Managing Your Credit Line

Whether you are leading a large or small organization, the health of your financial environment can equal the long-term viability of your business success.  The organizations that have survived the toughest economic times and grown into solid, sustaining businesses have done so through consistent due-diligence and staying on top of their financials.  How they managed their credit lines, thoroughly understanding where the cash flow is being generated from, knowing the specific profits attached to jobs and services and understanding how to maximize financial resources are all important when creating a healthy financial picture.  Managing your credit line correctly can increase your company’s net worth, provide assurance of cash flow during times of potential need and enhance your overall company image to potential investors or buyers.

Credit lines are most often used for one of two purposes.  The first is to create strong credit worthiness of a company that has limited the use of the credit line and, when used, paid any withdrawals back on a timely basis.  The second, and often more common use, is for cash flow injection into the business. 

Cash flow is said to be the lifeblood of any business. Points to consider for managing your cash more effectively, as shared by Les Masonson, author of “Cash, Cash, Cash:  The Three Principles of Business Survival and Success,” include the following:

Point 1
Accounts Receivable

All businesses should focus on collecting their receivables in the shortest timeframes possible.  Here are a few tips to help ensure accounts are credit worthy and collection timeframes can potentially be shortened:

•           Check the financial health of new customers before offering them credit. One way of doing this is by using a rating service, such as Dun & Bradstreet (1-800-234-3867).
•           Don’t offer too generous of a discount program, such as three percent for payment in 10 days. A better rate is 1.5 percent cash discount. It costs you less in the overall scheme of things.
•           Indicate on your invoice when payment is due and specify the penalty interest for late payment in an easy to find bold font.
•           Follow up on late payers with phone calls and letters with the first letter going out the very day the amount is one day late.
•           Don’t send out new merchandise if bills remain unpaid. Remember that bad debts hurt your bottom line. Be vigilant and try to get at least periodic payments from slow payers.
•           Fax and e-mail invoices to reduce the delay of regular shipped mail.
•           Send out your invoices the same day services are complete and not one to two weeks later.
•           For larger invoices, contact the customer to make sure they received it and ask the customer if they have questions regarding the terms and amounts.  This helps to confirm receipt and acceptance of the invoice with the customer.

Point 2
Deposit Checks Fast

While this seems obvious, it is extremely important and an often overlooked administrative task.  If you have not already, consider implementing the following:

•           Always deposit checks the same day they are received. Don’t hold checks until the next day because you lose one day’s float.
•           Obtain availability of zero to two days on deposited checks. Don’t let your bank give you the customer availability of one to five days. Be persistent.
•           Ask your bank about its deadline for receiving availability on deposited checks. Make sure you meet this deadline, otherwise you lose one day’s float.
•           Before using a bank’s ATM for check deposits, find out the bank’s availability deadline. Some banks have a 12 noon cut-off time which means that any checks deposited later are considered to be deposited the next day.

Point 3
Disburse Your Money Slowly

Just the opposite of collecting at the earliest possible moment, you should never pay a day sooner than you have to, unless you get a discount for doing so. Here are a few suggestions to slow down your disbursements:

•           Pay your invoices on the last day they’re due, not before.
•           Mail your payment on Thursday or Friday to pick up a few extra days mail float over the weekend.

Point 4
No Extra Money in Your Bank Account

Don’t keep too much money in your bank account where the capital is not working for you. Take the time to find out what your minimum balance needs to be and use your cash to  work for you.  Here are a few considerations for managing your bank balance:

•           Get a price list which shows how much your bank charges for services like account maintenance, checks deposited, checks paid, stop payments and wire transfers.
•           Review a monthly bank account analysis to see whether you are overcompensating the bank. Pull out any excess funds and invest them in a high-yielding liquid investment.

Point 5
Managing Your Credit Line Successfully

When using your credit line to supplement additional cash requirements of your business, it is prudent to undertake a financial analysis of your organization for determination of where and when additional business will be flowing into your organization to pay off debts in full.  When using the credit line it is critical to manage both the withdrawals and payments with the highest level of due-diligence.  Here are a few tips:

•           A credit line is just that: Credit. The important thing to remember is that this line of credit is not how much money you have to your name. Your line of credit is actually your potential of debt: the more credit you use the more debt you will carry — debt which must be repaid.
•           Paying the minimum is a bad idea. The “minimum amount due” is a really slick way of getting you to pay off your debt over the course of several decades. Always pay more than the minimum (and pay off the entire debt in one fell swoop if you can).
•           Leverage your assets. Remember: you are the customer and you have a right to renegotiate your terms. If you want a lower rate, more credit or different terms then try speaking with your bank. Your lender would rather keep you as a customer than spend the money to acquire a new customer.

The suggestions here are based on a general management overview only and not intended as specific advice.  Always speak to your financial advisor or certified accountant to obtain the latest advice and meet the specific financial needs of your company.