Cash flow and credit control: what you need to know » SMEInsider

Cash flow and credit control: what you need to know

Produced in association with Experian.

SMEs must keep a close eye on their cash flow and credit terms if they are to maintain good financial health. In this article, we look at the causes of, and solutions to, poor cash flow management.


Cash flow problems

‘Cash flow’ is the difference between the amount of money coming into a business (inflows) from sales and investment, and the amount leaving from payment of bills, wages etc. (outflows).

Unfortunately, these two aren’t always in sync – with businesses often unable to acquire sufficient funds in time to cover their outgoings. In the short term, businesses may be forced to take out a loan to cover the gap, absorbing the cost of the interest. In the long term, late payments can affect credit scores and damage relationships with suppliers and staff.

In its most basic form, poor cash flow can be caused by low profits. Without sufficient cash coming into a business, there won’t be enough to cover bills. Over time, this will erode cash stores and can lead to businesses running out of cash entirely.

Another cause is overtrading. If a business focuses too heavily on expansion and not enough on profitability – it can lead to significantly more cash leaving the business than coming in.

A third reason is demand fluctuation. If a business sells a product or service that is seasonally-dependent, it will have peaks and trough in demand. In this case, cash flow must be carefully forecasted to avoid being caught short.


Problem customers

Cash flow problems can be exacerbated by late payments from customers. Research by the Asset Based Finance Association (ABFA) found that British SMEs in 2015 were owed a total of £67.4bn in unpaid invoices – a figure that has grown by over a third since 2011. What’s more, SMEs are now waiting an average of 72 days to receive payment for their invoices – with more than half (61%) remaining unpaid within the debtor day period. In a recent CIMA survey, medium-sized organisations in the UK cited cash flow as a key area of concern:

  • 50% of the mid-sized businesses said that it is more challenging now than 12 months ago to access capital
  • 66% stated that it is more difficult to receive payments from customers.

However, despite the risk of late payments, businesses are still willing to extend credit to customers who can’t pay immediately. The prospect of increased revenue, and the benefits associated with strong customer relationships, are certainly tempting for growing businesses.

But the reality is that customers frequently exceed their payment terms. This is especially true if there is an asymmetry in the size of your companies. Big companies are typically slower to settle outstanding invoices than smaller companies. Without a solid system in place, late payments can easily spiral out of control. And over time, unclaimed revenue can accumulate, putting you in a financially difficult position.


Credit control can help

One solution to late-paying customers is to offer a cash incentive to those who pay within the terms of the agreement. While this will certainly help to make sure you get paid promptly, it will eat into your profit margin.

A more effective solution is to implement proper credit control. This is a system that ensures you only extend credit to customers and clients who are able to pay on time – minimising the risk of being left high and dry by debt gone bad.

Two key elements of good credit control are identifying and assessing risk, and setting terms and conditions to protect yourself before signing a contract – as detailed below:


  1. Identify risk

The more you know about the company you’re doing business with, the more accurately you can appraise the risks involved in providing credit. Running a credit check is the quickest and simplest way of eliminating any uncertainty. The check will give you an insight into:

  • How quickly they pay their suppliers – indicative of how reliable and financially sound they are.
  • Their financial performance – so you can spot any red flags, such as a rising debt-to-equity ratio (taking on more debt than they can handle).
  • Their credit score – a gauge of how risky they are to work with.
  • Their directors and associated businesses – giving you a sense of who’s making the decisions behind the scenes.


  1. Terms & Conditions

When you’re satisfied by the other business’s credit rating, and are happy that the risk is acceptable, it’s time to set the terms and conditions of the arrangement. Setting concrete rules prior to signing an agreement is an essential part of good credit control.

First, you must examine your own finances and ensure your business can survive financially in the time between delivering the service and receiving the payment. Once you’re happy, consider the following:

  • Setting a maximum credit limit on the customer – this decision should be based on information from your credit check.
  • Taking out credit insurance to protect against bad debt.
  • Calculating exactly how much you can afford to lose – you should never risk more than you have.


Good credit control is largely a result of good planning. If you research diligently, check everything and plan for the worst, you’ll be in a strong position to reclaim your finances if things go bad.

For more information about effective credit control and cash flow management, download the whitepaper The Credit Controller’s Guide to Collections. The white paper, produced by Experian, contains practical advice on day-to-day credit management, as well as information on dealing with problem payers, seeking legal advice and more.