Checklist for spotting the signs of a successful business
18 November 2011
Business Moneyfacts October 2011: Checklist for spotting the signs of a successful business
By Gordon Skaljak, Director, Graydon UK
As the economy threatens to take another turn for the worse, securing sales will prove vital to the survival of many businesses, though making sure that trade invoices are actually paid could prove to be even more crucial.
There is a common misconception that credit control departments are 'anti-sales' when they prevent the sales team from closing a deal with a prospective customer deemed to be too high a credit risk. This can result in a disgruntled sales team, disappointed and frustrated by the amount of time and energy they have wasted as their sale is blocked by their credit control colleagues. In order to avoid such situations arising, credit control and sales teams need to work together far more closely.
While sales concentrate on driving deals for the business, credit departments are there to ensure that customers are able to pay their invoices and are thus "good for the money".
A way of solving the tension between teams is to encourage credit control to educate their sales colleagues on what a financially sound prospective customer looks like. This could serve to diffuse tension later down the line, while also saving your sales team a lot of wasted time and resources.
There is a general check list companies can keep in mind when assessing the health of a prospective customer. For example, the age of a business is important; the longer a business has been running, the lower the general risk, as start-ups tend to fail more frequently than established businesses.
Businesses should encourage their sales team to provide their credit managers with an account application form. This acts as a checklist, requiring the sales representative to provide the credit control department with information on factors such as whether the company has a website, whether it operates as a sole trader, partnership or limited liability partnership and whether any of the business principals have been involved in liquidation or bankruptcy in the past.
The location of a business is also important, particularly for the retail and hospitality sectors as large scale redundancies in an area can impact upon consumer spending. A detailed location report will give credit control an indication of whether the business is on a busy high street and has the potential to attract passing trade, the state of repair of the premises, and even the level of staff morale.
The position of a prospective client in the supply chain is also worth considering as the farther down the chain they are, the higher the cost of their products. This is due to each supplier in the chain adding a margin. Margins tend to become squeezed at the end of the chain as the supplier seeks to remain competitive, so the longer the chain the more the margins become squeezed.
As the majority of small businesses file the minimum information required by Companies House, credit control and sales teams need to be smart about how they assess potential clients to avoid investing time and resources pursuing a sale with a failing company.
While it is crucial that companies run credit checks on prospective customers, you should bear in mind that a bad credit rating should not necessarily mean that you should turn away the business. Many SMEs have bad credit ratings because of a lack of information about their business, rather than because they are financially unstable.
It may be worth sales asking to see the prospects' management accounts as filed accounts are historical data and may not reflect the business's current circumstances. Management accounts provide a number of valuable clues about the health of a business. For example, they indicate whether, and how quickly, the business is reducing its debt. While paying down debt is generally seen as a positive indicator, it is equally important that businesses pay down debt in a carefully planned manner to ensure that liquidity is not adversely affected. Businesses need to strike a balance as cash is always the strongest factor in a company's credit worthiness alongside sales and profitability figures.
In general, it is riskier to take on new customers than grow existing ones. Credit control teams should regularly look at under-trading reports, which indicate the extent to which a business can safely grow the client, and encourage growth in stable businesses. It is also important to build a broad ranged base of clients however, in order to ensure that the loss of one or more clients does not disproportionately impact on the company's cash flow.
Companies can also consider offering discounts to new customers as an incentive to make payments in advance of receiving goods and services, to make payment by direct debit, or to pay via cash on delivery, particularly if the customer is less financially stable or is a start up company.
Establishing a strong relationship with customers is also a good tactic as it positions you close enough to your customers to spot the signs that the business may be struggling while enabling you to step in and provide advice to help your customers grow and run their business on a sound financial footing, particularly in the case of start up firms. Sales representatives can act as the eyes and ears of their credit control colleagues, sensing how busy a firm is, whether it is well-stocked and what the general attitude of the staff is, which cannot be assessed at the end of a telephone line. Therefore, credit control is relying on the sales team to provide crucial insight to the decision making process.
Both the sales and credit control teams have a vital role to play in maintaining the health of their own company. Rather than being 'anti-sales', the credit manager's function is not only to ensure payment is received on time but also to assist the growth of the business on a sure financial footing, which acts to balance risk against reward. A good credit manager will also be able and willing to advise their customers on best payment practices to help them to ensure that they do not fall victim to late and non-payment themselves.
