With trade credit becoming the primary source of finance for small businesses over traditional lending avenues such as banks, small businesses must now be more adept at being able to manage their cash flow to ensure that suppliers are paid on time and your customers are paying within terms.
However, what happens if your customer delays their payment to you? This could have a knock-on effect with your own payment responsibilities and in the long term your own creditworthiness.
As a CFO of a multi-national company, I've come across many different issues that can affect a business' cash flow, all of which can be a major problem for small businesses and start-ups. Here are ten tips on keeping your cash flow healthy:
- Forecast continually to anticipate cash ‘pinch points’ as early as possible
- Identify the key customer accounts and make sure there’s an open working relationship
- Identify your own 'flex' options for credit e.g. non-business critical suppliers or spreading payment terms
- Communication is key – engage with your bank and other finance partners early to avoid painful surprises – show them you know what’s going on with your cash flow and business as a whole
- Early payment discounts can provide one route to cash acceleration payments from customers
- Monitor customer creditworthiness to look for early warning signs of payment difficulty
- Consider finance alternatives e.g. invoice factoring
- Treat credit control as a key proactive element of your business
- Consider discounts or other offers for prospects, so your sales team can close a sale early
- Plan early and have protocols in place so you can pay and be paid
Having customer payment information at your fingertips definitely makes a difference, as it ensures that you can react should something change and it doesn’t always mean in a negative way. A cash-only customer may have an upturn in business, increasing their creditworthiness and therefore, you’re able to increase their credit facility and payment terms, which in turn leads to an increase in sales and revenue generated for your business. Surely that's a win-win situation? However, with good always comes bad, and if that reliable payer all of a sudden is hit with a CCJ or loss of business, you need to make sure that you have the right processes in place to deal with any fall-out of that change.
Doing something as simple as using a company credit report to monitor customers and suppliers can make all the difference to your cash flow because with knowledge comes the ability to make more informed business decisions. You’re able to anticipate changes in credit rating, see whether their payment history has changed (paying inside or out of agreed terms) and check on directors – you wouldn't want to be dealing with a 'phoenix director' as this could put your business at risk.
With the economy set to continue in its current form for the foreseeable future and a 4.7% increase in start ups in 2012 (there are now over 493,000), being able to keep our cash flow healthy and out of payment trouble will mean the difference between survival and growth, next to failure and starting again.
