanced, is only as good as its configuration. The value it adds to the operations of a business is heavily dependent on the expertise of personnel responsible for mapping out key business processes. When undertaking this task, consideration of business relevant metrics must be taken into account. Whilst these vary considerably from operation to operation, there are financial fundamentals which every business must pay attention to if it is run better. Listed below are 3 limits we recommend every business should implement or at least heed some consideration:

Customer Credit Limit

This one is so obvious but we include it none the less because of the increasing number of South African businesses we come across that ignore implementing customer credit limits. Credit limits are ceilings to outstanding unpaid amounts at a given moment. The consequence of trading without credit limits in place materialise when customers default on making payments. Credit limits should be reviewed regularly with consideration made for on time payments. Customers that pay within set time frames if possible, should be given settlement discounts to further encourage prompt settlements of bills.

Financial Budget Limit

The idea behind defining business financial budgets is to be able to track expenditure versus what the business defines upfront most commonly at the start of its financial year. The goal is to be able to track expenditure against budget amounts with the end game being to stay on top of expenses to maintaining profitability. Regular review of expenses versus budgeted amounts during the progress of the year assists businesses to review if all is going as per plan or if corrective measures need to be executed.

Whilst setting of budgets is sometimes viewed as a complex tasks by some, the easiest way to come up with realistic budgets is to analyse figures from the previous year(s) and set these as benchmarks or mark them up or down by percentage points.

Proactive management of budgets is to not analyse the figures after the expenses have already been processed, but to consider the impact of transactions in the earlier phases .This can be accomplished by checking of budget amounts at purchase order or purchase quotation phase. This gives management the opportunity to accept/decline or alternatively put off potential transactions that may negatively impact budgets and consequently business cash flow.

Customer Order limit

A lesser known limit tightly related to customer credit limit is the customer order limit. This follows the same principal of checking financial budget limits at the purchase order stage of supplier transactions instead of the traditional invoice phase. Customer order limits apply for businesses that first record orders from account customers before provision of goods. Placing limits on the amount a customer can order from a business prevents scenarios where a business accepts/processes orders for goods or services from customers that are not in a position to pay for them. As with the other limits, this must be regularly reviewed. In some cases, customer order limits must be reviewed and further taken into account outstanding unpaid balances if the customer has already been separately invoiced .Customer order limits aim to prevent continued acceptance of additional orders which if processed and supplied to customers may jeopardise the operations and become bad debts.