A major reason for the failure of small businesses is not a lack of profit, or even a lack of sales. It is the cash flow crunch that happens when the turnaround time between delivering an order and getting paid for it is simply too long. This puts strain on everything else in the business – from working capital to buy raw materials and produce more orders, to salaries, wages, paying overheads, paying suppliers etc.
Simply put, if you do not manage your debtors and have policies and procedures in place to ensure that you get paid for your goods or services when you need to, you will run into trouble sooner rather than later.
Similarly, you also need to manage your stock and stock levels, especially when supplying large retailers such as Tiger’s Eye, Woolworths or Pick n Pay. You need to have enough stock on hand to ensure you can meet all your delivery requirements and responsibilities, but also need to be ever mindful of having too much money sitting on the shelves….a delicate balancing act indeed!
Here are some tips to assist you in dealing with these two critical areas of your business:
Good practices in managing debtors:
- Have the right attitude to the control of credit and make sure that it gets the priority it deserves.
- Establish clear credit practices as a matter of company policy.
- Make sure that these practices are clearly communicated to staff, suppliers and customers.
- Be professional & circumspect when accepting new customers, especially larger ones and new export clients – check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources, colleagues who have dealt with them etc.
- Establish credit limits for each customer… and stick to them.
- Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector.
- Invoice promptly and clearly.
- Consider charging penalties on overdue accounts – again, this must be communicated clearly.
- Consider accepting credit /debit cards as a payment option.
- Monitor your debtor balances, and don’t let any debts get too large or too overdue.
Warning signs of potential bad debt:
- longer credit terms taken with approval, particularly for smaller orders (eg 90 or 120 days)
- use of post-dated checks by debtors who normally settle within the agreed terms
- evidence of customers switching to additional suppliers for the same goods
- new customers who are reluctant to give credit references
- receiving part payments from debtors.
- Develop appropriate procedures for handling late payments.
- Track and pursue late payers in a polite & professional manner.
- Get external help if your own efforts fail.
- Don’t feel guilty asking for money…. it’s yours and you are entitled to it!!
- Make that call now. And keep asking until you get some satisfaction.
- In difficult circumstances, take what you can now and agree to terms for the remainder. It lessens the immediate strain on your cash flow.
- When asking for your money, be hard on the issue – but soft on the person. Don’t give the debtor any excuses for not paying.
- Make it your objective is to get the money – not to score points or get even.
Factors to be considered when determining optimum stock levels include:
- What are the projected sales of each product?
- How widely available are raw materials, components etc.?
- How long does it take for delivery by suppliers?
- Can you remove slow movers from your product range without compromising best sellers?
For better stock control, try the following:
- Review the effectiveness of existing purchasing and inventory systems.
- Know the stock turnaround times for all major items in your range.
- Apply tight controls to the significant few items and simplify controls for the trivial many.
- Sell off outdated or slow moving merchandise – it gets more difficult to sell the longer you keep it.
- Consider having part of your product outsourced to another manufacturer rather than make it yourself, this can lessen stockholding costs & increase efficiencies.
- Review your security procedures constantly to ensure that no stock “is going out the back door!” Undetected theft is one of the biggest causes of business failure!