Six Tips for Successful Credit Management in a Recession

The recession is heavily affecting small businesses, both established ones and those in their early stages. According to research by BDO Stoy Hayward, the number of start-ups expected to go bust by the end of 2009 is in the 30,000 region, almost a 50% increase on last year. This could have a devastating effect on Britain, as small businesses play a crucial in the UK economy, employing an estimated 13.5 million people.

Contrary to popular perception, business success in a recession is within reach. Many companies buck the trend during an economic downturn by remaining healthy or even growing. Flourishing businesses, regardless of what they specialise in, share some common elements. These include awareness of market conditions, competitors and financial planning along with a clear vision of goals for the short and long term.

Cash Flow Management

If business owners could focus only on one of these elements, this should be maintaining a healthy cash flow. Cash is the oxygen for any business and so the saying ‘cash is king’ has never been as reinforced as it is during these times. With this in mind, the most basic, but best, business practice any business owner can implement to ensure survival and even success through the credit crunch is maintaining a healthy cash flow. This won’t necessarily guarantee a company’s fortune but cash flow management can help unlock capital, transform bottom lines and safeguard a business’ future in a downturn.

Cash flow is essentially the measure of a business’ ability to pay its bills on time and on a regular basis. Therefore, as part of managing cash, the inflow and outflow of cash needs careful monitoring. Being fully aware of how much gets spent and for what, tracking VAT and making accurate returns can make a real difference. This can be achieved by making sure all aspects of accounting are in order and effectively managed. As such, it is important for small business owners to keep on top of book-keeping right from the start, otherwise they may risk forgetting crucial costs or even worse failing to invoice a customer. Business owners should also be well aware of payment and tax deadlines to avoid paying fines and save time and money by scheduling recurring invoices and purchases.

Furthermore, businesses should also regularly look at their relationships with banks, suppliers and customers and check if they are fully aware of all payment dates and their terms. It is crucial to investigate if there is anything that could be modified to help maintain a healthy cash flow, such as moving key dates and adjusting payment terms. Ensuring customers pay on time or asking them to do it sooner, can improve everyday cash flow as can asking for extended credit terms with suppliers. Other measures include ordering less stock but more often and considering leasing fixed assets or getting them on hire purchase rather than buying them outright.

An important aspect of cash flow management is identifying potential problems before they occur. This can be achieved by forecasting peaks and troughs in a business’ cash balance and keeping an eye on market conditions. Accurate forecasting also helps plan borrowing and it is a clear indicator of how much surplus cash a certain business is likely to have at any given time. Many banks require forecasts before considering a loan.

Underpinning all this best practice should be a way of seeing what money is coming in and what is going out, and making sure there is always more flowing in than out. This calls for processes to monitor and track how finances are doing, as well as tools to help business owners prepare their cash flow forecast, allowing them to update their projections if there is a change in market trends or their businesses’ fortunes. This doesn’t always require an experienced accountant. With the right support and processes, a small business can operate more efficiently and increase productivity, which will be essential when trying to ultimately make it through these turbulent times.

Best Practice Credit Management

Along with a healthy cash flow, good credit management is essential to any business and no company can afford not to take it seriously, especially when the availability of credit is tight. Recession or no recession, any business can compete and even grow just by adhering to a few basic principles of credit management outlined below:

1. Understanding the customer base – Knowing customers is critical when it comes to credit management. Business owners should check the exact name and legal status of each of their customers and credit check new customers when possible. Credit ratings, however, are not the only means of judgment. References from other suppliers and a company’s assessments on the customer’s propensity to pay are also useful tools.
2. Setting payment terms – Businesses should always be clear on their credit policy, especially when they take on a new customer. It is important to agree payment terms at the order stage and make them very clear. It shouldn’t be assumed that invoices will be paid on 30 days or end of month following. Business owners should set out payment terms in writing and try to obtain written acceptance, ensuring customers’ orders do not suggest different payment terms.
3. Encouraging timely payments – Printing the payment terms on easy-to-understand invoices that go out on time can also help prompt debtors to pay as will the clear setting out of penalties if a payment is late. Another way of encouraging customers to pay quickly and on time is by offering discounts for prompt payment.
4. Getting invoices right – A disputed invoice will not be paid. As such, it helps to pay attention to the accuracy of their invoices so as not to give customers any excuse to contest them. This requires accuracy, clearly specifying the goods or services being paid for and being sure to quote the customers’ order numbers.
5. Managing debtors – Once an invoice has been issued, it is important to keep an eye on debtors. For large or important amounts, phone contact should be made before the due date to make sure the payment is still on track. If a payment hasn’t arrived, business owners shouldn’t be afraid to ask for it. In fact, they should make immediate contact with their customers and be assertive about when they can expect the payment, ensuring they fully understand the consequences of non-payment.
6. Chasing payment – If contacting the debtor to try and resolve the issue has not been fruitful then there are various ways businesses can retrieve payment. Firstly, they can consider exercising their legal rights under late payment legislation to charge penalty interest or add debt recovery costs. If that doesn’t prompt the debtor to pay, then business owners can hire a specialist debt collector to help them. They have the expertise and time to focus on retrieving the debt. If all else fails, then taking court action can also be considered, although this should be seen as the last resort as it can cost time and money.

With a few best practice methods in place, business owners can confidently avoid many of the pitfalls often encountered during a downturn. If it is managed correctly, businesses will be in a stronger position to enjoy fruitful relationships with customers and ensure they continue to flourish.

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