Top tips for surviving a tight credit market

AS small businesses brace for an economic slowdown, keeping a watch on cash flow is the answer to growth and sustainability, according to global business finance provider, Bibby Financial Services.

AS small businesses brace for an economic slowdown, keeping a watch on cash flow is the answer to growth and sustainability, according to global business finance provider, Bibby Financial Services.

“2008 will be a challenging environment for cash flow,” says chief executive of Bibby Asia Pacific, Greg Charlwood.

“It’s important for SMEs to be diligent in managing their working capital.

“While there is always a need for working capital in business, the need for cash flow becomes greater when a business is growing.”

Charlwood says growth in a tight credit market presents particular challenges for business owners.

“To compound the normal pressures of a growing business, simple sources of cash flow are naturally affected in tight credit conditions. For example, it is common for invoices to be paid late during tough times.”

The latest Business-to-business Trade Payments report by Dun & Bradstreet reveals that payment terms are increasing across Australia.

“The figures show the average payment term across all sectors has risen to 52.6 days — that’s almost four weeks above normal credit terms,” says Charlwood.

“With some business owners already feeling the pinch of tight credit conditions, late invoice payments can place a major strain on cash flow and operations generally. The impact could be greater for those who do business with large or public companies, as they are commonly the slowest when it comes to paying accounts.”

Charlwood warns growing SMEs which lack cash flow are also at risk of ‘over-trading’.

“Growing demand for products and services exposes businesses to over-trading, where the finance available is less than the cost of delivering orders.”

To avoid cash flow problems in a slowing economy, Charlwood recommends the following tips:

* Always check the credit status of a new customer: Risks must not be underestimated in the enthusiasm of taking on new business. Credit checks can be done quickly and are relatively inexpensive.

* Review existing customer status: Remember that circumstances affecting existing customers are constantly changing.

* Clearly define and agree credit limits: Always ascertain the expected size and regularity of orders. Set a credit limit for each customer and stick to it. Do not give unlimited credit.

* Set out terms and conditions of sale: Terms of sale should be stated boldly on order acceptance, invoices and any other documents. Include a provision for adding interest to the outstanding account to help encourage payment on time. Be aware of your company’s legal entitlements concerning Late Payment of Commercial Debt (Interest) Act.

* Chase overdue accounts regularly and take prompt action: Send out statements monthly. Do not wait until the end of the month before invoicing. If you can, send out invoices at the same time you send out goods.

* Follow up overdue accounts by telephone: Check customers have received invoices and that there are no queries. Deal with the same person each time you contact the company and make the largest outstanding debts your priority.

* Check administrative details: Ensure that invoices are correctly addressed, relate to the goods delivered and include order numbers if they are required. Conduct regular checks to ensure that all details are accurate.

* Keep accurate records: The sales ledger must record all sales, credit notes issued and adjustments to accounts. Invoices and payments should be entered as soon as they are issued or received.

* Recognise any problems at an early stage: Be aware of potential problems and take action immediately.

* Consider factoring: Look into using the expertise and experience of a business finance organisation that has the systems and resources to help improve your cashflow.