Home' Border Enterprise : Enterprise Spring-Summer 2009 Contents 42 enterpris e
POOR financial management is the
main reason small and medium-sized
enterprises fail, but there are simple
procedures to follow that will help
keep things on track.
Damian Karmelich, from credit research
company Dun & Bradstreet, says sharp attention
to cash flow and bad-debt reduction can
significantly improve the financial health of a
"About 90 per cent of business failures are
because of poor cash flow," Karmelich says.
"These are businesses with good sales but they
don't get cash flow working.
"It really goes back to having a plan. They'll have
a marketing plan and set up a business plan. But
cash flow is what causes failures. It's not that
people don't make the sales; it's because they
don't get paid in time."
Karmelich suggests three steps to help business
owners manage cash flow.
"Cash flow is the cheapest form of credit you'll
ever get because it's your own money. If you don't
manage your cash flow well, you'll end up paying
credit card interest or overdraft.
"The second thing: make your payment as late
in the cycle as possible, without being delinquent,
and collect your cash as early as possible in the
cycle. You should really do whatever you can to
get that payment earlier.
"The third thing is actually being prepared to
collect your cash. If your customers are late you
cannot be afraid to pick up the phone and talk to
them about their late payment. It doesn't need to
be an aggressive call."
Karmelich also says small businesses should
have a detailed credit policy that includes
information about how much credit will be
offered and on what terms, how to decide which
customers will receive credit and at what point
credit checks will be made.
"There's no point sending stock to a new
customer that ends up going bust. A credit check
is something that can be done online with a credit
card," Karmelich says.
It is also important to know the financial health
of your existing customers before shipping large
orders on credit.
"Around 80 per cent of bad debt comes from
customers that have been on your books for
12 months or more," he says. "You need to be
updating information about existing customers to
see if anything has happened."
John McAskill runs advisory Accounting for
Growth. He says financial risk management
is an important issue, not only with credit risk
assessments but right across the business.
"Risk management is a three-step process. You
identify the risks, you rank the risks and then you
work on the largest ones that are possible to work
on," he says.
This approach can be applied to any type of
financial risk management, whether training a staff
member as a back-up to a key person, increasing
your customer base if you are too reliant on one
large customer or when choosing how much stock
you are realistically able to insure.
Another simple but vital step to staying on track
is to have a clear budget and refer back to it at the
end of each month, McAskill says.
"If things start to go astray then you've got a
benchmark to immediately measure the business
against and how it is performing," he says. "If you
have sales of $1 million a month, that might sound
good but if your budget is for $40 million then
you've got a problem."
It is also important to understand the risks and
expected outcomes of major decisions made by
"We find businesses get into trouble where they
make decisions such as moving into a new office,
WATCH THE CASH FLOW
Keeping track of cash needs is a priority for SMEs, writes MICHAEL BAKER
For a great range of
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