Muck in to manage finances

AS A NATION, credit and being in debt has become second nature and a bad habit, with a lot of us living beyond our means on both a business and personal level. Now that the credit bubble has burst, it’s time to get our finances in order so we can drive the economy and our businesses forward.

The latest figures from the Insolvency Service show a 22% increase in UK companies going insolvent in the last year. This worrying figure highlights how debt management needs to not only be streamlined but also become the responsibility of the entire company. Simply put, businesses can no longer afford to place entire responsibility for managing debt solely on the financial team.

The issue of tackling bad debt however is easier said than done. But creating an effective regime for improving cash control as well as making debt a company-wide concern has got to be a good starting point.

1. Ears to the ground
Conversations regarding late payments or unprofitable clients naturally falls within the role of finance teams and no-one would deny that the finance function is ultimately responsible for monitoring the financial health of the business, including pursuing debtors. However, the sole responsibility for chasing missing payments shouldn’t just lie within the finance departments.

There is a significant contribution that non-finance colleagues can make to prevent bad debt from accumulating in the first place. For example, raising a red flag when they think something maybe going on internally within the clients’ business that could impact on payments, for example multiple redundancies will give finance teams the heads up that all is not quite right.

2. No ‘I’ in team
Put your policies regarding payment in writing and circulate them regularly to staff, making it clear what their roles and responsibilities are for tightening the noose on bad debt. From sales officers through to the board, it is important that all colleagues support each other to resolve any disputes quickly and as smoothly as possible, easing the burden across all teams and the client.

3. Honesty is the best policy
When times are hard it’s easy to put your head in the sand and hope business will pick up again. It’s at times like these when it is important to be honest with yourself and your colleagues, especially the senior team who can consider the best course of action to take.

4. Use technology to get hard facts
It is for this reason that it is important that as credit controllers you are equipped with the right tools so it’s clear where money is owed and prompts for payment are automatic. The right software will be able to forecast profitability and any cause for concern should be highlighted to the board immediately so a solution can be found. Good cash flow forecasting can be a lifesaver. The objective should be to know what your cash position is right now, and what it is likely to be in six months’ and in a years’ time.

Software can also be significant for providing information on debtors, which can sometimes be overlooked if it is buried within detailed management reports. Dashboards can be used to deliver financial data, key performance indicator updates and operational reports to your desktop. This avoids information overload and means that departmental heads are presented with important business information, such as problem debtors, as soon as they open up their emails.

5. Be clear on your conduct
Strictly enforcing your terms of business and having clear procedures in place when payments become delinquent is imperative to your business’ survival. Although being firm with those customers you may have forged a personal relationship with will feel uneasy, it is important to set those relationships aside for the time being and get back to business. If you don’t take the necessary steps, you won’t be setting a good example for other staff to follow. Communicating to staff so they are all aware of missed payments will allow you to pull together as a team during these uncomfortable conversations. Selling to customers, even existing customers, without checking their account and credit status should be a strict taboo. Why waste time, incur expense and introduce risk by selling to those who have no intention or means of paying?

6. Check your process
Make sure that the finance team has the right processes in place to manage and control cash flow more efficiently. Good cash control management can go much further than simply tracking who owes money where. It can show you where the cash drivers are in your business, who is performing well and other events that could threaten or boost your profitability.

Most financial software includes tried and tested formats for debtors’ reports and credit control ‘to-do’ tasks. Reports on receipts and payments will tell you what cash is due and whether it arrives by the specified dates. Also, consider how you are asking your customers to pay; is it the most effective method to ensure prompt payment? For example, using BACS payment streamlines the process for all parties and provides more immediate feedback on payments.

The most important point to remember is that you are running a business. Poor cash management impacts your own working capital, eating into the amount of money you have to invest in the business and affecting your ability to pay your own debts. Furthermore, the longer a debt is outstanding, the greater the risk of the customer going out of business and the greater the cost of resolution.

Paul Sparkes is product director at Iris Accounting & Business Solutions