Sometimes these reasons are quite good – Blockbuster didn’t get on board with streaming quickly enough, Borders didn’t adapt to a world of e-commerce, etc. etc. – but running out of money is almost always the central, unalterable fact of a company shutdown.
The problem of cash flow is fairly obvious, but it’s also a very hard problem to fix in a world where bank finance is increasingly defined by its rigidity – to the point that SME overdrafts are being withdrawn on a daily basis. There’s a popular saying that most people are a paycheck or two away from homelessness. It could easily be paraphrased to suggest that most businesses are an unpaid invoice or a withdrawn loan away from complete insolvency.
Nonetheless, if you’re one of these businesses and you’re feeling the pressure, you have more options than you might think. With the right processes and some strategic adjustments, you can manage your finances in such a way that you can simultaneously mitigate your risk – and stimulate further growth.
A diverse client base
When it comes to your company’s sales ledger, a degree of promiscuity is not a bad thing. The level of service you provide and the goodwill you’ve incurred sometimes won’t matter. Your customer relationships are largely beyond your control, so if any individual account comprises over 50% of your sales, you’re in dangerous territory. Maybe they’ll fold; maybe a competitor will offer slightly better rates. Monogamy is for romance, not business.
Diversify your ledger across different accounts, and you can protect your company against invoice disputes, customer insolvency, and any other client-borne issues that might threaten your stability or your plans for expansion. This will also make you more attractive to potential lenders: they’ll typically require more security if your organisation has too much business concentrated with a small number of few clients.
While you don’t want to be entirely dependent on big invoices, it’s also wise not to let smaller ones accumulate. While it can often seem like it’s more work to pursue delinquent customers, these small sums can add up over time – and increase your operational costs.
Often, recovering this money is a simple case of implementing a reasonable credit management process and following it strictly and unwaveringly. Something as simple as sending a polite reminder notice alongside a monthly statement can serve as an effective means of motivating your clients to pay up. If not, send further notices, and slightly escalate the tone with each one – while staying professional, and short of outright hostility. Blocking access to further services should be a last resort, but you must be willing to exercise it. Do not ever continue to trade with people who refuse to pay you. If they didn’t have the money, they shouldn’t have come to you in the first place.
Realistic credit terms
When you’re a small business, it’s easy to be so happy about signing a new customer that you’re slightly unrealistic about your needs. If you have monthly overheads, you can’t rightly work on 90/120/150 day payment terms: it encourages a “feast or famine” approach to enterprise that is functionally irreconcilable with profitable business models.
Sometimes you’ll have to play hard ball. Sometimes you’ll lose clients because of it. But if you can negotiate better credit terms, you’ll protect your company in the long run. If they’re a larger organisation, you might be able to sign up for their supplier finance scheme – but this will cost you a small charge for timely content. If they’ve got slightly longer terms and you still want their business, offer incentives for early payment – or insist that the total invoice can accommodate your expenses.
Alternatives to bank finance might well present themselves if you’re struggling to secure more traditional funding, but always read the fine print. Contracts and agreements are often dull and borderline impenetrable to anybody without a law background, and that’s for good reason: inside this dense, unreadable, and largely irrelevant text are fees and charges that may come back to bite you. A 10 per cent arrangement fee that nobody bothered to tell you about; a quarterly business audit at a significant cost each time.
Some of these charges are more common than others, and many are standard practice across all lenders. But the ones that don’t tell you about what they expect you to pay are to be avoided and treated with suspicion.
Keep the cash flowing
Cash is King, and when money flows irregularly and erratically, it can be almost impossible to maintain an effective business. Financial continuity is important: it allows you stability across the business, and it provides a solid foundation for future growth.
Follow the above tips, employ your common sense, and treat suspect lenders like plague victims. Your business’ future depends on it.
By Chirag Shah, CEO, Nucleus Commercial Finance