Dun and Bradstreet - Tip for Business

Cash flow is the lifeblood of every business. Current estimates indicate that approximately 90 per cent of business failures are the result of poor cash flow and with just weeks to go until the new financial year now is the time for SMEs to ensure they have their books in order.

The lag between the provision of a product or service and receipt of payment can create a significant burden for business, particularly if you have slow payers among your customer base. Bad payers considerably reduce business cash flow, draining the funds required for the day-to-day running of operations. In addition, delinquent payers consume internal resources as staff are forced to chase overdue accounts or increase sales to make up the shortfall.

Dun & Bradstreet's data reveals that business-to-business trade payments have escalated to their highest level since 2001. Firms are now waiting an average of 55.8 days to receive payment. That means they are being denied access to their own funds for almost four weeks longer than the standard term.

While the extension of credit is a necessary part of growth, the way it is managed will determine whether it boosts profitability or has detrimental ramifications for the business. Executives need to ensure they have solid cash flow management and risk mitigation processes in place so they can stay in business and ahead of the game.

In its most simple form cash flow management means delaying cash outlays for as long as possible while encouraging anyone who owes you money to pay on or ahead of time.

Top tips for managing cash flow

Develop a cashflow projection and ensure you monitor and update it regularly
Minimise bad debts through an established credit assessment procedure
Establish an accounts payable policy at the outset of every credit relationship
Establish a deposit policy for work in progress
Monitor your customers' use of credit and adjust their credit limits accordingly
Closely manage your invoice process and collections practices
Re-arrange annual payments such as insurance so you pay small installments frequently, this will help to smooth out lumps in your cash flow cycle
Select an appropriate source of funding for your requirements and pay the debt before the interest kicks in
Use short term cash surpluses wisely, don't keep them in accounts that don't pay interest

An effective cash flow process requires the preparation of cash flow projections at least quarterly, if not more frequently. While this may seem like a timely undertaking, an accurate cash flow projection will alert you to trouble before it occurs - it is one of the most important things a business can do.

A cash flow projection needs to account for both incomings and outgoings. How much cash is the business going to get in and pay out, and when will these actions take place? When drawing up a cash flow projection it is important to identify both set and variable costs, and to take into account customers' payment histories as these items will influence the amount and timing of incoming and outgoing funds.

Shortfalls and seasonal fluctuations also need to be considered. A business should be aware of slow sales periods or seasons in which customers are more likely to pay late. Be sure that you have enough cash on hand during these periods to cover inflexible business costs such as wages.

Simply forecasting your cash flow isn't enough, you need to put in place a continuous monitoring process to keep your actual inflows and outflows in check. A positive forecast cannot keep your business afloat if your actual cash situation is plagued by serious shortfalls in funding.

Acquiring an accurate insight into your customer's financial health and debt paying behaviour is also critical to the ongoing viability of your business. Understanding the ability of a customer to pay, and their propensity to pay on time is an essential part of the risk mitigation process. To achieve this understanding smart business operators utilise simple credit checking procedures.

A credit check should be undertaken prior to the extension of credit and it must occur regardless of the size of the business as size cannot be assumed to correlate with payment behaviour. In fact, D&B's latest business-to-business payments data shows that big businesses (500+ employees) are the worst payers, taking 62.7 days to settle accounts.

As part of this process businesses must be prepared to turn potential customers away. The loss of a sale is much more manageable than a persistently late payer that negatively impacts cash flow and spreads resources thin as the business seeks to recoup outstanding monies.

Existing customers should also be investigated as there may be bad payers among them. Our experience indicates that up to 80 per cent of bad debt come from companies you have been working with for more than a year.

Traditionally, low value amounts (below $500) and non-bank credit have been considered less important when assessing credit applications and risk. However D&B research reveals the importance of this data by demonstrating that those who default on non-bank credit and low value amounts are a higher risk of defaulting on larger amounts and traditional credit types.

D&B research also shows the increasing propensity of Australian consumers to default on smaller amounts of debt. In the March 2008 quarter more than 60 per cent of consumer debt referred to D&B was for amounts of less than $400.

Although the dollar value of these debts is small this trend puts significant strain on business cash flow. The individual debts add up to a significant amount of money, particularly for small businesses.

Despite its many benefits, implementing a credit checking process does not guarantee that debtors will pay their accounts on time. Accordingly, the onus is on business to ensure it has solid receivables processes in place. An efficient receivables process is characterised by:

the establishment of clear credit terms at the outset of a relationship
prompt issuance of invoices
tracking of accounts receivable to identify slow-paying customers
regular communication with customers to identify and resolve problems before invoices become overdue
action taken against a debtor if they are persistently delinquent.

SMEs often lack the capacity to manage accounts receivable processes internally but they shouldn't be afraid to utilise the services of professionals by outsourcing the debt to a reputable collector.

Managing payables also forms an important part of cash flow management, particularly when a company is growing. Business growth often creates a false sense of security however it is vital that expenses are closely monitored and controlled to ensure they don't grow faster than sales.

A business should also take full advantage of the payment terms of its accounts by holding onto its money until the invoice MUST be paid.

From time to time, a business will require funding either to help it survive a cash shortfall or to fund business growth. There are a huge variety of finance products available to businesses and it is important to select a source that meets your requirements. In addition you must make sure you can repay the debt before the interest kicks in.

Having a more complete picture of your business incomings and outgoings, and a better understanding of your customers' financial health will help to kick start your cash flow for the new financial year.