Old lines like ‘money makes the world go round’ aren’t bandied about for no good reason.
As such, the notion of credit management tends to evoke strong responses in people. For small business owners, a discussion on the topic comes back to one key issue: cash flow.
Gone are the days (if indeed they ever existed) when people, and businesses alike, were as good as their word. It may sound cynical, but as someone who has been on the receiving end of literally countless late payments, like many of you, I’ve heard every excuse in the book as to why payments are late.
As with any supply chain, we rely on receiving monies owed, in order to pay what we ourselves and our businesses owe further down the chain.
In theory, it’s a seamless concept.
However as we know all too intimately, when someone drops their link in the chain, the whole thing can come undone. Indeed while the difference between good and poor credit management is certainly vast, as we’ve seen, conditions can turn dire with astounding rapidity.
Just the same as with one’s own personal finances, business finance must be watched like a hawk. It can be easy to slip into bad habits, and taking excuses like ‘not this month’ for an answer. But sloppy policies and procedures ultimately effect one thing, and one thing only: your bottom line.
When it comes to an individual, a creditor would never enter into an agreement before credit checks were carried out. Yet, when it comes to extending credit to businesses, all too often this basic rule-of-thumb is overlooked. Making an informed decision about the creditworthiness of a business is not just wise, it’s paramount.
Here is my quick checklist:
• Make informed credit decisions. Never extend credit to a business without conducting at least a cursory check of their credit history.
• Encourage on-time payment by engaging the services of a credit bureau.
• Continuously monitor businesses – there is no such thing as set-and-forget when it comes to credit checks. Circumstances can change overnight.
• Report bad debtors. As with many types of compliance, threats are sometimes not enough to cut through. Businesses need to be named and shamed in order to know you’re serious about collecting monies owed. The threat of being publicly outed as having defaulted is often enough to encourage a late or slow payer to settle their debts, and thus avoid having to engage a debt collector.
Ultimately, the key point to remember though, is all these policies and procedures are just lip service unless they’re routinely followed without exception. The stakes could not be higher. Accepting late payment behaviour directly affects your cash flow. Remember that late payments from debtors can very quickly turn into your bad debts.