Part
Nine - Working Capital/Credit Lines
Working
Capital and credit lines provide the liquidity
that keeps a business in business.
From
the outset it is important to know the cashflow
cycle for your business, how that affects the
demands on your capital and the dispersal of this
capital at any one time.
If
you have a cash business you are in the fortunate
situation of not having to provide capital to
fund debtors, as your customers pay straight away.
If
the nature of your business is where the majority
of your sales are on account then effectively
your business acts as your customers' bank (and
many business people use their supplier as their
bank or defacto working capital provider).
If
you are providing credit then you should have
policies and systems in place, covering who qualifies
for your credit, what are the terms and collection
policies for those who breach the terms? Your
pricing should also factor in the cost of providing
this credit. Some businesses offer this interest
premium as a prompt payment discount to encourage
their customers to pay early. You are either providing
goods and services or credit.
You
have to ensure your credit policies are not abused.
Failure to control them could affect your business's
liquidity or working capital position. It helps
if you don't take advantage of your suppliers
either. I have noted it is quite often the bigger
players who stretch paying their smaller creditors,
thus putting them under liquidity pressure, when
they could so easily pay promptly.
You
should also have a system in place (or software
these days) to keep a track of both your debtors
and creditors. The report provided is commonly
called the "Aged debtors/creditors"
This shows how timely you pay your creditors and
how quickly you collect from your debtors. Banks
like to see these for this reason, but also to
see how current (no stale debts nor no pressing
creditors) your debtor/creditor ledger is. Questions
such as, should some debt be written off? Or is
a creditor pressing and about to stop supplying?
Can then be addressed.
After
seeing rules-based, tick box lending being introduced
for the majority of small business borrowing,
and the fact that the borrower has to continually
fill in forms for the bank, I am now a firm believer
of getting as large a credit facility in place
as soon as possible, as long as the bank fees
are within reason.
You
have all probably heard the banks referred to
as fair-weather friends, happy to supply the umbrella
while the sun is out, but as soon as it clouds
over they want it back. By having reasonable credit
lines in place all the time, you have more flexible
options (not to mention service) and you don't
have to continually go cap in hand to the bank.
When you need it you can access it without having
to justify your need.
With
the bank's focus on selling, the review of your
account is not likely to be actioned unless it
is over say $50,000. Respecting the arrangements
and maintaining good conduct of the account is
also likely to see you ignored, something a lot
of small business owners are experiencing when
they actually still want a relationship with their
bank.
