What can you do to improve cash flow for your business?
Cash flow is king within any business, therefore knowing how to improve your cash flow is essential to your business’ survival. I have to say that there are many things that can affect your cash flow, for good or bad, I am only going to discuss one aspect of your cash flow (and one of the more important ones at that), credit management.
I have seen many businesses play a dangerous game with their cash flow; they will accept sale after sale, work extremely hard to get their work done and delivered to their customer, but in the process their credit management procedures fall to the way side and will only chase for payment when cash flow becomes tight. I call these practices ‘cash flow Russian roulette’, because that is exactly what some businesses are doing; your cash flow may have survived the first time, or the second or even the tenth time but eventually the risk a business is taking (each time they don’t chase until last minute), will be that one time too late.
Tips to improve cash flow
Ensue your customer has the ability to pay
Performing due diligence on a customer prior to carrying out any work can help to identify any potential issues you may have when it comes to getting paid. Credit checking your customers will show you a snapshot of your prospective customer’s financial details from that moment in time, the information you find here should be weighed up when deciding to go ahead with work for a customer. Issues such as, CCJs, poor payment performance details, indications of reducing cash flow and so on, may indicate that you customer is either a poor payer or does not have the adequate ability to pay. This should be tied in with ongoing monitoring of your customers, which will give you prompt notice when a customer’s financial situation has changed, for better or worse.
Get the right people in
The credit control process should add to the customer relationship, and not detract from it; your credit controllers should have a number of characteristics that will make them a great asset to your business with regards to collecting money and enhancing a customer relationship. Your credit controllers should encompass the 4 p’s, professional, persistent, polite and positive; they should maintain a friendly demeanour through all contact with a customer. Being friendly, however, does not cancel out your ability to be firm; it is within this that confidence in speaking to the customer is essential.
Mix up your collection strategy
Using the same method over and over again within your collection strategy, without the desired results, will hinder your collection performance significantly. I have found that a mixture of emails, phone calls, letters and statements can improve the effectiveness of your credit control activity. Letters are especially effective when your customer is not responding to emails or phone calls, they tend to have more gravitas than other methods; by sending one final letter your customer you will also be complying with court pre-action protocols that requires you to send a final demand prior to initiating court action.
Use credit limits to reduce your risk
Having credit limits for your customers will reduce the amount of risk to bad debt you are exposed to. By limiting the amount of credit you can give your customer, you limit the amount that has the potential to go unpaid. Using credit limits will also provide you with a great source of leverage if your customer is not paying to terms, by stating they are nearing their limit and work will halt without payment, you will be surprised how many customers will jump to pay you.
Don’t be afraid to get firm
One of the main worries people have with regards to credit control is the risk of alienating customers. It is all well and good taking a commercial decision to give your customer some leeway with regards to payment on the odd occasion, but if you continually let them extend the process, give them more time and allow them to evade you at every turn, you will eventually become known as a soft touch and people will take advantage of it. Trust me when I say, you can have a great relationship with your customer, but still be firm when asking for payment. Telling your customers when you will ring back, who you will speak to regarding their account and what the next steps will be if you don’t receive payment can be extremely effective to encourage payment; convey your knowledge of credit control processes, whilst maintaining your friendly demeanour and more often than not your customer will respond positively.
Outsourcing credit control with CMG UK will provide you with an expert virtual credit control department that can significantly improve cash flow for your business in a customer focused way.
