Credit management: insulate your business from the risk

Clients who insulate their business from the economic crisis will be in a stronger financial position when the first shoots of recovery come.


Credit is tight and with the tally of failing businesses rising by the day, even the most well run enterprises are vulnerable to losing control of the cash coming in and out of their company.
However, in spite of this air of uncertainty, there are plenty of steps you can take to make sure your cash flow remains unfrozen and your business is protected against the frosty times ahead.


First and foremost, make business decisions on a day-to-day basis that help maximise your working capital position. These are unpredictable times, so it may be a good idea to avoid large capital expenditure outlays by renting equipment rather than buying it. If a vital piece of machinery costs £5,000 to buy, it is far more cost-effective to rent it instead and keep the liquidity within your business. If demand falls and production has to be put on hold, you can stop renting the equipment without a £5,000 hole in your pocket.


In writing
Furthermore, it is highly advisable to produce a contract setting out credit and payment terms from the start so there is no room for confusion. Ensure these details are also printed on your sales invoices and delivery notes, too. If your business deals in tangible products rather than services, why not think about introducing a ‘Retention of Title' clause into your contracts which will allow your company to maintain full ownership of the products you have supplied until full payment has been received. So even if the buyer company folds, you, the supplier, can legally reclaim all your stock.

Additionally, you could think about offering incentives for customers to make prompt payments.


Spread the risk
As well as shoring up possible risks, it's worth returning to basic business principles. In an environment where even big names are proving less safe than we thought, your clients should avoid putting all of their eggs in one basket. Don't crack open the champagne because you've signed a big deal which ties up 90% of your business; rather, build a mixed client portfolio which doesn't rely on a single customer.


Similarly, it may pay to keep more of your business local. Know where those who owe you money are, keep in regular contact and build relationships with the people working in the accounts department. If the worst comes to the worst, this will make it easier to visit late-paying clients in person to ask for the monies you're owed. All this will allow you to keep a tighter watch over your business dealings.


Another way of keeping control is to remain vigilant at all times. Before you start doing business with a new customer, find out as much as you can about them by carrying out credit checks. Of course, this is especially important for your biggest customers whose payment irregularities will have the biggest effect on your business' cash flow. But with credit reports now costing as little as a few pounds over the internet, it will pay to check even the smallest of enterprises on your sales ledger.


Once you've checked them out, continue to monitor and look out for any changes to their credit status which could lead to late payment issues in the future. While many businesses will carry out an initial credit check, many fail to keep track of their customers' change in status. Being complacent about where your risks lie is a dangerous trap for small businesses to fall into, as existing customers can often give the biggest surprises.


Finally, try to take a more proactive approach. If you're looking to borrow more money from a bank, be as thorough and professional as possible. Arrive with a plan, have your budgets sorted and invest in the accountancy software or specific financial advice that demonstrates you are a savvy and secure business to work with.


So, stay calm, stay in control and remember your basic business principles, and you'll put everything in place to ensure your business emerges from the current credit freeze intact.