Accessing finance is often a challenge for SMEs and although the Australian business environment looks to be on the up and up, credit providers look set to maintain a tight rein on their credit books. This means finance will continue to be hard to come by so, you need to ensure your cash flow is healthy.

As economic conditions improve after a significant downturn, firms often make the mistake of assuming their own business conditions will automatically improve. However, the truth is a recovery can catch many businesses by surprise. Firms that are under-stocked or under-resourced will be left scrambling and may face negative cash flow as they outlay funds to meet demand but are forced to wait for payment. With credit providers continuing to be wary of risk it's unlikely you'll be able to borrow your way out of cash flow trouble so, it's critical that you get your cash in order.

The following ideas will help you improve your cash position without assistance from the bank:

• Get your cash in the door ASAP
  
  
• Delay your payments for as long as possible but don't pay late
  
  
• Keep an eye out for signs that your customers are facing pressure
  
  
• Check potential new customers before extending credit
  
  
• Establish an open relationship with your bank manager

 

Get that cash in the door

Getting your cash in the door as quickly as possible will provide a significant boost to your cash flow and the best way to do this is to ensure that you have an efficient receivables process in place. Developing this process shouldn't be complicated, simply follow the steps below:

• establish clear credit terms at the outset of a relationship
• issue invoices promptly
• track accounts receivable to identify slow-paying customers
• communicate regularly with your customers to identify and resolve problems before invoices become overdue
• take action against a debtor if they are persistently delinquent.

Delay your payments for as long as possible but don't pay late (preserve your credit rating)

In its most simple form, cash flow management means delaying outlays for as long as possible while encouraging debtors to pay promptly. But, it's important that you don't delay your payments for too long or you will find yourself with a significant blemish on your business credit file and as a consequence, you may have difficulty the next time you try to borrow funds.

A strong credit rating allows you to keep your finance options open and the best way to get a strong rating is to pay your trade accounts on time. Your payment record is included on your commercial credit report and if you are a habitually late payer you are only damaging your chances of being able to access affordable credit when you need it.

Have you checked your company credit report recently? Don't wait till you need finance to ensure it's as up-to-date as possible, check your company credit report today >>

Keep an eye out for signs that your customers are facing pressure

That you need to keep a close eye on your customers when times are tough is a well known fact however, keeping a close eye on your customers when business conditions are improving (after a downturn) is just as critical. Monitoring your clients' health can be relatively simple as some signs of potential distress are easy to spot. If your clients cheques start to bounce, they delay their payments or their staff turnover becomes rapid you need to act quickly to protect your business. An appropriate response will depend entirely on the situation however, you should consider actions such as reducing the amount of credit you extend, cutting off the line of credit until all current payments have been settled or requesting up front payment (or payment upon delivery).

Check potential new customers before extending credit

Knowing your customer has never been more important. To achieve the required level of customer understanding, smart operators are utilising simple credit checking processes. A credit check should be conducted before you extend credit and it must occur regardless of the size of the business as size cannot be assumed to correlate with payment behaviour.

As part of this process, you must be prepared to turn customers away. The loss of a sale is more manageable than a persistently late payer that impacts cash flow and spreads resources thin as you try to recoup outstanding monies. Always remember that bad payers considerably reduce your business cash flow, draining the funds that are required for the day-to-day running of operations or could be used for growth.

Establish an open relationship with your bank manager

Having an open relationship with your bank manager is particularly important for SMEs. The better your bank manager understands your business the easier it is for them to help you when you need it. By talking to your bank manager regularly and keeping him updated on how your business is performing, he'll know which product best suits your needs when the time comes for you to borrow funds.

But remember, having an open relationship with your bank manager is not a guaranteed ticket to finance when you need it - your bank manager is still going to check you can repay the money. This means it's critical that your finances are in order, your credit report is up to date and your business is performing well if you want to apply for a loan.

Maintaining a strong cash flow is going to be absolutely critical for your business as the Australian economy recovers from the credit crisis. For more tips on effectively managing your cash flow, read D&B's top tips >>