KEY POINTS:
Howard Thomas, of Lowndes Associates, on the issue of credit in less buoyant times
Why all the fuss about cash flow and credit?
Cash flow is the movement of money in and out of a business. Extending credit, whether voluntarily or not, delays the inward flow of money. Longer debtor days mean delaying access to your cheapest funding - your own cash. Borrowing, even short-term, to pay your own creditors is currently relatively expensive and will become harder to source.
What happens when the debt turns bad?
Not only are cash flow problems compounded but margin can be obliterated. If the big deal turns sour it can devastate the year's results, or worse. To reduce the cash flow risk, the aim should be to narrow the gap between the signing of the deal and the receipt of the cash.
Are businesses tightening their practices?
Certainly. Poor or non-existent credit control was less obvious, and less important, in better days. Belts are now being tightened and businesses are being smarter, earlier.
What's the best method of controlling credit?
Extend credit as if you were lending cash (if your business has debt, you are effectively borrowing that cash at a high interest rate and lending it on interest-free).
Remember the importance of protecting your margin - against that background, have the courage to say "no". Consider alternative payment arrangements - deposits, retainers, cash-only transactions in advance, cash on delivery, eftpos, automatic and credit card payments - and where relevant, reflect these in your terms and conditions of supply.
Okay, but most businesses need to extend credit. How is this best managed?
Actively and openly. Undertake initial credit checks for new customers and review them regularly. Make credit decisions quickly. Get invoices out promptly. Follow up late payments as soon as practical and stop further supply. Ensure dialogue with significant debtors. Protect good relations, particularly with significant customers.
Can anybody help with the process?
Alternatives include outsourcing credit control. Businesses can factor their debts, selling them to a commercial factor which can provide, say, 80 per cent of the debt immediately with the rest paid (minus a fee) when the total debt has been recovered. Lowndes Associates is an Auckland City-based corporate-commercial law firm.
