When it comes to cashflow, it’s wise to hope for the best while preparing for anything less. How can you pick the right customer to limit bad debt and safeguard your company’s cashflow?

Attracting new business often means encouraging customers to choose you as their goods or services provider. But, to avoid cash flow problems, choosing your customers may better serve your business.

Calling on local partners to strengthen relationships is a solid starting point to build local knowledge and visibility in the long-term.

It’s also key to select your customers by looking beyond factors such as their financial ratings. You should ask yourself ‘will my business strategy and culture align with theirs?’ and ‘do they have risk coverage?’ This will help you decide if their business shares common values with yours or has strong corporate governance. Understanding your customer’s business and being selective in your choices can allow you to take smarter risks and manage potential exposure of your cash flow.

Limiting late payments works in the same way as any damage control – thinking ahead will be key to how much bad debt you can carry and will highlight potential causes of cash flow problems. A solid, well-planned strategy should be in place to avoid bad debt that will impact your forecasting and bottom line - monopolising resources that could go into more productive areas of your business.

Central to this bad debt protection strategy, is ensuring that your customers have the right information from the very start of your relationship. This means implementing standard terms and conditions to ensure they are fully aware of your standards of practice and penalties for late payment. You need to be proactive and decide the best time to chase bad debt. Knowing your ‘tipping point’ will help unnecessary use of resources and put you in a stronger financial position.

Along with a strong strategy that can be easily customised based on your customer’s needs, it is important to build a good relationship with the key customer contact. Being able to transparently discuss objectives and management of issues with them will ensure there are less excuses for bills to become overdue and result in bad debt. Learning more about the customer and their market will also help you better understand data, collection practices and the legal system. You should also assess your customer’s creditworthiness and define the credit limits and payment structure thoroughly

With the global pandemic continuing to impact interest rates and trading conditions, bad debt is becoming more difficult for companies to manage – and corporate collapses can be catastrophic for unprepared small businesses.

Here are four key steps to protect your business against customer insolvency risk:

  1. Analyse continuously. Ensure you have the data to make informed credit line decisions.
  2. Exercise caution. Know how to identify early warning signs so you can manage customer debt proactively and protect your cashflow management.
  3. Understand your customer. Become familiar with the political and legal systems in your market and ensure you adhere to local regulations.
  4. Have a plan B. Contingency planning is key. This is most effective at the local level and should involve insolvency risk.
  • Research every client prior to signing a contract
  • Clearly document and share terms and conditions
  • Ensure every customer shares signed receipts for products and services
  • Bill immediately upon delivery
  • Call customers on or before invoice due dates
  • Establish an automated reminder process
  • Document and communicate your process to your entire organization
  • Regularly review undated financial information without bias
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