management advice

Critical credit management advice for small business and start-ups

Starting or running a small new business can be an exciting yet daunting prospect, and there are many hurdles which owners must overcome to ensure that their business survives for the long-term. Primary among the business survivalist toolkit is a healthy cashflow. The saying goes “turnover is vanity, profit is sanity, but cash flow is reality.” Without being able to pay staff and suppliers on time, your business will not survive very long. At the core of a healthy cash-flow lies the function of credit management. It sounds quite simple if you think about at it first – you just need to make sure that clients pay their bills on time, right? “Not quite that simple,” says Frank Knight, CEO of Debtsource, which operates as a specialist B2B credit management company.

“The first problem faced by most new business owners is that they are so keen on proving their model works that they will focus on turnover, almost at all costs,” says Knight.  He says owners need to overcome the hurdle to understand that a sale does not equal cash flow, and that a sale is not good for your business until it has been paid.

“South Africa is littered with companies that went under while making a profit and the simple thread running through the majority is they were not able to convert that profit to cash. Just think about that: you fool yourself thinking that the business is growing nicely and that profits are on the up, yet it is exactly those unpaid sales that create your demise.”

And late payments from customers are almost as bad as not being paid at all, especially so for really large deals. “We have seen some really big companies go bust, or nearly go bust, as a result of receiving a significant order,” comments Knight. He says that businesses typically require additional resources to fill big orders and when their large new customer does not pay them on time, it creates a massive ripple effect back onto their cash-flow. The problem is exacerbated when the small business owner does not feel he has a “right” to ask a big business for their financial credentials and assumes that large business equals great-paying business.

“This is a real misnomer,” says Knight. “Some of South Africa’s largest companies and institutions are experiencing pressure on their resources and will not hesitate to delay payments to facilitate their own cash-flow issues.”

So, what can business owners do to prevent the crippling effects of late or non-payment? Knight advises that the first key element is to build your business on quality debtors, defined as a customer that pays their account on time, repeatedly. “Smaller businesses especially need to do proper research on a debtor before taking them on and must make sure that there is a verifiable track record before extending credit.”


There are also options to credit insure B2B commercial transactions, and this is definitely recommended if you intend selling into any export markets. Knight says that you need to have a simple check-list for every new client you take on. Ask yourself:

  • Do I have a proper written agreement with this client?
  • Have I verified their credentials to avoid the possibility of fraud and does their track-record show that they can and will pay?
  • Have I considered obtaining additional securities on the account, or trade credit insurance?
  • Am I betting the farm? If this company fails to pay me will my entire business be at risk?
  • Am I regularly contacting the debtor to make sure they process my payments on time and do I resolve queries quickly?
  • Am I continually reviewing my client base to ensure that the good apples haven’t gone sour?


Knight emphasises that smaller businesses are particularly vulnerable and should be especially vigilant in applying proper credit management. Where larger businesses may have deeper pockets, small businesses are not able to withstand many delinquent debts, and therefore should look to build their cash flow on a solid client foundation. “It is crucial to remember that a company’s liquidity is largely determined by the quality of its debtors,” Knight concludes.