Credit where due
When finance people speak of a company having a healthy cashflow, they do not mean that managers spend their time shuffling through thousands of pristine-clean and disease-free £20 notes. They envisage, instead, managers in a position to regulate both the size and speed of funds entering the company and the size and speed of funds going out.
This is called liquidity; it is where a company's cashflow is so healthy that managers have the means to meet all current and immediate future bills and other financial obligations on the due date, and have a margin for contingencies such as unforeseen delayed completion of jobs.
To achieve liquidity, managers make sure that the company is not being taken for a ride by bad payers and that they themselves get the best possible terms from their suppliers. What they are mindful of is the "squeezed from both ends" trap that many entrepreneurs fall into. This is meeting the demands of customers who want extended credit, while at the same time meeting the demands of suppliers who want payment on the nail.
Cash flow
Ensuring that the cash flows in speedily and in quantity is perhaps the most difficult part of the exercise, but it is also the most rewarding. Each successful company has its own rules, but most run a credit check on all prospective customers and a similar check on all but a few of their regulars from time to time.
Some business folk wince at this, but experience shows that if a prospect cannot accept a check with grace then the chances of him being a sound customer for the future are slim.
Experience also reveals that those companies flattered by the attentions of industry giants should be even keener to check, not so much on the ability to pay but the willingness to pay in full and on time.
The check should be made with an agency, preferably one with a complete database and a fast response. The information provided should include full customer details, financial results where appropriate, payment experience of other suppliers, county court judgements, registered lending and a recommended credit rating.
It is particularly helpful to get an opinion on how much credit should be allowed. Bank references are useful for small-value decisions or to support other reports. These can be difficult to obtain, however, as banks require the written permission of the customer.
For the best results and to reduce credit checking costs, use what is known as the 80/20 formula to identify the biggest buying customers. This lists all accounts in descending order of value until they add up to 80% of the total. These are given a full credit check periodically on the basis that by checking customers by size of debt rather than in alphabetical order, the business never suffers a large bad debt if it runs out of checking time.
It is also important to set credit limits. There are several approaches, but the most favoured is based on the maximum amount the business is prepared to be owed, regardless of current sales levels.
A popular calculation is the lower of 10% net worth or 20% of working capital (net current assets). An accountant should be able to help here.
There is much to be said for risk codes (A = no risk, B = average risk and C = high risk) as these enable marketing people to put extra sales efforts into the As and Bs.
It is common practice to ask dodgy customers for an advance before providing service. Normal credit is then allowed on the balance, for instance 20% before despatch, and the balance payable from seven to 30 days from receipt. Accounts on special terms should be grouped together in the ledger for constant collection attention.
It pays to negotiate precise terms of trade and not to be embarrassed to ask for money when it is due.
Below, produced with the help of the Department of Trade and Industry and other bodies, are some useful guidelines on how to render accounts:
Design an attention-grabbing bill that is better than those you see coming through your own letterbox. Keep it brief.
Do include payment terms and due date, delivery date and method, description, price and total payable, and especially the customer order number.
Be accurate. You cannot expect payment against an incorrect invoice. Any slip is an excuse for delaying payment.
Invoice within 24 hours of a chargeable event. Remember that nothing happens until your bill gets into the customer's payment process.
Send the invoice to a named individual. Use first-class post to beat customers' closing deadlines. Use a courier for very large values.
