Healthy cash flow is the life blood of every business, regardless of its size. It ensures that creditors are paid (including employees) on time, thereby protecting the business’s 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 distressed business.
The below are some of the most important aspects to consider when developing a cash flow / debtor management strategy for your business:
Engage within clear parameters.
The 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).
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.
Related: How to Avoid Bad Debt Clients
Know your client.
Many businesses employ the services of consultants to check on consumer’s payment records and credit information before engaging them. The consumer should consent to this before such an investigation is embarked upon.
Knowing who you are contracting with is invaluable in order to facilitate the risk involved and contracting appropriately.
Suppliers should similarly ensure that their credit information is checked regularly so that any errors or adverse listings may be appropriately managed, as these listings may adversely affect the supplier’s ability to contract with investors, stakeholders or as consumers.
Take a deposit.
Deposits like other types of property belonging to a consumer must be handled with care and kept separately according to the Consumer Protection Act of 2008. Deposit amounts should be carefully considered depending on industry, target market and importantly with consideration of winning and keeping the consumer’s trust.
Most people are hesitant of pre-paying for expensive goods or services especially when they have not previously engaged you. So, this is a branding, legal and financial consideration and should be handled with the necessary consideration and care.
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 negotiate 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 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.
Your bookkeeper / credit controller must be proactive.
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.
So that the (court) debt collection process if needs be invoked is streamlined as are costs.