Thinking Money | Free Financial Advice and Tips

How to Increase Cash flow, Profit, Net worth and Credit rating

Posted on 07. Nov, 2011 in General News

Why are we in business?

The Equifax Quarter 3 Business Failures Report shows a 20.3% Year on Year increase in companies going under and a 7.8% increase Quarter on Quarter. With a total of 7,994 businesses failing in Q3 2011, this is the highest number of failures for more than 12 months and is not far short of the peak in numbers seen in Quarter 2 2009 (8874).

The biggest reason for failure is insufficient Cash Flow and a real understanding on how to maximize cashflow and protect it.

If you can answer YES to any of the below, then it is time to get help, otherwise your business will end up being one of the failures.

• Sleepless nights over business finances
• Customers paying late
• Bad Debt increasing
• No consistency in the debt collection process
• Poor Credit rating
• Overdraft facility heavily used
• Using Credit Cards to clear business liabilities or paying suppliers
• Late payments increasing
• No Procedures or policies to support the business continuation and growth
• Suppliers demanding you adhere to their Credit Terms
• Giving credit without considering the risks

Wow, as business owners we like to suffer sometimes in silence.

I will tell you straight, get Credit Management right and you will get a ROI, fact. I know, I have done it and I have being doing it for over 20 years.

A lot of businesses see Credit Management as a cost and a burden; after all, all we are talking about is picking up a phone, right! WRONG. This thinking will jeopardize all the hard work in setting up and continuing to be profitable in business.

Debt collection is just one piece of the puzzle.

Credit Management is a saving if dealt with effectively, it will increase your net worth, profit, credit rating and cash flow, after all, you went in to business to increase all four elements I mentioned not de-crease them.

I worked for a multi-national, multi- million pound organisation, and over a period of the last three years I worked there I saved them in excess of over £400k.

AND before you say “I’m not a multi-million pound organisation, I’m a very small company with minimal funds”. If that is the case then it is far more important as a small business you get it right or you will not survive.

IMPROVED REDUCED

Access to resources Cost of Sale
Asset Protection Cost of Operations
Profit Protection Relationship Risk
Client retention in Sales Exposure to external forces
Operational Efficiencies
Cash Flow
Revenue

Credit Management protects your profit, without it you will suffer or fail in business especially if you give credit. A truer saying has never been said:

“If revenue is the engine that powers your company, Credit Management is the oil that keeps it flowing”.

In business we have all heard the saying ‘Cash is King’ or ‘A Sale is not a Sale, until the money is in the Bank’; unfortunately many businesses forget this, as they are more concerned with upsetting or losing a customer. It is not all about the customer wanting you, it is also about you wanting that customer, believe me, there are many customers out there you don’t want.

So, what’s it all about Graham, how do you get the perfect customer? It is not about the perfect customer, it is about you educating the customer on what you expect so they become that perfect customer that pays regularly and on time.

Look internally at your own Sales Ledger, you will know the customers that pay you on time, a question you should be asking yourself is, why are they paying you on time, and why are your other customers not paying you on time.

You cannot always blame the customer!. If you were herding sheep into a pen 50 meters away, what would you do to accomplish it? You would guide them and cajole them to where you want them to go, it’s exactly the same with your customers, OK, they are not sheep, but the principle still stands. You need to guide them, cajole them, educate them in the way you work and what you expect in return for the products or services you have provided, if you don’t, what do you think will happen, yep, the same old customers will still not pay you on time.

Good Credit Management is about your relationship with your clients. Social Psychologists say that the three greatest fears are death, public speaking and asking for money. You know what I mean, when you get the gut wrenching feeling when someone owes you money and they are not paying you. Businesses would rather do without the money than risk a confrontation with a client and unfortunately the bankruptcy statistics are evidence that this is a serious issue. Many businesses instead go for the additional funding rather than taking a look at the internal cash flow mechanisms of the business.

If you give credit you need to have strong credit management procedures and policies in place. In my profession I come across many businesses that don’t have a clue of what their Debtor Days Outstanding (DSO) is. Every business that gives out credit should be using this Key Performance Indicator.

There is a strong chance, depending on the industry you are in, that 25/40% of your cus-tomer base will probably pay you late, but you don’t have to be a statistic in the late pay-ment culture if you put in place simple credit control procedures and be disciplined in your actions.

Most businesses have delayed payment of an invoice at some point, often past the due date. It is very tempting to do this especially if your sales are down and there are no consequences for paying late.

So with this in mind, look at where a substantial amount of cash may be tied up on your sales ledger, otherwise known as account receivables or debtors. All successful businesses rely on money flowing through the company at a certain rate to meet the businesses commitments. If this flow of money is sluggish, then you have a cashflow issue.

Credit control is not an exact science. It takes dedication, hard work and discipline to set up and maintain a credit control function in line with your business commitments and future operations.

So in summary, it is fatal to ignore the back office, get staffed trained in Credit Management get sales and credit control together. Get the rules in place for credit checking and write up sustainable procedures and polices so all staff members understand what is expected.