Cash Flow – Why Credit Checking Customers Doesn’t Work

credit checking for cash flowCredit Checking Customers? It’s Your Cash Flow 

Is pretty common these days for businesses to undertake credit checks on their customers. It is a fairly standard practice and something which is generally recommended when deciding what payment terms to offer after all cash flow is essential and understanding the risks that sit within your debtor book is a sensible thing to do.

The standard way in which credit checking is carried out is via an online system or plug-in to an existing accountancy package. This will look at information on your customers including how they perform in terms of payment, the strength of their balance sheet and how their financial performance has changed year on year.

All pretty good and sensible? Maybe not.

The cash flow issue with credit checks

The issue with any system that uses financial records is that those records are historic.

Let me give you an example:

A limited company has nine months following its year-end date to file the accounts. This means that when the accounts are filed some of the information within them is at least 21 months historic. If you add in that a limited company can extend its financial reporting period then the information could be anywhere up to 30 months historic. If you further adding that it takes time after filing for the credit agencies to pick up the records then what you may consider being the latest information may be almost 3 years out of date.

If you are basing your assessment on this information then you may well be missing a trick. Cash flow is, and always will be, absolutely essential to every single business. If you want to assume that your debtor book will turn into cash then it is good practice to credit check customers. The caveat to this is that if you only base your assessment historic figures you may leave yourself open to future bad debts.

Google and your cash flow

I’m no means suggesting that you stop credit checking clients, what I am saying is that you do this and do a little more.

Take this example:

A few years ago there was a profitable fireworks manufacturer where their factory caught fire. All stock was lost. In addition, the HSE were called in as well as a full fire investigation. Ultimately the business folded. The credit standing of the business was great and you would happily have given good payment terms to them. The fire was the major issue, but fire is not factored into a credit check. Had you been unaware and credit checked the company in the weeks following the fire you would still have given them good payment terms. If you weren’t watching the local news you would have been wholly unaware.

There are several pieces of software available which will search through media articles for any given term, company name, director or location. You could also do this yourself with a few simple online searches.

We all know that cash flow can change very quickly and it only takes one or two major events to turn a positive cash flow into one that requires finance to support it.

Sometimes the information you want is not within the financials, it is much more recent. As a business, you want to know how your customer will pay the invoice issued. You don’t want to know whether they were capable of paying this invoice, you want to know they can pay the invoice today.

By carrying out a few online searches you can quickly build up a picture of what your customers are up to, and more importantly, whether there are any warning signs you should be taking note of. The thinking here is that the events happening now will be the events that influence your customer’s cash flow and therefore their ability to pay you.

If you have got debtors beyond the days it may be well worth spending a few minutes online looking for news articles or press pieces that give you a few insights. If you wait for adverse issues to show within the credit report you may well be too late and end up with a bad debt you could have avoided.

Food for thought.

By Dave Farmer

Summary
Cash Flow - Why Credit Checking Customers Doesn't Work
Article Name
Cash Flow - Why Credit Checking Customers Doesn't Work
Description
We all know that cash flow can change very quickly and it only takes one or two major events to turn a positive cash flow into one that requires finance to support it. Sometimes the information you want is not within the financials, it is much more recent. As a business, you want to know how your customer will pay the invoice issued. You don't want to know whether they were capable of paying this invoice, you want to know they can pay the invoice today.
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Lime Consultancy - London Business Finance Brokers
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