Phil Simmons, commercial director for Aon Trade Credit UK, gives his views on cashflow and the recession and what entrepreneurs can do to cope.
It's been a rough year for many entrepreneurs and Phil Simmons has seen in detail how businesses have been affected. His business is all about how companies handle hard times, offering a range of insurance and risk management services and products.
Cashflow is always a big issue for businesses, but Simmons says it became even more crucial after the credit crunch hit the UK. "I would say that since about Q3 2008, cashflow has been a fundamental issue for many businesses. Suppliers to businesses have found that many are requesting longer periods to make repayments; whereas before it was 60 days now it can be three, four or even five months.”
It's a double bind for businesses, Simmons suggests; everyone wants to pay later but to be paid sooner. "The other issue is the availability of finance. Everybody kicks the banks for reducing credit lines and certainly the banks have had a part to play in it. But because of a lack of finance suppliers are more inclined to tighten up their cash collection."
So in such a grim climate what are entrepreneurs to do? For Simmons, better information is part of the answer. "Entrepreneurs need to understand the machinery of their own businesses. Often they require better processes for understanding their financial information and for administration. Small businesses need to prepare monthly accounts and reports that help them look to the future.”
Also, during a recession businesses are increasingly desperate for new business and more sales but this can lead to further problems. "I think that businesses need to understand the importance of cashflow more than they do currently. There’s too much focus on the front end such as sales targets rather than the cash targets. In order to improve cashflow a business needs robust credit management procedures that begin at the initial stage, which is when the contract is won. This can be supported by credit insurance.”
Sometimes you actually have to turn business away. This is, of course, painful but a business is can’t be built upon unpaid invoices. “You need procedures to block orders. If you have a client that hasn’t paid for anything the sales team must know not to keep on making deals. They might not always think that it’s their job. But businesses need systems that ensure that credit control and the sales teams are working together.”
Finally, you must make sure your paperwork is clear so if there is a delay on payment it is clearly understood by all. “You need to communicate payment terms effectively; if you are expecting to be paid within 60 days, do they know it is 60 days? I also recommend having clear collection procedures. The old standard letters are not enough, particularly in the current climate. You need more than that.”
Phil Simmons is commercial director for Aon Trade Credit UK. He has over 30 years experience in the trade credit market, combining both broking and insurer roles, and spent a number of years as an underwriter in the steel sector.
