Are your customers killing your cashflow?
It might seem a bizarre question. But if you’re a small to medium business owner who operates a line of credit to meet your financial commitments because your debtors don’t pay you on time, your customers are killing your cashflow.
Firstly, it’s important to state that SME’s need to fund and grow their business, which is done through various forms of finance. In Australia, the main reasons SMEs apply for finance are:
Maintain cashflow (47%)
Replace or upgrade existing capital (41%)
New capital purchase (32%)
General business growth (31%)
Ensure survival (27%)
Funding is essential, but let’s not forget, it comes at a cost. And that cost is usually linked to the risk assessment of your business. But what’s this got to do with customers paying you?
Over the years I’ve had many clients who, prior to my engagement, had taken on some form of funding to assist with business growth and cashflow. However, the bank made it clear the company needed to address the state of their aged trial balance (ATB; also called debtors or receivables). The business was instructed to give this area of their business more attention, and in some cases, it was a condition of the finance. Why? Because a poorly managed ATB is a big risk to a business. Regardless of how good your sales are, if you’re not getting paid for those sales, you might not be doing as well as you think, and your risk of loss is increasing month on month. Plus, you’ve got funding based on the fact you’ll be paid for those sales. But, if you’re extending credit to customers past their agreed trading terms, this is also costing you, and it’s a significant cost based on the length of extension, the value of the debt, and the number of customers. Having both these costs is what I call a double whammy, and you need to get rid of one of them.
My good friend André often repeats the saying “turnover is vanity, profit is sanity, and cash is reality”. It’s easy to focus on sales figures, they make us feel good, but failing to assess your whole financial cashflow situation on a regular basis is like playing Russian roulette. If you struggle to read financial reports, it’s imperative you have a good management accountant to help guide you in financial decision making.
If you’re an SME who has funding to maintain cashflow, you must give serious attention to your trade debtors. How much money is trading outside terms? If this money was paid on time, could you reduce the funding you have? Or would you be eligible for a better rate on the funding? Perhaps you could eliminate the funding altogether. This is where many SME’s get caught between a rock and a hard place, perhaps not understanding the cost of finance, and the cost of extending credit to customers. Although funding is necessary, it can also become a noose around your neck in the longer term if your business cashflow is not properly managed. Eventually, if receivables are mismanaged and funding repayments become difficult to meet, you can be in a situation where there’s no more cashflow to operate the business, and you implode as quickly as you grew.
So, what do you need to do with your customers? For many years I’ve said this to my clients: “customers are like children, they will do whatever they can get away with, and they will always test the boundaries to see if they’re still the same”. What I mean is this: you are responsible for how your customers behave, what their payment behaviour is like, and how much respect they have for your business and your trading terms. You are the one that sets the boundaries, makes the terms, and then you must also adhere to them. Then you need to successfully communicate this to your customers, ensuring a long term, mutually beneficial relationship is continued. And the good news is, this is all within your control, so any changes you need to make can be given priority now to ensure optimal cashflow.
Customers have more respect for a business that maintains consistency and expects to be paid within terms. From the moment you onboard a new customer, they should be well informed of your trading terms and what your expectations are. As my mother used to say, start how you mean to finish!
Consistency is a vital tool in receivables management, and there are many cloud-based options to assist you in automating and managing your receivables. However, it’s important to balance the process. Never use 100% automation to communicate with your customers, as this dehumanises the process and the customer no longer feels a connection to your business. Building relationships and connecting with customers is integral to receivables management success and maintaining a loyal customer base. There is no substitute for human connection.
