Credit and Finance, Management
Credit check your customers to improve cash flow
Posted on by Cindy Yip
Estimated read time: 5 mins
Cash flow is the net amount of cash going in and out of the business. Positive cash flow indicates a company’s liquid assets are increasing, enabling it to settle debts, reinvest and give out dividends to shareholders. Cash flow can be used to assess the quality of a company’s income, that is, how liquid it is, which can indicate whether the company is in a position to remain solvent.
One of the ways you can actively make sure your cash flow is positive; that you may not have thought of is by controlling the quality of your customers. A quality customer doesn’t just mean one that pays their debts, but one that pays their debts on time. Cash flow doesn’t just mean getting the right amount of money in and out of the business but the right money at the right time. This means being able to predict or know when your customers will be paying you and what times of the month or year they’re in the best and worst position to do this.
Customers along with cash flow are the lifeline of any business, there’s no denying that. The problem with this is that businesses jump at the opportunity to take on every new customer so that their business can grow. How well do you really get to know your customers before agreeing to go into business with them? If you’re selling to your customers on credit then it’s risky to not find out more about their financial status, unless they’re paying upfront which would be great but doesn’t happen often.
Unfortunately, some customers may not be who they say they are and their finances not in the state they claim for it to be either. It’s possible that you end up finding yourself chasing after owed money for a long time or even become unsuccessful in recuperating these costs. Later payments than planned could mean you’ll be unable to pay your suppliers, workforce and bills on time. This could damage not just your reputation but impact your credit score too.
This is where credit checking can help eliminate these uncertainties where you’ll be able to look at a snapshot of a potential customer’s financial status and past payment behaviours; enabling you to make informed decisions about the effect the customer could have on your cash flow. Credit checks can help improve your cash flow in the following ways:
- Determine their credit worthiness– All potential customers will tell you they’re financially reliable and will make good customers but how many would actually tell you if they were having financial problems? By conducting a credit check, you can find out by yourself from reliably sourced data what their creditworthiness is, and if they’ll be able to keep up with payments as expected. This is the first line of defence you could take to make sure your cash flow isn’t affected.
- Plan ahead – Maintaining a positive cash flow not only means being dependent on customers to make payments but anticipating when you’ll receive these payments and how they’ll affect your cash flow management. By looking at their past payment behaviour, it’ll help you determine and predict accurately when they’re most likely to pay so you can budget your money better.
- Determine your customer’s long term survival – Going into business with a company that may become insolvent is enough to make anyone think twice. Credit checks can reveal a company’s past accounts and how financially stable they are, if they potentially run the risk of going insolvent soon or have already filed for bankruptcy.
- Determine payment terms – By having a clear understanding of your customers’ ability to pay, you can create payment terms that are suitable for both parties. For poorly rated customers, you could get them to pay you on a cash basis or upfront before they build their trust with you, or determine what payment terms to offer to those that are creditworthy.