At any time of the year, getting your business operations and finances in order makes good business sense to any organization. As a small business owner it is especially important as cash is king! See also Building a Healthy Cash Flow and Increase Profits.
Managing cash flow and mitigating risk
Today’s challenging economic times make businesses looking for the edge over their competitors. However the reason many businesses to fail are often found much closer to home.
Approximately 90 % of business failures are the result of poor cash flow and debt management practices. Still, many businesses remain unaware of how to prevent them.
Bad payers are a substantial drain on business cash flow
Bad payers considerably reduce your businesses cash flow, because they are draining the funds that are required for the day-to-day running of operations or could be used for growth. Also, bad payers stretch internal resources as staff are required to recover overdue amounts or are pushed to increase sales to make up the shortfall.
Businesses currently have 57.6 days to pay their bills. What this means is that businesses are being denied access to their own funds for almost double the average period of payment.
Developing an effective cash flow management and risk mitigation process
The extension of credit is a necessary part of running a business. However, you still need to ensure you have solid cash flow management and risk mitigation processes in place since this helps stay in business and go ahead of the pack.
One of the most important things a business can do is develop an effective cash flow process is as it will alert you to trouble before it occurs.
In simple terms, cash flow management means delaying outlays for as long as possible while encouraging debtors to pay promptly.
A cash flow projection needs to account for both incomings and outgoings. Also it is important to identify both set and variable costs. In addition to all that, customers’ payment histories should be taken into account as they have a significant influence on your incoming funds.
Understanding the financial health of your customers
It is critical to have an insight into the financial health of your customers, for the ongoing viability of your business. Simple credit checking processes are used to achieve the required level of customer understanding.
A credit check should be conducted prior to the extension of credit and it must occur regardless of the size of your retail business since size cannot be assumed to correlate with payment behavior.
As part of this process, businesses should be prepared to turn customers away. Losing a sale is more manageable than a persistently delinquent payer that impacts cash flow and spreads resources thin as your business seeks to recoup outstanding monies.
Existing customers should also be investigated as there may be bad payers among them.
Research shows the increasing propensity of consumers to default on smaller amounts of debt. This is a trend that puts a significant amount of pressure on the cash flow of businesses. Besides the dollar value of the debt being small, the money that the individual owes can add up to a significant amounts, particularly for your small businesses.
See also Building a Healthy Cash Flow.