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Part 3 of 7 · Credit limit reviewer series ~6 min read

Why exposure is more than the unpaid invoices

Every business that has been caught by a customer failure discovered afterwards that the real number was larger than the one on the screen, and usually by about a week.

Key takeaways

  • The ledger balance is exposure minus everything that has not been billed yet.
  • Accepted orders, picked stock and goods in transit are all money at risk.
  • The gap is about one trading week, which is when failures happen.
  • A disputed invoice is still exposure until it is credited.
  • One number, recomputed on events, not a nightly batch.

What the ledger does not know

Where committed exposure is invisible to the invoice ledgerThree boxes across the top outside the AWS account, forming a sequence. Order accepted, stock committed, on day zero. Goods despatched, on the van, on day two. Invoice raised, finally visible, on day five. Beneath each, inside the account, is what the ledger sees. For the first two, Counted by nobody, not on any screen. For the third, Counted at last, the ledger wakes up. A note says five days of exposure that every report in the business values at zero.AWS ACCOUNTOrder acceptedstock committedGoods despatchedon the vanInvoice raisedfinally visibleCounted by nobodynot on any screenCounted by nobodystill not on any screenCounted at lastthe ledger wakes upday 0day 2day 5Five days of exposure that every report in the business values at zero.
Fig 1. The order-to-cash sequence with the ledger’s view underneath it. The first two columns are the ones that get people hurt.

The commitment happens at acceptance

The moment you accept an order you have committed stock, allocated labour, and in many cases bought something specifically. If the customer fails on Wednesday, the order taken on Monday is a loss whether or not anybody has raised the paperwork.

Which means exposure has to be counted from acceptance, not from invoicing. The billing run is an accounting event; it has nothing to do with when the money went at risk.

Counting it properly

Everything that belongs in the number

  • Posted invoices, unpaid. The part everybody already counts.
  • Delivered, not yet invoiced. Usually two to five days of trading.
  • Accepted orders, not yet delivered. Committed the moment you said yes.
  • Goods in transit, which is the same thing with a lorry attached and a longer tail on a three-day delivery.
  • Less: payments received but unallocated. The money is in the bank; do not hold it against them because the cash posting is behind.
  • Not less: disputed invoices. A dispute is a reason not to chase, not a reason to stop being owed.

The unallocated payments line is the one that causes arguments internally, and it is worth being firm about. A customer who paid on Friday should not be blocked on Monday because the remittance has not been matched yet. Blocking a paying customer is the most expensive false positive this system can produce.

Disputes are still exposure

How a disputed invoice affects chasing and exposure differentlyA vertical chain of four steps entered by a box labelled Invoice disputed, short delivery. Step one, Chasing stops, correctly. Step two, Exposure does not, because you are still owed it. Step three, Resolution or credit, one or the other, with a side box noting that left open is the failure mode. Step four, Exposure moves, only now. A note says a dispute that stays open for four months is a credit note nobody wanted to write.AWS ACCOUNTInvoice disputedshort deliveryChasing stopscorrectlyExposure does notyou are still owed itResolution or creditone or the otherNot 'left open'that is the failure modeExposure movesonly nowA dispute that stays open for four months is a credit note nobody wanted to write.
Fig 2. What a dispute changes and what it does not. Removing disputed value from exposure is how a limit quietly stops meaning anything.
  • Machine learning
  • Security & identity
  • Management
  • Analytics

Recompute on events

Exposure is one number per customer, and it changes when something happens: an order is accepted, a delivery goes out, an invoice is raised, a payment lands, a credit is issued. That is a handful of events a day for a small business.

Recomputing on those events rather than in a nightly batch means the number is right when somebody looks at it, which is invariably at four in the afternoon while a customer waits on the phone. A nightly figure is a figure from before this morning’s orders.

The headroom number

What the sales floor needs is not exposure and not the limit; it is the difference. Headroom is the number that answers the actual question, which is whether this order can go on the account right now.

Publishing headroom rather than exposure also stops a well-meant argument about which figure is correct. There is one number, it is derived, and it is either positive enough for the order or it is not.

Next: when to look at the limit again.

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