One of the reasons for undertaking a commercial audit as part of the funding process is to identify areas for business improvement that can reduce, or even remove, the need for funding.
One key area we encounter frequently is getting the cash owed to the business, actually into the business, by effective credit control. This can significantly reduce the need for debt based commercial finance.
Consider you are owed £10,000 and your gross margin is 30%.
If unpaid then to recover that £10,000 revenue you will need to sell four more contracts at £10,000 which at a 1:3 conversion ratio will require 12 qualified opportunities and at a 1:10 prospect conversion ratio means the business will need to have generated 120 enquiries.
Quickly work out the time and money required to generate 120 enquires and by comparison you’ll realise how much cheaper and easier a properly constructed invoice with credit terms and a few phone calls is.
One of our partnerships to whom we refer credit control issues is Tony Dalton of Think Cash and bestselling author of Cash Management. Tony considers there are three most important things in business:
- Cashflow; and
We completely agree.
Here are Tony’s 9 steps to ensuring a business does not run out of cash:
1. Make sure your customers know your terms of trade. i.e. Payment is due in 7 days. Many companies offer 30 days, why? Whatever it is, make sure they know what your terms are and the reasons for them.
2. Make sure you raise your invoices promptly for work done.
3. Send out statements at the end of each month for all outstanding invoices. Many companies only pay on statements.
4. 7 days after sending the invoice, telephone your customers to ask if they have the invoice and is it in the next payment run? If it is great, if it is not ask why not?
5. Become friends with your customer’s purchase ledger managers.
6. Record the date of each customer’s payment runs, then you know when to chase your payments.
7. Deliver your invoice when work is completed, letting your customer know that you expect prompt payment.
8. For larger projects, get either staged payments or a payment up front for materials etc.
9. For ongoing work, ask for a standing order so you get a regular monthly payment without continual chasing.