Cash flow is essential for a company’s survival. However, the day-to-day challenges of running a business, especially a smaller one, can lose focus on some of the most important skills for efficient cash flow management. And, given the current economic climate, it’s unsurprising that firms are determined to keep their cash for longer to meet their own cash flow needs. That is why credit management is so crucial.
So, what are some basic steps a company can take to keep cash flowing and what credit management best practices can they employ?
>See also: One out of every ten small businesses may be forced to collapse due to late payments
Know who your customers are.
The first step in ensuring a successful connection is ensuring that you are clear on the exact name and legal status of the business/individual you are providing. You won’t be able to check if they’re good for the amount of credit you need to provide them, you won’t be able to invoice them accurately, and you won’t be able to take legal action efficiently if it becomes required if you don’t know who you’re dealing with. To put it another way, if you get the basics right from the start, you’ll be able to make better credit judgments, avoid uncomfortable situations, and be paid for the items and services you provide.
Terms of payment
If you expect to get paid on a certain date, but your customer has a different date in mind, you may be in trouble. Making assumptions is risky; thus, officially agreeing on payment terms in advance, according to a set of agreed-upon terms and conditions (that are reviewed and updated regularly).
You will not be paid if you do not send an invoice. That’s all there is to it. Invoicing should not be a back-office administrative annoyance but rather a critical first step toward maintaining a healthy cash flow. The sooner you inquire, the sooner you will be compensated. However, verify with the supplier to see how you should invoice them – do you require a Purchase Order, for example – and double-check that the invoice information is valid. Once your invoice has been sent, check to see if it has arrived and if there are any problems. This will eliminate the possibility of future disagreements or delays.
Suppliers are treated fairly.
You expect your invoices to be paid on time, and you should expect the same from your customers. It displays good business practices and ethical behavior, and a broader sense of corporate social responsibility. To avoid being caught off guard, make sure payments due are included in your cash flow estimate.
We are trying to collect money.
Once you’ve been paid for a sale, it’s finished. They’re holding onto money that is legitimately yours until then, and you should ask for it. Routines for following up on non-payment should be in place as normal, including letters, email, and phone calls, with the need to be flexible if the amount owed is high or you have worries about the customer’s financial sustainability.
>See also: Small businesses spend an hour and a half pursuing late payments every day
When funds are scarce,
Businesses rely on cash to stay afloat. As a result, carefully plan your cash flow requirements, considering the variances in payment terms you receive from your suppliers and those you give to your customers.
When everything else fails…
There are times when you just can’t be paid, no matter how disciplined your team is or how well you follow best-practice credit control practices. The longer a loan goes unpaid, the more likely it is to become a bad debt, which significantly impacts cash flow. Taking legal action and hiring a debt collecting firm or submitting a statutory demand are all options.
When a consumer defaults on a payment
Businesses collapse, and when one of your customers goes bankrupt, your resources may be exhausted. Understanding the many types of insolvency, bankruptcy, IVAs, CVAs, liquidation, and administration, and how each affects your chances of recovery is helpful in these situations. If you stay informed about what’s going on in your sector and with your clients, you may avoid being caught off guard and progressively limit the amount of credit you extend over time.
There are six techniques to avoid being late on a payment.
Businesses can reduce the risk of late or non-payment by implementing the following strategies:
- Payment techniques are automated to ensure that funds are transferred quickly.
- Explicit payment terms are agreed upon in advance of a transaction.
- Invoicing customers as soon as possible
- Providing no reason for a consumer to contest an invoice
- Demanding interest on late payments is a legal right for a business.
- Maybe even rewarding those consumers that pay on time.
Controlling credit is crucial.
Above all, probably the most effective strategy to handle cash is to follow the maxim of “know your customer,” which entails reviewing a customer’s credit details at the outset of a new business relationship and regularly. Because in these difficult times, fortunes can shift in an instant.
Check out the CICM Managing Cashflow guidelines for further information. They were first written in 2008 for Lord Sugar, the then-Small Business Tsar, and are now frequently updated and available online.