Offering credit to clients is standard practice for most businesses in South Africa and has become essential to remaining competitive in the challenging economic environment. With most consumers and businesses currently experiencing financial hardship, this approach offers an attractive option for customers to pay off a purchase over a longer time period, therefore decreasing some of the pressure. However, offering credit presents a cash flow risk for those providing it, and defaulting clients have the potential to negatively impact a business within a short space of time.
Small and medium enterprises (SMEs) often can’t afford to offer credit or run the very real risk of the business’s cash flow being negatively impacted should they choose to do so. Thankfully, there are ways to manage this risk, and measures can be put in place to protect the business before it finds itself in a sticky situation. It’s worth noting that listing a delinquent payer with the Credit Bureau or handing the account over to a collection agency are measures that can only be taken after the payment stops – at which point recovery of the full amount becomes less likely. So, while businesses generally might factor in the probability of such losses, successfully rebuilding the operation in 2021 requires a much more early and effective management of this risk.
For SMEs to proactively manage this risk, consider following the recommended steps below:
- Always do the groundwork
All SMEs should have policies in place that mandate thorough risk assessments for all new clients. This includes checking credit scores and credit reports as part of the onboarding process. The small cost and extra time needed to vet customers are negligible when compared to the risk of losing up to hundreds of thousands of Rands in unpaid invoices.
- Upgrade your financial department
Fortunately, data analysis tools have evolved by leaps and bounds, with various cost-effective solutions and tools available to help businesses analyse and monitor accounts. In-depth data analysis can even help SMEs predict any possible payment problems with clients before they happen, based on previously observed patterns. This in turn will enable business owners to identify, intervene and prepare payment plans for struggling clients early on.
- Have a strategy at the ready
Following on from the previous point, it is essential to have payment plans and strategies prepared in the event that a customer might have trouble repaying a debt owed to the company. As such, take the time to devise some possible worst-case scenarios as well as possible solutions to implement if a customer becomes in danger of defaulting – and train the accounts team to make use of these strategies when required.
- Regularly review reports
Business owners may be in the habit of shifting focus away from outstanding accounts, choosing instead to spend the bulk of their energy on new business. It is however crucial to regularly review financial data, payment patterns and existing customer trends – as this information should not only inform ongoing credit policy changes, but also future growth strategies.
Considering that many companies (and individuals) are still struggling to recover from the events of the past year, defaulting accounts and clients are becoming more likely. By managing this risk correctly, businesses can increase the chances of regaining profit margins over the coming months and years.