The Octempo:RM Blog

Bank lending to small businesses in June was over a third lower than in the previous year, despite the British Bankers’ Association (BBA) claiming that its members were making loans of around £27m to small businesses every day. Total loan value in June 2010 was £598m but this is a 31% drop on last year when loans for the same month reached £867m.

We are past the halfway point of 2010 and so far monthly average for lending to small businesses is around half the amount banks lent two years ago. 

So, forget the spin that the state owned banks want us to believe. The real story is the trend that shows lending is going down and considerably decreasing. Fortunately it appears that Vince Cable is at least on top of this, having warned bankers that their bonuses could be linked to lending - a statement likely to get their attention.  

It's unlikely to change in the short term though and, as always, there is a solution easily at hand - get your customers to pay your invoices on time.

Sounds simple but newly released Business Link data shows that nearly half of UK small and medium sized businesses have no efficient system in place to chase unpaid invoices. Efficiency is one thing but effectiveness is more fundamental. Many businesses use very traditional credit control processes with a lot of manual correspondence and little use of the phone.

If you fail to be pro-active in chasing up your invoices then you will get what you wish for. A lot of credit controllers I've come across are actually afraid of using the phone, largely because they only chase invoices after they are overdue so every phone conversation is negative and defensive. It doesn't need to be this way. Pro-active credit control and invoice chasing is really just good customer services and handled properly can boost the professional reputation for your company.

Next time you're looking at your cash flow and bank balance, take a look at how long your debtors take to pay before you pick up the phone to the bank. 

We all love our customers, but some demand a disproportionate amount of our time when it comes to getting paid. All businesses have them: they are well meaning but disorganised; great business partners but just awful at paperwork. And if you're not careful they divert your credit control resources away from good paying customers and before you know it you've got credit control challenges everywhere.

If this has happened to your business, or is about to happen, follow these simple steps to avoid it hammering your cash flow:

1. Take a look at your customer list and the average days they take to pay. If you're not sure how to do this take the month end debtor balance, divide it by the annual turnover of that customer and then multiply by 365 days. This will give you a rough measure of the number of days an invoice from your business remains unpaid
2. Compare this list to the standard terms you give your customers. Surprised? Most companies are and that's why it's a useful activity
3. Of those customers who pay late, try and estimate how much time you spend chasing invoices each month. Then do the same for the good payers. Big difference isn't it

Chances are that your good payers will also start to take longer to pay as you divert more credit control resources to the slow payers and away from the good payers. Remember, many businesses don't pay invoices until they are chased for them, on the basis that 'if you don't chase you don't need the money'. I'm not suggesting this is good practice but it is often the reality.

So, you've done the analysis and identified the problem, but what's the solution? You either take it on the chin and suffer, or do something about it. If you want to do it yourself internally then you will probably need to hire more people, but is this the most cost effective solution. A better idea would be to pass these customers out to a third party to manage - you pay for what you use, get access to their software and efficiencies, and allow your staff to focus their energies on strengthening the relationships with your good payers. The third party, either working in your name or theirs, can then work on improving the payment behaviours of your consistent late payers.

There you have it - how to avoid 20% of your customers consuming 80% of your credit control resources, and boost cash flow.