While revenue and turnover are key metrics used to measure the success of a business, companies live and die by their cash flow. That’s the view of Frank Knight, CEO of credit management specialist Debtsource.
“Most businesses are too focused on turnover. While this figure may look good on an income statement, it simply represents a commitment to pay. Until the invoice has been seettled it’s a hollow figure, because a business is unsustainable if there’s no money coming in to pay suppliers or staff.”
Knight states that a sound trade credit management strategy is essential for the establishment of healthy cash flow. “In constrained lending environments, like that being experienced presently, there is greater demand to source credit from suppliers and partners.” This trade credit – an agreement between the provider and a customer or another company to purchase goods on account and pay at a later date – must be established based on the quality of potential debtors.
“When you build your business on quality debtors then you can be assured of robust cash flow.”
The intent of a trade credit management strategy must be to recover the maximum amount of outstanding debt in the shortest period possible, without compromising on the prospect of repeat business from the debtor.
“The first step in this regard is to improve the credit granting process, then augmenting this with processes for recovering money owed and managing the client’s credit lifecycle.”
This process should begin with the drafting of credit policies that define how companies extend credit to customers and clients, along with the accompanying documentation. “That’s because the moment you start providing trade credit you become a lender,” says Knight.
He adds that the ability to combine credit bureau research with a company’s own client data is also vital to making better credit management decisions, and a key enabler of these capabilities is technology.
Simon Russell, MD of Experian South Africa, explains that making the right customer decisions, particularly in the case of smaller businesses, is imperative for managing cash flow and ensuring the company stays afloat. “Being able to grant credit to the right individuals is critical. Better responsiveness for credit granting at a faster and smarter rate is vital to winning and retaining customers. Finding the balance between offering better terms than competitors and limiting credit exposure are essential.”
However, this process can often prove challenging as finance and sales teams are required to process reams of paper-based application forms.
“This can make the decision-making process to grant a customer credit and the value thereof a long and tedious process. There is also additional pressure to make the right decision to avoid the risk of granting credit to the wrong customer or client, which would expose the company to bad debt. The subsequent loss of business and revenue can be detrimental, especially for a small business.”
Knight adds that a suitable credit management solution also requires management oversight capabilities and reporting functionality to identify patterns. “Access to granular real-time information enables businesses to continually review the credit management status of clients to inform on-going decisions, as payment terms and the status of debtors change over time.”
Without this functionality, cash flow can become constrained, which is when companies turn to risky practices such as invoice discounting, says Knight.
“Companies sell their outstanding debt to collectors or banks to generate the working capital to keep the business afloat. However, with the appropriate credit management systems and processes in place, this option of last resort can often be avoided as cash flow remains robust.”
This article was originally published in Business Day on 22 February 2018.