Cashflow is critical to business survival. But all too often the day-to-day challenge of running that business, particularly a smaller business, can mean losing sight of some of the fundamental skills for successful cashflow management. And in the current economic climate, it is not surprising that businesses are determined to hang on to their cash for longer to satisfy their own cashflow requirements. Which is why credit control is so important.
So, what are the simple steps a business can take to keep the cash flowing and what best-practice credit management techniques should they follow?
Know your customer
Ensuring you are clear as to the exact name and legal status of the business/individual you are supplying is the first step in ensuring a successful relationship. Failing to know exactly who you are trading with means you won’t be able to check if they are good for the amount of credit you need to grant them, you won’t be able to invoice them correctly, and you won’t be able to commence legal action effectively if it becomes necessary. Put the other way, get the basics right from the start mean you will make better-informed credit decisions, avoid unpleasantness, and bet paid for the products/services you deliver.
If you think you are going to be paid on one date, and your customer has a different date in mind, you could be heading for trouble. Making assumptions is dangerous and formally agreeing payment terms in advance, to an agreed set of terms and conditions (which are regularly reviewed and updated), is vital.
If you don’t raise an invoice, you won’t get paid. It’s as simple as that. Invoicing should not be seen as a back-office administrative nuisance, but rather a vital first-step in achieving healthy cashflow. The sooner you ask, the sooner you can get paid. But check with the supplier on how you need to invoice them – for example, do you need a Purchase Order – and make sure the details on the invoice are correct. Follow up once your invoice has been sent to check it has arrived and that there are no issues. This will avoid the potential for disputes or delays further down the line.
Treating suppliers fairly
You want your invoices paid on time and you should do the same. It’s not just good business practice and ethical behaviour, it also demonstrates a wider corporate social responsibility. Make sure payments due are in your cashflow forecast so that you’re not caught unawares.
A sale is only complete once you’ve been paid for it. Until then, they’re hanging on to money that is rightfully yours and you should ask for it. Routines should be in place as standard for following up on non-payment that includes letters, email, and telephone, with the need to stay flexible if the amount outstanding is large or you have concerns over the customer’s financial viability.
When cash runs short
Cash keeps businesses in business. Plan your cashflow requirements carefully, therefore, allowing for differences in the payment terms you receive from your suppliers and those you give to your customers.
When all else fails…
However disciplined your teams, and even when you follow best-practice credit control techniques, there are some occasions when you just can’t get paid. The longer the debt remains unpaid, the more likely it is to turn into a bad debt and bad debt seriously affects cashflow. Legal action is an option, but so too is employing a debt collection agency or issuing a statutory demand.
When you customer goes bust
Inevitably businesses fail, and when one of your customers goes bust, your resources can again be depleted. It helps in these cases to understand the different types of insolvency, bankruptcy, IVAs, CVAs, liquidation and administration and how each affects your chances of recovery. Forewarned is forearmed, but if you keep alive to what’s happening in your industry, and your client base, you can avoid being caught unawares and gradually reduce the amount of credit you extend over time.
6 ways to prevent risk of late payment
Businesses can reduce the risk of late or non-payment by using:
- Automated payment methods to ensure the immediate transfer of funds
- Agreeing explicit payment terms in advance of a transaction
- Invoicing customers promptly
- Not giving a customer any reason to dispute an invoice
- Demanding interest on late payments, which is a company’s legal entitlement
- Perhaps even rewarding those customers who do pay promptly
The importance of credit control
Above all, perhaps, the best way to manage cash effectively is to follow the mantra of “know your customer”, and that means checking the credit details of a customer, not just at the start of a new business relationship but also on an ongoing basis. Because in these uncertain times, fortunes can change almost overnight.
For more information, check out the CICM Managing Cashflow guides. Originally written in 2008 for the then Small Business Tsar Lord Sugar, they have been regularly updated and are available online.
Sue Chapple is chief executive of the Institute of Credit Management