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Blog // 12/04/2019

Avoiding insolvency with effective credit management

Cash flow planning for first-time business exporters

Last year’s increase in corporate insolvencies of around 10% clearly illustrates the struggle of businesses to make a profit within competitive markets – highlighting that many are still unaware of how to protect their operations in order to prevent insolvency.

The profitability of any firm comes down to strong financial management, of which effective credit management is an essential factor. Credit management describes the process of ensuring customers pay their invoices within the payment terms and conditions and contributes to a healthy cash flow by aiming to prevent late or non-payment.

Cash flow

coins and £20 noteWith several high-profile financial failures in 2018, the rise in corporate insolvencies in the UK could have been anticipated. Although a business might seem profitable, poor cash flow management, which is one of the main reasons for insolvency, may cause them to struggle to make payments when they are due.

Efficient credit management focused on ensuring timely customer payments, can help boost the business’ cash position and avoid cash flow difficulties. However, simply reminding customers to pay will not suffice. In order for credit management to be effective, extensive processes, from setting the right terms and conditions to procedures on how to enforce them, should be adopted.

Common pitfalls

Obtaining new business, maintaining good customer relationships and keeping key clients happy are common reasons for owner-managers to avoid having difficult conversations with clients about payment terms or for extending credit lines, without looking at the bigger picture. On the other hand, ineffective management of invoices and reminders, or a lack of investment in specific systems and personnel, are also frequent credit management shortcomings.

Taking appropriate steps

Step to Bulb

A growing customer base only benefits the business when these customers actually pay their bills on time. Conducting a thorough credit check is therefore advisable, not only before agreeing terms and conditions with new customers, but on an ongoing basis to also monitor potential credit risk changes with existing clients.

To ensure payments are received without delay, it’s vital the business clearly communicates with their customers. Additionally, other incentives should be considered if possible, such as discounts for early payment, which will increase the likelihood of maintaining a healthy cash flow.

A regular audit of the business’ credit management processes and procedures is recommended. This can be done in-house or outsourced, either way, in addition to covering invoice and reminder processes, procedures for debt recovery should not be omitted. Although debt collection agencies and legal proceedings are often considered to be a last resort, they will sometimes be inevitable. Being prepared for any worst-case scenarios can help you to avoid financial failure when all other efforts have been exhausted.

Prompt Payment Code

Standards for payment practices and best practice are set by the Prompt Payment Code, which is administered by the Chartered Institute of Credit Management and gives suppliers the opportunity to raise an issue if they feel treated unfairly by a customer. Businesses who sign up to the code demonstrate their dedication to a fair supply chain by paying customers on time and, in turn, business owners can look for such credentials before forming new partnerships.

Get your priorities straight

Bethan Evans - Menzies AccountantMaking effective credit management a priority within your daily business activity is key to preventing financial difficulties and maintaining a healthy cash-flow. By applying best practice in this area, businesses of all sizes can guard against late payment in order to improve their cash position which minimises the risk of insolvency.

For further information contact Bethan Evans, insolvency partner on +44 (0)2920 447512 or at BEvans@Menzies.co.uk 

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