Liquidity: one of the most important elements of business growth and sustainability is adequate cash availability.
Liquidity, in simple terms, means the availability of enough cash (or the business having the means to raise enough cash) to pay for all immediate and short term liabilities.
To manage such an important process in the business, it’s imperative that the credit control department plays a dynamic and forward-looking role. This should allow the company to continue as a ‘going concern’.
The main sources of liquidity in a business are as follows:
- Cash reserves
- Bank deposits
- Debtors (trade receivable)
- Stock (inventory)
The nature of the business model will play a key role in the type of credit control process needed to manage a good liquidity status. It’s easier to manage cash and liquidity for a cash business (such as a fish & chip shop) than for a business, like Argos, where customers can buy now and pay later.
To establish a good credit control system in any business, both external and internal information can help to ensure only paying customers are given certain privileges. Let’s look at these sources of information.
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The external source of information
A variety of sources of external information can be consulted prior to taking on new customers. This is done to make sure they are going to be making payments on time and that they don’t have any pending issues. For existing customers who are wanting a credit facility or an increase in their credit limits, we will look at their source of information after the external sources of information. The external sources of information are:
- Bank references
- Supplier references
- Credit circles & Rating agencies
- Official publications
- Management accounts of the business
- Accounts filed at Companies House
Alternatively, the business can use a credit application form for those customers asking for a credit account. The details within the form will normally include the following key headings/ elements:
- Bank details
- Credit requirements
- The registered name and address of a limited company
- The names, business and home address of partners
- The name, business and home address of a Sole trader
- The length of time they have been in business
- Any trading name used
- At least two trade references
The internal source of information
The following will help to better understand the potential of existing customers being taken on board and allowed credit facilities or to have their existing credit limits increased.The following will help to better understand the potential of existing customers being taken on board and allowed credit facilities or to have their existing credit limits increased.
- Records of meetings
- Conversation, emails and visits by a variety of employees of the organisation e.g. the Sales ledger & Sales teams
Also a few additional factors will play a good positive role in the credit department to run smoothly and give a good liquidity position for the business. These factors are as follows:
- Reduce the trade receivable days (days customers owe you money)
- Increase the trade payable days (days you owe money to suppliers)
- Analyse the interest cost of borrowing against the outstanding amount from receivables, to keep it acceptable
- Always negotiate a competitive bulk purchase price of raw material on extended payable days
With the above factors taken into consideration at any stage of the business, this will improve liquidity and in return move the business process in a growth mode. It will reduce bad debts and late payer’s issues as well as litigation costs associated with claiming for accounts that have gone bad.