Successfully managing finances presents many challenges for the small business owner such as dealing with late payments, reduced access to credit and the impact of the shrinking economic stimulus. Given these conditions, the ability to identify risk and improve cash flow by employing the best business practice is more valuable than ever. Many business owners have adequate processes in place to manage risk, but lack the right knowledge or framework to identify problems ahead of time. Prevention rather than cure is the key: if businesses can spot any potential hazards and take action proactively they will save the time, money and effort of clearing up the mess after the fact.

Find out how to avoid the common mistakes, identify the risks and increase the cash flow to any business.

Predicting customer bankruptcies

There are a wide variety of causes that can result in a business going bankrupt. However, implementing basic risk categories and a risk scoring system based on up to the minute data can dramatically reduce exposure to customers defaulting.

The consumer market has a well established system of credit scoring and risk profiling that is equally applicable to small and large business accounts. Credit information services record and maintain databases of payment history and can provide access to vital information that will assist in predicting future payments. Most credit profiling companies will employ a range of measurements to assess the risk potential a client presents. Once businesses have a good overall picture of their clients risk profile they can be divided into various categories from high to low-risk.

Due to changing economic conditions and the transient nature of many business operations, businesses will need to regularly review clients and their payment record. This should be part of an ongoing business practice as a matter of course. Naturally business managers should also maintain regular contact with all customers and ensure they remain informed on how their business is performing.

When combined with a risk profiling system managers will be in a much better position to judge which customers they should pursue more forcefully for payment, where to extend or reduce credit lines and where to focus resources, such as placing more experienced staff members in charge of potentially problematic accounts.

Recognising fraudulent accounts

There are several tell-tale signs that can help to spot a fraudulent customer before it's too late. On their own they may appear benign but if an account has more than one of the following attributes alarm bells should start ringing and further investigation is necessary:

• Unlikely start date - a potential customer claims they have been in business for many years, yet nobody has ever heard of them and there is a distinct lack of historical information available about their operation.
• Business owners involved in other fraudulent activity - everything about a particular business may seem fine, but that doesn't mean the customer has not engaged in fraudulent activity through other enterprises. Managers should check the character of the principals in charge of any new business they are dealing with to ensure that they are not the first in line for their latest scam.
• The customer has all the answers in record time - while it is great when a client provides all the information and documentation you request in a very short space of time, how often does this actually happen? In situations where an owner seems over eager to please, you should ask yourself why?
• Over-the-top business name - Global-Compu-Hyper-Mega-Net may initially sound like a serious operation, but further research could reveal the company consists of one man sitting at a computer in his garage.
• Additional tell-tale signs include trade references that are all from one industry or references that are from an obscure or unrelated sector to the one you or your client are dealing in.

Regularly reviewing all customer accounts

When it comes to identifying potential bad debt risk many business owners focus all their attention on new customers. Once the customer has established a working relationship there is a tendency to let all this good work go to waste. Research shows the majority of bad debt is generated from customer accounts that businesses have been dealing with for over a year. (insert link to whitepaper here) This is where the risk profiling and scoring system discussed earlier would prove invaluable.

Regardless of the industry you're involved in, changes in virtually all areas of business occur at a rapid pace and require constant attention in order to make informed decisions. Business information companies offer a range of services from real time data monitoring to more in-depth analysis and reporting. This can provide vital information regarding court judgements, slow payments to other vendors in similar industries, licences or business registrations being revoked or bankruptcy filings.

Businesses should also develop a culture where employees are encouraged to share positive and negative customer information, whether gained from a conversation over the phone, a client visit or other research. This will help to provide a more complete picture of what's going on with each customer and to gauge whether a client is experiencing difficulties.

At a bare minimum businesses should conduct annual reviews of all customer accounts, but obviously this can change according to the amount of credit exposure that exists with any one account and how they have scored them in a risk profile.

Additional factors that will help increase efficiency and spot potential hazards include keeping up to date with the latest technological advancements. This may apply to the business operation or tools that are being used by external business information providers. Businesses should also develop a clear idea of their risk preference when it comes to the type of customer they prefer to deal with and how much risk they are willing to take on.

These are just some of the things a small businesses need to consider as part of the overall strategy for identifying and managing risk.. Putting these measures in place now will pay dividends later on through increased cash flow, decreased bad debts and improved business relationships.