Is your business in the fast lane?
In this the fifth article in the series – “Is your business in the fast lane?” – I concentrate on the importance of Cash in helping your businesses reach the fast lane. Subsequent articles focus on other areas to ensure improvement, growth and sustainability of your business.
“Cash is king” for all businesses, so maintaining accurate, up-to-date information about cash-flow is essential.
Giving credit to customers is part of business life; and unless you sell directly to consumers it is unlikely that you are paid for your goods or services when they are sold or supplied.
Extending trade credit means you are vulnerable to payment delays and bad debts, which in turn can put a huge strain on your cash as your debtors’, in difficult times, may take longer to pay and your bad debts will probably increase. Therefore good credit management is essential to get more bills paid on time.
Thus, it is essential to adopt the right attitude and understand why credit management is vital to your cash flow, profits and business success. Remember a sale is not a sale until it is paid for. Some customers will pay on time; most have to be reminded and some have to be threatened. The interest cost of waiting for a late payment can, sometimes, be bigger than bad debt losses. It can exceed your net profit so do not allow credit to persistent slow payers – they will drag you down. Make enough time for reminders at short intervals. The sooner you ask, the sooner you get paid.
The easiest way to boost cash flow is to get your debtors to pay on time. This involves:
Good organisation – keeping accurate records, prompt invoicing and a system for monitoring overdue payments. Organisation – should tell you who owes what; how long payments are overdue and if debts are in dispute and what action has been taken. Make sure your invoices and reminders are sent out promptly, that they are accurate, have a reference number and are sent to the correct person
Credit checks of your potential / customers and assessing your risks. Don’t limit credit checks to new customers. Regularly review existing accounts, particularly if your system reveals that a company is taking longer to pay. Once you have established credit terms with your customers it is difficult o change these without risking valuable business so it’s best to set the terms before you take on any new business. Likewise when a customer’s payment times begin to deteriorate, take quick responsive action and don’t wait until the situation is out of control. Before taking on a new customer check how long they take to pay and their usual payment terms. If their payment terms are likely to take so long that your cash flow will suffer or borrowing costs will wipe out any profits, think twice before you take on this customer.
Remember it’s better to have a lower but more profitable turnover than a larger turnover that may turn out to be unprofitable due to slow payment or bad debts. Whenever possible avoid extending credit.
Make sure when making a sale, that you state your payment terms and ask the customer if they have any problem paying on time. Don’t hide your payment terms in small type at the bottom of the order confirmations and invoices. They should be shown in bold type so your customers are aware that they are a condition of sale, not a polite request to be paid on time. Set ground rules quickly with new customers and don’t let them get into the habit of paying late.
Chasing Debt – You need an efficient debt collection system in place for collecting outstanding debts. Such a system will ensure that all your staff know what action is to be taken and when. Make sure the system is adhered too and that you are notified if any customer is to be given leeway.
Your procedure should include: Informing your customers about payment terms and spelling these out on each invoice and the terms and conditions of sale; Sending out invoices at the same time as you dispatch the goods or complete the service and detail when you expect payment; Telephone you check they have received the invoice and agree the amount; Send out monthly statements of account showing how much is owed; Once a customer starts to breach these time limits contact them immediately by telephone. Be firm but polite; Make your largest debts a priority. Don’t accept any of those “the cheque’s in the post” excuses. Ask when they are going to pay; Check there are no reasons for non-payments, such as a query or a problem with the goods or service provided; Send reminders first class post and follow this up with a final demand to someone more senior in the company, not you failed name contact; Take legal action, as a last resort; Consider legal expense insurance.
Ensure you prepare and monitor cash flows, at least on a monthly basis as it is imperative to the success of your business. If you don’t know how to do this ask your Accountant or seek professional advice. Remember more businesses fail because of poor cash flows that any other reason.
In summary, cash is King and vital for your business to succeed. Cash is the “lifeblood” of your business and Cash Flow Budgeting, monitoring and control is an essential, but often ignored, system for all businesses. Don’t fail as a result of poor cash flow management. Is your organisation good at Cash Flow Forecasting, management and control?