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Surviving and growing in a tight credit market - 10 tips for SMEs

Supplier: Bibby Financial Services Australia
29 April, 2008

As small and medium sized businesses brace for an economic slowdown, keeping a watch on cash flow is the answer to growth and sustainability, according to global business finance provider, Bibby Financial Services.

"2008 will be a challenging environment for cash flow," says chief executive of Bibby Financial Services Asia Pacific, Greg Charlwood. "It's important for SMEs to be diligent in managing their working capital.

"While there is always a need for reliable working capital in business, the need for cash flow becomes greater when a business is growing."

Mr Charlwood says growth in a tight credit market presents particular challenges for business owners.

"To compound the normal pressures of a growing business, simple sources of cash flow are naturally affected in tight credit conditions. For example, it is common for invoices to be paid late during tough times."

The latest Business-to-business Trade Payments report from Dun & Bradstreet, the world's leading source of commercial information, reveals that payment terms are increasing across all sectors in Australia.

"The figures show the average payment term across all sectors has risen to 52.6 days - that's almost four weeks above normal credit terms," says Mr Charlwood.

"With some business owners already feeling the pinch of tight credit conditions, late invoice payments could place a major strain on cash flow and operations generally. The impact could be greater for those who do business with large or public companies, as they are commonly among the slowest when it comes to paying accounts."

According to Dun & Bradstreet Australia CEO, Christine Christian, "Businesses receiving late payments will in turn seek to delay their outgoings in an effort to better manage cash flow. This sets off a late payment cycle which impacts broader economic performance."

Mr Charlwood warns growing SMEs which don't have flexible, reliable cash flow are also at risk of 'over-trading'.

"Growing demand for products and services exposes businesses to over-trading, where the finance available is less than the cost of delivering orders."

To avoid over-trading and to continue to maintain cash flow in a slowing economy, Mr Charlwood recommends the following tips:

Always check the credit status of a new customer

Risks must not be underestimated in the enthusiasm of taking on new business. Credit checks can be done quickly and are relatively inexpensive. It is important to establish the correct business title, together with its legal status (i.e. limited company, sole trader etc.) before seeking reports from agencies or trade references.

Review existing customer status

Remember that circumstances affecting existing customers are constantly changing, so they will also need regular reviews.

Clearly define and agree credit limits

Always ascertain the expected size and regularity of orders. Use this to assess the limits required. Set a credit limit for each customer and stick to it.Do not give unlimited credit.

Set out terms and conditions of sale

Terms of sale should be stated boldly on order acceptance, invoices and any other documents. Include a provision for adding interest to the outstanding account to help encourage payment on time. Be aware of your company's legal entitlements concerning Late Payment of Commercial Debt (Interest) Act.

Chase overdue accounts regularly and take prompt action

Send out statements monthly. Do not wait until the end of the month before invoicing if you can send out invoices at the same time you send out goods or deliver a service.

Follow up overdue accounts by telephone

Check customers have received invoices and that there are no queries. Deal with the same person each time you contact the company and make the largest outstanding debts your priority.

Check administrative details

Ensure that invoices are correctly addressed, relate to the goods delivered and include order numbers if they are required. Conduct regular checks to ensure that all details are up-to-date and accurate.

Keep accurate records

The sales ledger must record all sales, credit notes issued and adjustments to accounts. Invoices and payments should be entered as soon as they are issued or received.

Recognise any problems at an early stage

Be aware of potential problems and take action immediately. Only use a solicitor as the very last resort as the legal bill may be out of all proportion to what you are owed.

Consider Cash Flow Finance

Look into using the expertise and experience of a business finance organisation that has the systems and resources to help improve your cashflow.

Mr Charlwood says: "These tips on keeping cash flowing may seem obvious on reflection, but many companies get bogged down and forget to apply these simple rules.

"Bibby Financial Services helps businesses to improve cash flow by converting up to 80 per cent of the value of each sales invoice into cash within 24 hours. We also provide effective sales ledger management, collecting outstanding payments. This frees up valuable management time, which can be refocused on moving the business forward."