Healthy cash flow is the lifeblood of every business, regardless of its size. It ensures that creditors (including employees) are paid on time, thereby protecting the business’ valuable reputation and ensuring that profit distributions are possible.
However, with that being said, the effect of cash flow problems generally has the most adverse impact on smaller businesses.
To avoid these negative effects, having a sound debtor management strategy in place (as part of your cash flow management strategy) is key. Moreover, prevention is really better than cure, as litigation to collect outstanding monies may further strain an already financially distressed business.
1. If clients have not agreed to particular terms they will not pay on time
Your terms and conditions of sale and / or service regulate the exchange between supplier and consumer. It is important that these are carefully thought through, comply with prevailing legislation, make good business sense and, most importantly, are mutually beneficial and not unfairly one sided (aligned with the Consumer Protection Act of 2008 as amended).
It is, therefore, advisable that these are carefully considered to serve your target market most effectively and are drafted by an attorney and not copied from the internet.
2. Why give your clients credit?
Most businesses operate, at least in the beginning, under the premise of cash on delivery only. However, when the business grows and its clients are no longer small businesses themselves but are negotiating payment terms depending on their payment cycles, the arrangement may no longer be feasible.
When this happens the ramifications on cash flow and the impact of the National Credit Act of 2005 as amended on the business should be assessed, appropriate contracts and documents drafted and risk ring fenced. Here, the services of both a financial and legal expert should be invoked.
3. Your bookkeeper / credit controller must be proactive so you don’t let client accounts spiral out of control.
Even with the most sophisticated strategy in place, cash flow issues may arise if you are not ensuring that your credit controller collects payments in respect of outstanding invoices promptly.
In debt collection, we often refer to the “golden period” when collecting the money outside of court structures is most likely to be successful. This is ideally the first week after payment was due and generally no later than 30 days after it was due.
It is important for the bookkeeper / credit controller to contact the customers in default promptly and, where needs be, dispatch an appropriate letter of demand or to enter into a formal and professionally drafted agreement (by an attorney) where payment arrangements are made.
It is also important to ensure that you are aware of the payment not being received so you do not carry on doing more work or rendering additional services, which is a snowball effect.
It is noted that ceasing work is not always possible, but some form of control should be applied so that the situation is not negligently escalated. So that the (court) debt collection process invoked, if needs be, is streamlined as are costs and prospects of success increased.
4. Pay your suppliers when due – not earlier
I am not suggesting credit if you are already over-indebted or financially distressed, but rather ensuring that you are aware of your supplier’s payment terms. If not, negotiate these and come to an acceptable agreement which does not incur more costs, such as interest.