By Mark Byrne, Managing Director of Calverton Finance
In the current economic climate, managing your cash-flow is even more important than usual. Mark Byrne is the managing director of Calverton Finance, an independent company that provides services including invoice finance to help with cash-flow. He says there are many things that companies can do themselves to help keep their cash-flow in good shape, and here he shares his top six that every business should be doing.
1. Negotiate credit terms when you negotiate your sales price.
Begin to think of your cash-flow as the most valuable part of your business. Every time you grant credit to your customers it is costing you cash-flow (as well as real money). Every time you negotiate credit with your suppliers it improves your cash-flow (and saves you money).
Credit terms should be negotiated early on, in your initial sales meetings.
Make it your goal to be stingy when granting credit to your customers and pushy when negotiating credit with your suppliers. For new customers ask them to pay on invoice, or in 14 days, before you go to 30 days.
To help customers pay quickly, offer them discounts for early settlement and consider penalties for late payment (you are legally entitled to do this – go to the Business Link website and search on ‘late payment’) .
2. Put together realistic cash-flows (and review them).
Even if it’s just for the next quarter, put together a cash flow detailing your future cash requirement.
Review this every month (every week if cash is tight) and look at your actual position against your budgeted position. If it’s way out then find out why. Are payments slowing? Do you need to step up credit control? Are you making your margins on sales? Are you buying the right stock? Are costs under control?
There are so many variables and so many ways for cash to move out of the business, you must be vigilant. Even if your cash position is healthy there is no room to be complacent in this market.
3. Don’t pay lip service to credit control.
A good credit controller is worth their weight in gold and, more than anything else, good credit control is about consistency. Most small companies allocate too little resource to proper credit control. Often it will be the owner-manager who will chase for payment - probably the most unsuitable and least qualified person in the business to be doing that role. This means that credit control is sporadic and often panicky – e.g. the customer who hasn’t been contacted for 60 days get a call threatening legal action! Good credit control works to a system of statements, letters, telephone calls and, only if very necessary, legal action.
Implement a system of consistent and regular contact with the customer – most people want to pay, you need to make sure you are first on list.
4. Credit check your customers.
This is a must. Although credit checking agencies work on historic information, which may be a year or more out of date, they will give you a feel for your customer’s financial strength and will list County Court Judgments (CCJs) - a real and immediate indicator of financial problems.
Not just on new customers: Remember things change quickly in this market and if you can get regular updates from a credit agency on your customers then this will provide you with valuable information.
If you do get negative information then act on it – chase harder, put the company on stop, take legal action if necessary.
5. Consider bad debt protection.
The only reason for not taking out credit insurance is if you are dealing with the Government. If banks can fail, then your customers can fail. Credit insurance does not exist to pay for itself, it is there to protect one of the most valuable assets in your business – your debtors.
Businesses will fail. If it is your customer make sure that you are covered.
6. Keep your lender informed of your progress (before they have to ask).
A disappointingly small number of our clients are proactive about keeping us informed of their progress. Those that do, tend to gain respect and credibility quickly, so if it comes to increasing a limit or arranging an overpayment their applications are 90% there.
Send your lender monthly management accounts with a brief commentary on performance. Inform them well in advance about required changes or increases in your facility.
I wrote an article back in early 2010 on ‘Recession proofing your Business’ which had a very similar message, it ended: “The most important thing to do is NOT TO DO NOTHING. Your motto should be: Act quickly, act strongly and believe that this recession will last twice as long as every thinks”.
As Mervyn King said “we are only half way through this” - I get the feeling he’ll still be saying that next year.