Credit terms feel the crunch

SYDNEY: Business finance provider Bibby Financial Services has urged small businesses to avoid over-trading and maintain cash flow in the slowing economy.

Bibby Asia Pacific chief executive Greg Charlwood said the current financial year would be a challenging one for businesses. Tight credit markets would present particular challenges for the small to medium enterprise (SME) sector, with the majority of fashion businesses classed as SMEs.

"To compound the normal pressures of a growing business, simple sources of cash flow are naturally affected in tight credit conditions," he said. "For example, it is common for invoices to be paid late during tough times."

Charlwood said a recent report by international commercial information specialist Dun & Bradstreet revealed the average payment term across all sectors had risen to 52.6 days – almost four weeks above normal credit terms.

He warned growing SMEs which lacked cashflow were at risk of over-trading, where the finance available was less than the cost of delivering orders.

Businesses could avoid the pinch of tight credit conditions by following a number of simple rules, he said.

Firstly companies should always check the credit status of new customers. Credit checks could be done quickly and were relatively inexpensive, he said, adding It was important to establish customers' correct business title and legal status – in other words 'limited company', 'sole trader' and so on – before seeking reports from agencies.

Existing customers should be periodically reviewed, he said.

Creditors should also clearly define and agree credit limits. They should always ascertain the expected size and regularity of orders and use this to assess the limits required. They should not give unlimited credit and should set a limit for each customer.

In addition, terms of sale should be stated clearly on order acceptance, invoices and any other documents and should include a provision for adding interest to the outstanding account to encourage timely payment. Companies should be aware of their legal entitlements concerning the Late Payment of Commercial Debt (Interest) Act, he said.

Businesses should chase overdue accounts regularly and take prompt action, sending out statements on a monthly basis. Rather than waiting until the end of the month before invoicing they should send out invoices at the same time as goods or services were delivered.

Overdue accounts should be chased up by phone, and creditors should check customers had received invoices and that there were no queries regarding them. Creditor companies should deal with the same person each time they contacted  the company and should make payment of the largest outstanding debts their priority.

They should also ensure that invoices were correctly addressed, related to the goods delivered and included an order number if required. In addition they should conduct regular checks to ensure all details were up-to-date and accurate.

Sales ledgers should record all sales, credit notes issued and adjustments to accounts. Invoices and payments should be entered as soon as they were issued or received.

Most importantly companies should be prepared to recognise and deal with problems at an early stage. Involving solicitors should be the "very last resort" as legal bills were often out of proportion to the money owed.

"These tips on keeping cash flowing may seem obvious on reflection but many companies get bogged down and forget to apply these simple rules," Charlwood said.