Protecting your cash flow with solid credit management

A healthy cash flow is the starting block for keeping all of your other operations on track, including investment in growth.  

A measure of the movement of money in and out of a business, cash flow is a critical aspect of your company’s financial health, as it determines how much money is available to your business at any given time.  

It is made up of: 

  • Inflows – Incoming funds generated through sales, investments and loans 
  • Outflows – Outgoing funds spent on operating expenses. 

To maintain good cash flow, inflows need to exceed outflows – in other words, you achieve a positive cash flow.  

A key part of managing this is to control when and how you are paid by clients through an adaptable, forward-thinking credit management strategy. 

Establishing a payment framework 

If your business operates in the retail or ecommerce sector, then your payment framework is likely to be straightforward – consumers pay a set price for a set number of units at the point of purchase.  

However, service-based businesses – particularly those which work with other businesses as clients – generally operate on either a retainer basis or a billable hours basis.  

If this applies to your business, it’s important to outline your payment expectations with clients at the start of the relationship.  

You should include them in any contract you have with a client, including: 

  • Rates of payment 
  • Length of payment terms 
  • How you expect payment 
  • Payment dispute processes 
  • Consequences of late payments. 

This will help you to plan your expected inflows for each payment period.  

Confirming creditworthiness 

Credit checks form the first line of defence for your business’ cash flow.  

While you may not be extending credit in the literal sense to a client, you may, for example, carry out work which is invoiced and paid after the project is complete.  

It is therefore crucial to understand the financial stability and credit record of new clients. Conducting a thorough credit check can reveal insights into a client’s previous payment behaviours and financial health, helping you make informed decisions as to whether you can onboard them.   

This proactive approach minimises the risk of non-payment and ensures that you are doing business with clients who are less likely to disrupt your cash flow. 

Managing late payments 

Late payments are sometimes inevitable and unavoidable, but it is possible to minimise how seriously they impact your cash flow and client relationships.  

Although late payments can be frustrating, it’s important to approach the situation in a measured way to avoid harming your relationship with clients – particularly if clients are disputing payment because of an issue with the service you have provided. 

Many payment strategies follow this reminder system: 

  • An informal reminder of the payment date 
  • A polite reminder of any late payment penalties 
  • An offer of a payment plan if a client is unable to pay debts 
  • A plan for formal negotiation if the situation escalates or is not resolved. 

This approach not only salvages a potentially fraught situation but also supports your cash flow by bringing in money that might otherwise be lost. 

By planning ahead and putting a solid payment strategy in place, your business can navigate the challenges which come with payment delays and mitigate the impact on your growth and investment plans.  

We can support you in developing a credit management strategy for clients and help you to review and adapt your policies to changes in the market and client needs. 

For advice on developing a client payment strategy and managing your cash flow, please contact a member of our team today.  

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