Most SME owners are also the rainmaker and business development head for their own company.
Many are also firm believers in this rudimentary business philosophy:
Revenue and sales will cure all business ills.
This results in a relentless hunt for revenue figures and the sales team are under constant pressure to deliver their sales numbers.
At the end of the financial year, the small business owner will look at his financials and be satisfied with his top line growth compared to previous year.
But when he looks at his current account, he might be puzzled why the cash in bank does not seem reflective of the strong surge in revenue figures?
He’ll then realize that despite the trajectory revenue growth had undertaken, his accounts receivables have also rise in tandem. With the bulging figures in the receivables column and corresponding increase in direct cost of goods sold, it’s no wonder there isn’t much cash to show for all the efforts put into driving revenue.
This is a common mistake among many SME owners:
Chasing revenue without looking over debts receivables.
Cash-flow is the lifeblood of every small business and should be prioritized over just revenue growth and profits.
A company could look great on paper with year on year revenue growth and high profit margins. This would still come to naught if your debtors are taking over 180 days to pay you or worst, you must bear provision for bad debts on your books.
What good is high revenue growth if you’re not able to collect the payments to generate cash flow.
It is prudent business practice to prioritize customers whom are willing to pay cash terms for your products/services rather than those whom place large orders but require lengthy credit terms.
This is especially so if the potential buyer is not someone you had a working relationship previously or a big name in the industry such as MNCs or government related entities.
A savvy business owner would rather lose a deal than to play the role of a financier by extending long credit terms to new accounts. When your customer uses your credit terms as a form of financing, they effectively save on business loan fees. Do not let customers abuse your credit terms as a interest free business loan facility.
Ultimately, collections of payment will directly affect your cash flow. You can’t use your revenue figures or purchase orders to settle rental or make salary payments.
Cash is king should be the mantra of all small businesses. If need be, a short term low interest funding could be obtained to improve company’s cash flow position while waiting for receivables to be collected.
Small businesses can compare all SME loans in Singapore to source for low interest short term funding with no early repayment penalty for the above purpose.
In certain situations, your sales team might come to you with these common reasons why you should extend longer than usual credit terms to customers:
“Without granting longer credit terms than our competitor, the customer will not buy from us.”
“The customer has a tight cash flow, let’s extend longer credit terms to help him tide over”
If you have reasonably sufficient reasons to justify extending longer credit terms to a customer (i.e. referred strongly by a long-time client) you should go ahead.
However, if it’s a relatively new customer that you’ve no industry insights about, you should err on the side of caution when it comes to granting credit. Especially so if the order size is not insignificant.
You should also constantly remind your accounts receivables staff on the importance of receivables collections and recovery.
Establish clear receivables guidelines and credit management within your sales and accounts department.
Receivables recovery is an unavoidable, challenging work that no one likes to perform. However, it is critical to manage receivables promptly to ensure that company’s cash flow position will always stay healthy.
It is commonly accepted that the longer a debt remains unpaid, the lower the chances of full recovery.
Never let receivables that have already been past due stay due for too long a period lest it turns delinquent.
Implement a standardized procedure in your company on how to deal with delinquent debts. Never fear engaging legal and legitimate debt collectors to chase after bad debts after all other less intrusive methods of engaging the customer is exhausted.
Some SME owners are afraid that engaging debt collectors will spoil the business relationship and leave a bad name for themselves in the industry. That should be the last of your concern since the customer did not intend to honor the debt in the first place by allowing it to go bad. There are also many other methods SMEs can implement to improve cash flow position.
By prioritizing collections and receivables management over pure revenue growth, your company’s working capital cash flow will be much stronger.