In the bustling world of UK business, maintaining a healthy cash flow is paramount. Credit control, the process of managing a company’s credit policies, plays a crucial role in ensuring that invoices are paid on time and that the business does not inadvertently become a lender to its clients.
Here’s a deep dive into effective credit control, the pitfalls of chasing invoices, and why lending clients money for no gain can be detrimental to your business.
The importance of effective credit control
Credit control involves setting credit terms, monitoring accounts receivable, and ensuring timely payments. It’s a balancing act between maintaining good customer relationships and protecting your business from financial risk. Effective credit control can:
- Improve cash flow: Timely payments ensure that your business has the cash it needs to operate smoothly, invest in growth, and meet its own financial obligations.
- Reduce bad debts: By assessing the creditworthiness of clients before extending credit, you can minimise the risk of bad debts.
- Enhance customer relationships: Clear communication and fair credit terms can build trust and loyalty with your clients.
Chasing invoices: the hidden costs
Chasing overdue invoices can be time-consuming and costly. Here are some of the hidden costs associated with this task:
- Administrative burden: Tracking unpaid invoices and following up with clients requires significant administrative effort. This time could be better spent on core business activities.
- Strained relationships: Persistent chasing can strain relationships with clients, especially if they are experiencing genuine financial difficulties.
- Opportunity cost: The time and resources spent chasing payments could be used to pursue new business opportunities or improve your services.
To ease these issues, consider implementing automated invoicing systems, setting clear payment terms, and offering incentives for early payments. Additionally, outsourcing debt collection to a professional agency can free up your time and reduce the stress associated with chasing payments.
Lending clients money for no gain
When clients delay payments, it can feel like you are lending them money interest-free. This situation is not sustainable and can hinder your business’s growth. Here’s why:
- Cash flow problems: Delayed payments can lead to cash flow shortages, making it difficult to cover your expenses, pay your staff, and invest in your business.
- Financial instability: Relying on late payments can create financial instability, making it harder to plan for the future and react to unexpected expenses.
- Lost opportunities: The money tied up in unpaid invoices could be used for other revenue-generating activities, such as marketing campaigns or product development.
To avoid these issues, establish strict credit policies, perform regular credit checks on clients, and consider using invoice financing to maintain your cash flow while waiting for payments.
Utilising your accounting software
Keeping your business’s cash flow in check is a breeze with Xero’s robust credit control features. Xero takes the hassle out of managing your invoices with its automated invoice chasing functionality. Set up automatic reminders to be sent to customers who haven’t paid, ensuring you stay on top of overdue invoices without lifting a finger. With real-time updates and easy tracking, you can see exactly who owes you what and when, reducing the time spent on chasing payments and improving your cash flow.
Say goodbye to manual follow-ups and hello to a more efficient way of managing your accounts receivable with Xero! And if you ever need a hand, the friendly DNA team is always here to help you make the most out of Xero. Give us a shout, and let’s keep your cash flow healthy and your business thriving.
How much should I save?
Saving money is a critical aspect of financial planning both for individuals and businesses. The amount you should save depends on your financial goals, current income, expenses, and future plans. Here are some guidelines to help you determine the right amount to save:
Emergency fund
An emergency fund acts as a financial safety net in case of unexpected expenses or income loss. Financial experts generally recommend saving three to six months’ worth of living (or business) expenses. This ensures you have enough to cover necessities without dipping into other savings or going into debt. An emergency fund isn’t just for your personal life!
Short-term goals
Short-term business savings goals are essential for immediate needs and planned expenditures within the next one to five years. These might include:
- Equipment upgrades: Saving for new machinery, technology, or office equipment to improve efficiency and productivity.
- Marketing campaigns: Setting aside funds for future marketing efforts to promote growth and brand awareness.
- Expansion costs: Building a reserve for potential expansion, such as opening a new location or launching a new product line.
- Tax obligations: Preparing for tax payments to avoid last-minute scrambles and penalties.
To achieve these goals, calculate the total amount needed and divide it by the number of months until the target date to determine your monthly savings requirement.
Long-term goals
Long-term business goals require a more strategic approach and planning. These goals might include:
- Major expansion: Investing in significant growth opportunities such as acquiring another business, opening multiple new locations, or entering international markets.
- Research and development: Allocating funds for the development of new products or services to stay competitive and innovative in the market.
- Property purchase: Buying commercial property for office space, warehouses, or retail outlets to reduce long-term rental costs and build equity.
- Retirement plans for owners: Ensuring business owners have a solid retirement plan in place, which might involve selling the business, passing it on to family, or investing profits wisely.
Use financial planning tools or consult with a financial advisor to estimate the amount needed and create a savings plan. A good benchmark for long-term savings is to reinvest a portion of your profits back into the business, ensuring continuous growth and sustainability.
Business Savings
For businesses, maintaining a cash reserve is crucial for handling unexpected expenses, opportunities for growth, and economic downturns. A good benchmark is to save 10-20% of your annual revenue. This ensures you have enough liquidity to manage your operations smoothly.
Pricing yourself right
Setting the right price for your products or services is vital to your business’s success. Pricing too low can undervalue your offerings and hurt profitability, while pricing too high can drive customers away. Here’s how to price yourself right:
1. Understand your costs: Calculate all costs involved in delivering your product or service, including direct costs (materials, labour) and indirect costs (overhead, marketing). Ensure your price covers these costs and leaves room for profit.
2. Analyse the market: Research your competitors and understand the market rate for similar products or services. Consider what differentiates your offering and how much customers are willing to pay for those differences.
3. Know your value: Identify the unique value you bring to your customers. This could be superior quality, exceptional customer service, or innovative features. Use this value proposition to justify your pricing.
4. Test and adjust: Pricing is not static. Test different price points and monitor customer reactions and sales performance. Be willing to adjust your prices based on feedback and market conditions.
5. Offer tiers: Consider offering multiple pricing tiers to cater to different customer brackets. This can attract a broader audience and maximise your revenue.
Conclusion
Effective credit control, strategic savings, and proper pricing are fundamental to the financial health and growth of any business. By managing credit wisely, setting aside savings for various goals, and pricing your offerings correctly, you can ensure a stable and prosperous future for your business. Remember, financial discipline and strategic planning are key to overcoming challenges and seizing opportunities in the ever-evolving business landscape.
At DNA, we’re passionate about helping UK businesses thrive. Whether you need expert advice on credit control, strategic financial planning, or pricing strategies, we’re here to support you every step of the way. Ready to take your business to the next level? Contact us today and let’s build a brighter future together.
