Cash Flow: Keeping Businesses in Business

A lot has been written recently about how the economy is effecting all business at the moment, from the largest multi nationals, to the one man bands who are setting up by themselves for the first time. One thing which does not seem to be getting the column inches it really needs though, is cash flow, and the importance of protecting what is essentially the life blood of a company. Without cash, a business cannot operate. It's as simple as that.

According to recent research carried by BACS, British SME's are having to wait an average of 41 days beyond terms to get paid, a situation which is clearly putting unnecessary strain on company cash flow. In fact, Lovettes have also recently said they seen a rise in late payment demands of around 24.5% recently, showing that companies are at least trying to address the situation and get their over due payments in. This can almost be a case of bolting the door when the horse is out of the stable though. The damage may well have already been done.

This strain on cash flow is clearly taking it's toll on British SME's, and as recently as a week ago, Forge Dam Ltd, a 2.2 million turn over company based in Leeds, cited "severe cash flow issues" as the principal reason for going into Administration.

Couple this constant late payment, with the fact that the availability of credit still appears to be an issue, and the future certainly looks difficult for companies. Currently more loans are being paid off than granted. Since 2008, lending figures have been positive in only 3 months, indicating that the money to lend either is not there, or isn't being released by the banks. This would certainly seem to be an issue the coalition government is taking note of also, with George Osbourn and Vince cable apparently set to spell out the dangers of a double dip recession if bank lending continues to dry up. With a significant number of loans set to mature in 2010, the banks certainly have a major part to play in the future of small businesses.

So surely, we need to be looking at solutions to this problem which companies can access easily, and will allow them to trade with confidence, and more importantly, get paid. Unfortunately, I don't have the power to solve the banking issues we have, or the money to issue the loans personally, so we have to be looking at solutions that are closer to home, and this is where the shameless plug come in!

Credit insurance is now sold as a package which is designed to address many of the issues that can affect a companies cash flow, and certainly help to ease the pressures that can be suffered. No longer is it a product which is solely used to claim against an insolvency (although this is still integral to the policy), but a product which should work alongside a credit control department.

Users are encouraged to credit check potential new customers, helping to identify those who are more likely to cause payment issues in the future, and all customers can be monitored to identify changes in payment patterns. The principal is to avoid the cash flow issues, by avoiding the companies who cause them. A customer is not a customer until they have paid. With many companies eager to take on new business, but worried about late payments, an aid to help ease the pressure is certainly out there.

Access to comprehensive legal and collections services also helps to strengthen the hand of the credit control department, with the threat of legal action carried out by an insurance company carrying a lot of weight. Especially when companies are monitored to see if they are slow payers, with cover potentially being withdrawn on the main offenders. By passing any severe issues to a credit insurer, it can free up more time to chase payments from others more quickly, and more effectively.

Finally, the policies still protect against the potentially catastrophic effects of a bad debt. A sudden large whole in cash flow can often cause a company fail themselves, the "domino effect" continuing until either a company is insured, or is simply big enough to take the hit. With cash seemingly at a premium though, it seems harder to find the companies who can soak up this debt, and harder to find those who are willing to take the risk and enter into large contracts that could leave them exposed to a catastrophic debt.

Credit insurance may not be able to solve all of a company's problems, but with the need to protect key assets becoming more an more important, surely it time for more attention to be paid to what for most companies is their largest, yet most vulnerable asset - their sales ledger.

For more information, please contact me at samf@exchangeis.net, or through twitter (sam_exchangeis) or find me on LinkedIn.