While the end-of-year holiday season can bring trips, gifts, vacations and all-round relaxation for many, it can also affect the cash flow of your business come February and March.
With the exception of certain sectors, such as hospitality and retail, we often see a drop in business activity in December and January. The impact of lower revenue collides with unchanging fixed costs, which is obviously detrimental to small and medium-sized businesses. Add to that a poor Australian dollar, and the climate for business couldn’t be more precarious.
Cash flow is king
Businesses taking a break, or at least cutting back activity, over the holiday period will see a decline in the speed and number of invoices their customers will pay. Why? Businesses stop chasing payment as vigorously as they would throughout the rest of the year, while customers themselves often head on holidays, making it difficult to follow up outstanding payments.
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If debtors fail to pay their bills, or worse, fall over, suppliers often follow suit.
Australian credit reporting agency CreditorWatch has found close to 40% of all defaults registered with the bureau occur in the March quarter, a factor that highlights the need for businesses to understand their clients.
According to ASIC insolvency statistics for the 2013–14 financial year, 80.6% of all insolvencies related to companies with less than 20 full time employees, while 61.8% of companies had estimated assets of $10,000 or less.
For SMEs, it is clear that cash flow ties in directly with their clients’ business health. As a business owner, it is important to ask yourself whether or not you understand your clients’ financial health.
‘Due diligence’ may be two words that are thrown about in business lingo often, but they couldn’t be more important when monitoring clients.
A good way to protect yourself from problem customers is to perform credit checks. Important things to look for include payment defaults or court actions that indicate they haven’t paid other suppliers.
Credit reporting companies will also monitor your customers for you, sending you email alerts when important changes occur that could affect their ability to pay their bills.
It’s well documented just how poorly the Australian dollar is performing. The AUD is currently sitting at around US80 cents and there’s no indication that it will increase. For now, this is the new norm. If your business is importing stock or if you have clients importing stock, costs will potentially increase.
Big businesses have the benefit of employing teams of people studying the market and judging what move the dollar will make next but SMEs often have to rely on media reports and overall speculation to cover themselves.
The unstable dollar is affecting imports, pure and simple, costing businesses more to bring in products. It’s important to ask, before purchasing products, if you can afford to sell them at increased prices.
Checklist – Dealing with debtors
- 1. Invest in a credit report on new customers. This will give you a good indication of their credit worthiness.
- Start off with a manageable credit limit for new customers in the beginning and increase it overtime as necessary.
- Monitor your existing customers for important changes with a credit reporting bureau. That way you’ll receive email alerts when a customer gets into financial trouble or defaults with a competitor.
- The squeaky wheel gets the grease. It might sound like a cliché but it works! You should actively chase overdue invoices.
- Have a written and formal strategy for collecting payments and stick to it. Diarise invoices, statements and follow up calls. This will ensure you don’t miss chasing a payment and it will also train your customers to pay on time.
Colin Porter an entrepreneur who knows how to develop ideas into business and is experienced in finance and risk. He is founder and managing director of credit reporting bureau CreditorWatch.