Most business owners are by now prepared for a reduction in credit as the banks hold onto their cash, but there is another danger. If credit becomes tight enough, customers will delay paying outstanding bills. Paul Hickson has five tips to help stop your cash from ebbing away.
Whilst most businesses can survive for a short time without sales or profits, regular cash receipts are essential. Cash pays immediate bills and lets trading continue. If your business is growing, and therefore offering credit to ever more customers, the need for tight credit control is even greater.
1. Run a credit check on all new customers.
If someone has not paid other suppliers there is a good chance they will not pay you either. If you have any doubts, request payment up front or consider introducing a strict credit limit at the start of the relationship. Alternatively, you can always ask for a third party guarantee.
2. Agree the contract in advance.
Set out your terms and conditions in writing. They should cover price, delivery, payment terms and credit limits. They should also state clearly how any dispute will be dealt with. Obtain the customers agreement to the terms and conditions in writing if all possible, and needless to say, you should ensure you complete your side of the bargain.
3. Communicate regularly with your customer.
Issue clear and accurate invoices as early as possible, as this helps avoid uncertainty and ensures any contractual changes are identified early.
You should also send statements and reminder letters on a regular basis so that the customer knows you have a consistent approach to cash collection. Credit control is an ongoing process, so don't live in a wilderness and ignore the problem.
Should a customer not meet your terms, it is even more important that you keep lines of communication open and try to reach an amicable arrangement. This not only keeps cash flowing through your business, but will help maintain relationships with the customer.
Legal action should only be taken as a last resort after all other communication has failed.
4. Manage your debtors
Make sure your customers know you are serious about credit control and expect payment deadlines to be respected. Review your debtors’ portfolio regularly (on at least a weekly basis) and look for trends, such as reliable customers becoming slower in paying, or an increase in the number of invoice queries being raised. Contact your clients to agree a payment date and resolve any queries before they get a chance to fester and become a major issue.
Apply your credit limits strictly. There will always be a temptation to sell more, but unless existing debts have been recovered, all you are doing is running the risk of incurring a larger bad debt.
5. Uphold your side of the bargain
Good business practices work both ways. You should deliver your services in accordance with your contractual obligations. If difficulties arise, keep your customer informed.
Whilst it is essential to collect debts it is equally important to settle suppliers’ debts in accordance with their terms and conditions. But if your cash receipts begin to slow down making it harder to pay your suppliers, keep in communication with your suppliers. Just like you, they will not want their outstanding debt to become a bad debt, so may agree to special payment terms.
Although these five points cannot guarantee to bring in all outstanding debts, they will help improve cash flow. However, it is worth remembering that despite the dramatic headlines, credit has not dried up completely, and that as well as managing your debtors you should also manage your bank relationship.
Maintaining good lines of communication with your bank manager is essential, particularly if you need to set up or extend an overdraft. There is no guarantee that they will assist, but they do not appreciate nasty surprises – so keep them in the loop.
Paul Hickson is a partner at Menzies. Menzies specialises in advising privately owned businesses on all stages of development, from start up through to developing exit strategies.