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Tough times, tight credit management

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Money, as the current state of the economy forcibly reminds us, is in short supply. Credit and profit margins alike are being squeezed.

The looming recession promises to be a challenging time for even the best organised of businesses as they strive to maintain a reasonable cash flow and to avoid late payments. Smaller firms in particular may feel the cold breath of the downturn more than most.

There are, however, a number of practical steps that business owners can take to ensure that they have as tight a control as possible over their finances.


The first is to keep an eagle eye on the credit health of customers. Progressively late payments made by customers once timely in settling their bills may be a strong indicator of problems with their cash position. A business should keep an equally close watch on its own finances, monitoring cash flow in case a blip looks as if it might become a trend.

It is important also to run credit checks on new as well as old customers (not an expensive policy), especially if they intend placing a large or a number of orders. Credit reports can help with marketing too: there may be little point investing time and effort targeting potential new business if the firm you have set your sights on has a fragile payment history or is experiencing financial difficulties.

Keep monitoring the credit status of customers you may have concerns about for any irregularities.

Of course, sound, copper-bottomed existing customers are the bedrock of a business when trading conditions are harsh. So you should make every extra effort to keep such customers happy and loyal: improve your service to them wherever possible; cement your relationship with them by maintaining regular contact and ensuring they still value your service or products.


Working capital is essential to businesses, and it makes sense to keep a firm’s finances as liquid as circumstances permit. In the short term, for example, it may pay to lease or rent new equipment rather than empty large sums out of the bank account buying it.

Terms and conditions

The stricter and more precise the terms and conditions you apply to a sale, the less chance there is of payments slipping and sliding. Ensure that customers understand those terms from the outset. Print them on both invoices and delivery notes.

If invoices are to be settled according to a payment schedule, secure a written agreement on when each invoice is to be sent and paid. To encourage prompt settlement of bills, offer an incentive such as discounts for early payments (while always balancing the extent of the price cut with the benefits of an improved cash flow).

If your business sells physical products, it may be worth adding a retention of title clause to any contracts. This means you remain in ownership of the items until they have been fully paid for. Should the customer fail, you can reclaim your stock.

Once a product or service has been delivered, invoice the customer as soon as possible. Ideally invoices should be sent out a full week before the end of the month so that they sit within that particular 30-day payment cycle.

It is important not to let any payment timetables slip: issue regular statements reminding customers of the sums they owe, how long they have been owed and for which products or services.

And, politely but firmly, always be assiduous in chasing overdue amounts.

Minimising risks

While bringing in a large piece of new business may appear the cause for celebration, it is as crucial to make sure that you have a good spread of customers. Over-reliance on just one or two clients can expose your own business should one of them go under.