Member Article

Maximising cash flow in a tough market

Credit sector expert Nick Hood from Company Watch explains how to optimise credit limits to maximise cash flow in a tough market.

Nick Hood is head of External Affairs at Company Watch, the corporate financial health monitoring specialists. He believes it is vital for companies to negotiate the best possible credit limits with suppliers.

Why do credit limits with suppliers matter?

2012 will be an extremely tough year with government austerity measures and collapsing consumer confidence generating increased insolvencies in certain sectors, like business services, construction, leisure and retail. Credit managers are tightening supply terms to limit the scope for bad debts. Less credit means faster cash outflows and more pressure on working capital.

Can businesses influence the credit terms theyre given?

Setting credit limits is a science these days, not a dark art. Its based on published accounts and other data about customers, using sophisticated financial modelling and certain red flag indicators of financial weakness. Good financial housekeeping goes a long way to avoiding a negative credit profile.

Why does filing your accounts on time matter?

Over 80% of all UK companies going into Administration or Liquidation filed their last accounts late or not at all. Its a big no no for credit managers.

Does the type of business a Company does affect its rating?

Credit insurers allocate different risk ratings according to the sector a company is in and exactly what it does. You cant change what you do, but you can make sure you describe your activities accurately in your accounts. Surprising numbers of companies get this wrong and suffer as a consequence.

What happens if a Balance Sheet is negative?

Credit managers cannot ignore a negative equity position in a balance sheet, which means the company fails one of the solvency tests set by the Insolvency Act. One answer is introducing more equity, or converting bank debt into equity. If you have management loans in the balance sheet, think about converting them into equity.

Are group subsidiaries rated as individual companies?

The credit industry has moved to assessing risk on a group basis, rather than by individual trading subsidiaries. Crippling debt often lurks in a holding company or some offshore subsidiary. If your company is part of a group, find out the bigger picture and neutralise suspicion by explaining the group structure and where possible, simplifying it.

Will current management information make any difference?

Companies House accounts can be as much as 21 months out of date and reflect a much worse trading profile than current management accounts. Sharing management information and forecasts with suppliers can change their perception of the financial risk you represent.

Do I have to accept my credit limits?

Dont just lie down and accept your credit limits. Talk to suppliers and where necessary, their credit insurers as well. Your insurance brokers can help you to negotiate better terms. They often have good working relationships with the credit insurer rating your company, which can assist in the negotiations.

This was posted in Bdaily's Members' News section by Nick Hood .