Tips to fix your cash flow
One strategy is to build your company on high-quality debtors
THE FIRST three months of any year are traditionally when many businesses that provide commercial goods and services on credit terms struggle with their cash flow.
Generous bonuses in December, staff on leave and a lack of enthusiasm from clients to pay what is owing according to the agreed terms have a negative impact on cash flow. It is not unusual to see a spike in delinquent debtors in this quarter, particularly for businesses whose clients operate in and rely on sectors such as manufacturing, construction and distribution, which traditionally shut down over the December holiday period.
For any business owner, these times can be daunting, because cash flow struggles have significant ramifications. The chief executive of every business – no matter how small or large – dreads having to deal with cash flow pressure. Making calls to suppliers, financiers or even staff to beg for extensions is not fun.
Here are some tips beyond begging your bank for an increased overdraft:
We conduct numerous assessments on businesses that have huge turnovers but where the profitability is so low you have to ask yourself whether the business is viable. Businesses with low net margins always suck cash and require continued capital and financing, which adds to expenses, which means lower profit, and so the spiral continues.
Fix your profitability. Get your documentation in order.
For some, it may be surprising to see this tip on the list, but we come across many businesses that don’t get paid on time because of disorganised or non-existent documentation. Incorrect purchase orders, missing contracts, improper credit agreements, delivery notes that have gone astray, incorrectly captured invoices and miserable master data result in delays in payment or non-payment.
Choose better-quality debtors.
According to the science of credit management, a company’s liquidity is largely determined by the quality of its debtors. Try to build your business on low-quality debtors and the result is obvious. Quality debtors are companies that have a good financial reputation and where there is no history of non-payment or late payment – pick those. Although there are specific strategies to deal with higher-risk debtors, this is not advisable for the novice credit person, and it will not contribute to fixing your cash flow in the short term.
Hand over non-paying clients sooner.
By the time your debtor owes you money and the account has aged to 120-plus days, it is safe to assume that whatever you are doing to recover the amount is not working. This (if not sooner) is the appropriate time to engage a proper expert to help you recover your money. By combining South Africa’s typical overdraft rate with our inflation rate you can safely assume that you are losing at least 1.5 percent of your outstanding amount for every month that goes by. It’s best to intervene quickly.
Insist on receiving your management 5 accounts within at least two or three weeks from the date of the last month end.
Typically, management accounts should include at a minimum an income statement, a balance sheet and a cash flow forecast. There is no way you can manage your cash flow successfully without this reporting, and we assess many companies where management is literally flying “blind” while waiting for their auditors to prepare last year’s numbers. If you have solid reports that are complete and that you can trust, you will be able to identify cash flow problems well in advance.
Frank Knight is the chief executive of Debtsource.