Pay day

Successful cash flow management can be the difference between business success and failure. Thankfully there are steps you can take to ensure your business's finances remain on track says Richard Holden

If you offer credit to your customers, it pays to vet them first. The checks you make on any customer will depend on the amount of credit being offered relative to your overall business turnover. If it's a relatively small order the investigation may cost more than the profit you make. So you'll need to decide whether you are willing to accept such risks. Often the franchisor will be able to offer some guidance with this and they themselves should have carried out extensive checks for any national work that you are offered.

For significant customer sales you will need to carry out your own checks. These checks could include bank references, trade references, reviewing the latest financial accounts, a credit reference agency search or even a site visit. You may wish to start a new customer on a relatively low credit limit to monitor their payment history before you consider increasing it. But remember you will need to carefully assess the risk each time you review a customer's credit limit.

Some alternative payment options are cash with order, cash on delivery, payment after a specified number of days, or monthly credit with payment by a certain day in the following month. Legally, small businesses can charge interest on late payment of invoices, although in practice this clause is infrequently enforced due to the fear of losing future business with a customer.

One way to encourage early payment is to offer a cash discount, although you will need to have good systems to closely monitor this and to make it clear that customers are only entitled to the discount if they meet the conditions you have offered.

Prompt invoicing is essential. I hear horror stories from businesses that only raise their invoices once a month and they then wonder why they have serious cash flow difficulties. You should, wherever possible, invoice on the day the service is provided or the goods are delivered. This is a sound financial practice, which should take precedence over other administrative duties you may have that day. Failure to do this creates the impression with your customers that you don't keep tight credit control and you won't mind waiting for your money. Credit terms should also be prominently displayed on the invoice.

A follow up phone call should be made after a few days to ensure that the customer is fully satisfied. This will give to an early opportunity to rectify any problems but also eliminates an often-used excuse for not paying the invoice on time.

Let your bank manager know if you are experiencing cash flow difficulties. They may be able to offer you support and guidance to assist you through this period.

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