In Focus Commercial Credit
Proactive trade credit: a vital ingredient for small firms
Cashflow will always be under pressure, but having a plan and sticking to it can bring success
Gary Pond Senior credit management professional
pond@talk21.com
After a lively debate at CCRInteractive, in association with Arrow Global, in October, I thought of the importance of trade credit to the growing small-business community. It plays a key role for these businesses and,
by helping to grow profit and tax, contributes to the economy. Do these companies actively manage reputation to maximise the potential supply of credit to support growth?
Credit savvy Now, consider how consumers have become increasingly ‘credit savvy’ over the past decade or so, perhaps as a symptom of an increasing reliance on consumer credit. You only need to visit websites like Noddle, or to google ‘my credit score’ or ‘credit-repair kit’ for evidence of this. Although new sources of finance are
emerging to support business growth – such as peer to peer and crowdfunding – trade credit still oils the wheels of commerce. Even a retail business model needs to finance stock, as few firms operate on a cash-only basis.
Seven pitfalls By paying attention to seven potential pitfalls which can dent a credit reputation, by suggesting stress and increased risk to stakeholders, small businesses can develop beneficial relationships. These problems are all avoidable, or at
least manageable, before they cause a lasting negative impact: l Fixed outgoings – the impact of an ‘unexpected’ HMRC or rates bills does not suggest that a business owner understands cashflow. These predictable outgoings can be tightly managed; the owner must visibly be in control of cashflow, not vice versa.
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l Capital expenditure – projects can easily run out of control with a devastating impact on cashflow. A novice should get professional help and have a realistic budget plus a contingency. You should stick firmly to it and compromise only if necessary, rather than being tempted to raid cash ring-fenced for day-to-day business needs. l Supply-chain management – any business that turns custom and profit away because it cannot supply a key product is inefficient. Key lines should be understood and always available with suppliers onside and a back- up just in case ‘my supplier let me down’.
Do these companies actively manage reputation to maximise the potential supply of credit to support growth?
l Failure to react – companies should experiment, innovate, and take risks, but an unsuccessful diversification of sufficient scale can down a business. Experiments not shut down before budgeted cashflow is exhausted can be terminal. A plan is needed beforehand with a timescale and what to do if it fails, then monitor closely and react. l Failure to maintain sufficient capital in the business – small businesses and personal finances can be closely linked. Failure to align them can put undue pressure on other stakeholders in the business, causing reputational harm. l Poor quality customer base – a non-retail business granting of credit to slow paying (or worse) customers, including fraudsters, can see cashflow blown way off course. l Communication – in the real world, the unexpected happens. Early communication, open dialogue, and a clear and realistic plan to get back on track will usually be supported with minimal impact on reputation. CCR
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