Picture: CHRIS RATCLIFFE, BLOOMBERG, 2012 BLOOMBERG FINANCE LP

JOHANNESBURG – The first three months of any year is traditionally the time when many businesses that provide commercial goods and services on credit terms struggle with their cash flow. 

Generous bonuses in December, staff on leave and a lack of enthusiasm from clients to pay what is owing according to their agreed terms all have a negative cash flow impact. 

It is not unusual to see a spike in delinquent debtors in this quarter, especially for businesses whose clients operate in and are reliant on industries such as manufacturing, construction or distribution that traditionally shut down over the December holiday period.  For any business owner, these times can be daunting, as cash flow struggles have significant ramifications. 

Every Chief Executive of every business – no matter how small or large – dreads having to deal with cash flow pressure! Making calls to suppliers, financiers or even staff to beg for extensions is not fun.

So how do you avoid those calls? What are the practical steps you can take in your business to keep it “cash fit”? What can you do differently in your business in 2019?

Here are some tips beyond just begging your bank for an increased overdraft:

1. Fix your profitability. We do numerous assessments on businesses that have huge turnovers, but where the profitability is so low you almost have to ask yourself whether the business is viable. Businesses with low nett margins always suck cash and require continued capital and financing, which adds to expenses, which means lower profit, and so the spiral goes. Better to slow the sales and make more profit if that’s a realistic option for the business.

2. Get your documentation in order. To some may be surprised to see this tip on the list, but again we see so many businesses that don’t get paid on time due to disorganised or non-existent documentation. Incorrect purchase orders, missing contracts, improper credit agreements, delivery notes that have gone awry, invoices incorrectly captured and miserable master data all create payment delays or non-payment events. Be meticulous and let staff who don’t follow the rules feel the wrath.

3. Pick better quality debtors. According to the science of credit management, a company’s liquidity is largely determined by the quality of its debtors. Try and build your business on low-quality debtors and the result is rather obvious. Quality debtors are companies that have a good financial reputation and where there is no history of non-payment or late payment – pick those! While there are specific strategies to successfully deal with higher risk debtors, this is not advisable for the novice credit person, and will most certainly not contribute to fixing cash flow in the short-term. 

4. Hand over non-paying clients sooner. By the time your debtor owes you your money and the account has aged to 120 plus days, it is safe to assume that whatever you are doing to recover the amount is not working. This (if not sooner) is the appropriate moment to engage a proper expert to help you recover your money – just make sure they are an expert though. By combining SA’s typical overdraft rate together with our inflation rate you can safely assume that you are losing at least 1,5% of your outstanding amount for every month that goes by. Best to intervene quickly.

5. Insist on receiving your management accounts within at least two to three weeks from the date of the last month end.  Typically management accounts should include an income statement, balance sheet and cash flow forecast as the minimum. There is no way that you can manage cash flow successfully without this reporting, and again we assess many companies where management is literally flying “blind” while waiting for their auditors to prepare last year’s numbers. If you have solid reports that are complete and that you can trust, you will see cash flow problems well in advance.

Content supplied by Frank Knight, Chief Executive of Debtsource.

PERSONAL FINANCE