There are typically two types of business in operation; those that don’t need to pay attention to cash flow, and then the rest. And with bad debt and cash flow problems commonly noted as two of the main causes of small business failure, keeping an eye on your current cashflow position is vital for all those businesses affected by it.
But in reality, too many small businesses are leaving it too late before they tackle cash flow dilemmas head-on. The consequence is a situation that can quickly escalate out of control. Debt becomes an ever-growing pile as you can’t afford to meet your outgoings, further compounded by any finance you may take on to alleviate this.
Small businesses generally don’t have the capacity for an internal credit controller to take rank, instead it’s down to whoever has a spare few minutes to chase unpaid invoices. It’s an obvious way to recoup some cash, but it’s also laborious and time-consuming and in the grand scheme of day-to-day business operations, is rarely a priority.
Investing time, however, in implementing some good credit management processes as a short-term priority, is a great strategy for long-term cash flow control. There’s no denying that the journey to get there could be onerous and time-consuming, but there’s no doubt it will result in a positive impact on your cash flow.
Check out our blog ‘Your cash flow is only as good as your credit management’
So, here’s six credit management tips for you to consider:
- Conduct customer credit checks
There isn’t a value to place on having a sound understanding of your customers’ current financial position before you engage in business with them. An unappealing credit history may not mean no business with a particular customer, but it could determine how you do business with them going forward as well as how much business you will accept from them.
Carrying out credit checks does add time to securing a business deal but it’s insignificant in comparison to the time you could spend chasing late payments further down the line. It gives you the option to decide from the outset whether you will offer credit or request full payment in advance.
- Offer a range of credit terms
There is no one size fits all when it comes to the terms on which you work with customers, the value is in making your payment terms clear. You need to be in a position to offer terms that will benefit you and reduce the risk of you not getting paid on time, or at all.
If you have doubts about a customer’s ability to pay then you should offer business on more stringent terms, giving them less time and flexibility to settle their debt with you. This can involve a limited amount of credit for a short period of time or in some cases, no credit at all.
This can be reviewed as they become a more loyal customer, but the priority is for them to prove their ability to pay on-time, on a regular basis. Discounts for early payment are also worth considering to improve your cashflow.
- Deliver speedy invoicing
Place emphasis on the importance of you getting paid by issuing your invoices as soon as possible. Once you’ve delivered the goods or completed a service, you can issue an invoice. You could also request deposits or stage payments to assist your cash flow and match any expenditure you might be about to incur.
Regular invoicing may require more resource but working on the basis of running just one invoice bundle a month could result in a big delay between when you complete work and when you invoice. A sale is a gift until it is paid for and so time really is of the essence when it comes to you receiving payment.
- Automate your invoice processing
Investing in a simple accounting system can significantly improve invoice processing times by automatically sending out invoices, invoice reminders and statements. Every invoice can be issued and with the customer on the date of issue, hopefully increasing the chance of them getting paid on time.
Automation also removes the need for manual inputting which not only delivers speed and efficiency but reduces the likelihood of error and the need for invoices to be queried or re-issued. Invoices that are correct, issued on time, detail payment terms and include your full bank account details have a much higher chance of being paid, and on time.
- Keep in touch with customers
Establish procedures for keeping in regular contact with your customers, even before an invoice is overdue. Regular contact throughout the credit period can significantly improve payment terms as well as giving the opportunity for any invoice queries to be addressed ahead of the payment due date.
It is also worth checking early on that they have actually received your invoice and ask then whether they have any queries they would like to discuss.
There is also huge benefit in making friends with your customer’s payments team.
- Have a process for late payments
Once an invoice becomes overdue, an automated accounting system will issue reminders and statements. In addition, you should pick up the phone and speak with a customer as a courtesy reminder of the late payment because the longer an invoice goes unpaid, the harder it is to collect.
You need to act before your cash flow is affected and so a clear escalation process is also advised. Consequences could be to charge further interest on late payments after a certain point or freeze any further work until payment is received. Legal advice is also an option for more serious cases where receiving payment is looking increasingly unlikely.
Credit management is incredibly valuable within a small business and is based upon assessing the risk of potential customers from the outset. Your credit management procedures need to be robust and should be applied to all customers, regardless of size or potential spend.
Your primary objective is to protect your own cash flow position and late payments on invoices issued is one of the key things to affect this, and it can happen quickly.
If you’re looking to grow your business but have cash flow issues to get under control first, speak to one of our advisers for some expert guidance on how to implement effective credit management procedures and how they could benefit your business.