Credit control & cash flow is vital when it comes to your company’s success and stability. Companies must monitor their credit and cash flow to maintain good financial health. The success of a company isn’t purely down to turnover.
What we need to consider when thinking credit control & cash flow, is the steps we need to take when trading with customers and suppliers and how their credit worthiness can be monitored effectively.
Cash flow issues
Cash flow can be defined as the difference between the amount of money coming into a business and the amount leaving. These two aren’t always in sync, because businesses often unable to acquire sufficient funds in time to cover their outgoings.
In the short term, businesses may take out a loan and struggle to pay it back. In the long term, late payments can affect credit scores and damage relationships with suppliers.
In its most basic form, poor cash flow can be caused by low profits. Without sufficient cash coming into a business, there won’t be enough to cover bills.
Ways to improve your cash flow
1. Speed up receipt of cash.
Any steps you take to shorten your receivables will enhance your cash flow. You may think to offer a small discount to customers who pay their invoices early and charge a penalty to those who pay late. Monitor your receivables on a weekly basis and follow-up with late customers.
Offer credit carefully and conduct a financial check on new customers before offering them credit. Also ask for their consent to check their business references.
2. Take advantage of your business credit card.
Consider using your company/business credit card to pay suppliers and make purchases. Learn about your card’s grace period, and take advantage of it. Some cards also come with cash-back features.
3. Encourage use of payment cards. You may be better off to consider accepting credit card payments. This allows you to receive next-day value for your sales and services, without the need to handle cheques and make deposits.
Whether you serve customers over the counter or online, a merchant services solution makes it easy to process payment cards. Don’t forget to compare costs when investigating a merchant services solution.
4. Analyse your cash flow. Many businesses go through cyclical highs and lows. A cash-flow analysis can highlight the cycles in your business. This information can be used in many ways, such as timing your borrowing or arranging the right amount of staffing.
5. Work with an accountant. The services of an accountant can serve as an investment rather than an expense. An accountant can review cash-flow projections and results, provide insights into areas that you may have overlooked, and help you anticipate and plan for cash-flow problems.
6. Use a line of credit. Having a line of credit in place to cover short-term needs is a much more efficient way to manage your cash flow than trying to get a loan in a hurry.
7. Benefit from your cash. A high-interest savings account for business allows you to earn a competitive rate of interest on your cash on hand, but the funds are accessible whenever you need them.
8. Long term financing. Consider taking a loan to fund your business needs instead of buying it outright with cash. You’ll free up some cash that can be used in rainy days.
9. Invest more in your business. Building up your business and investing in human resources, such as training staff or boosting your marketing, can help improve your overall business, hence cash flow.
Defaulting customers & cash flow
Cash flow problems can be aggravated by late payments from customers. However, despite the risk of late payments, businesses are still willing to extend credit to customers who can’t pay immediately.
The chances of increased revenue, and the benefits associated with strong customer relationships, are certainly tempting for growing businesses.
But the reality is that customers frequently exceed their payment terms. And big companies are typically slower to settle outstanding invoices than smaller companies. Without a solid system in place, late payments can put you in a financially awkward position.
Credit control can help
One solution to late-paying customers is to offer a cash incentive to those who pay within the terms of the agreement. While this will certainly help to make sure you get paid promptly, it will eat into your profit margin.
A more effective solution is to implement proper credit control. This is a system that ensures you only extend credit to customers and clients who are able to pay on time.
Two key elements of good credit control are identifying and assessing risk, and setting terms to protect yourself before signing a contract – as below:
- Pinpoint potential and current risk
The more you know about the company you’re doing business with, the more accurately you can evaluate the risks involved in providing credit. Running a credit check is the simplest way of eliminating any doubts.
The check will give you an insight into:
- How quickly they pay their suppliers.
- Their financial performance.
- Their directors and associated businesses.
- Set your own terms
When you’re satisfied by the other business’s credit rating, it’s time to set the terms and conditions of the arrangement.
First, you must examine your own finances and ensure your business can survive financially in the time between delivering the service and receiving the payment, then consider the following:
- Setting a maximum credit limit on the customer
- Taking out credit insurance
Good credit control and cash flow management is a result of good planning. If you conducted good due diligence, you’ll be in a strong position to reclaim your finances if things go bad.