After the tsunami in the financial markets, now comes the aftermath. With credit tightening, house prices falling and confidence out the window, the ‘R' word is on everybody lips.

The technical definition of recession (two quarters of negative growth) is pretty meaningless but it becomes very real when people start losing their jobs and livelihoods, and businesses - especially small ones - start to struggle.

There are two things that become all important in this hostile business environment: cash and bad debts. So how do you protect yourself against these twin threats in a recession?

Cashflow

• Visit your bank manager now
  You should take with you up-to-date accounts, forecasts and aged debtor and creditor lists. Your aim should be to confirm your facilities for the next 12 months. Remember overdrafts are ‘on demand' so if your overdraft is under pressure your manager may request that is converted to a medium-term loan. Your bank manager will be looking to significantly increase his charges so your counter negotiation should be to get him to commit facilities for the long-term.

• Financial information
  The benefits of timely and accurate management accounts are more prevalent than ever. These should be produced not only for your benefit but for also for your bank, your suppliers and credit reference agencies. A cashflow forecast is essential and this should be your starting point for negotiations with your bank.

• Credit
  Begin to think of your cashflow as the most valuable part of your business. Every time you grant credit to your customers it is costing you cashflow (as well as real money). Every time you negotiate credit with your suppliers it improves your cashflow (and saves you money). So get all your customers to pay cash and agree longer payment terms with suppliers.
  
  To help customers pay quickly offer them discounts for early settlement and consider penalties for late payment (you are legally entitled to do this: go to the Business Link website and search on ‘late payment').

• Credit control
  A good credit controller is worth their weight in gold and, more than anything else, good credit control is about consistency. Most small companies allocate too little resource to proper credit control; often it will be the owner-manager who will chase for payment who is probably the most unsuitable and least qualified person in the business to be doing that role. This means that credit control is sporadic and often panicky.
  
  Good credit control works to a system of statements, letters, telephone calls and, only if very necessary, legal action. As chief executive of Calverton Factors (we collect £120m of our clients' sales turnover) it always amazes me how little legal action we take. But that's because we implement a system of consistent and regular contact with the customer: most people want to pay, you need to make sure you are first on list.

• Invoice factoring
  Invoice factoring provides early payment against the value of a business's invoices. It also provides immediate access to a highly experienced and capable credit control team. As well as providing upfront cash against the invoices, the factors will credit check customers, chase for payment and if required insure the customers against non-payment.  

Bad debts

• Credit checks
  This is a must but it is not foolproof. Credit-checking agencies work on historic information which may be a year or more out of date. However it will give you a feel for the company and it will list County Court Judgements (CCJs) a real and immediate indicator of financial problems.
  
  Don't just do this with new customers. Remember things change quickly in this market and if you can get regular updates from a credit agency on your customers then this will provide you with valuable information.

• Credit control
  A good credit controller is worth their weight in gold. Not only do they get your cash in quicker they will also save you from bad debts. They should pick up signs of problems very early; it may be an excuse they haven't heard before, a delayed payment or just a different tone of voice. Pay for the best, if they are good they will save you a lot more money than you will pay them.

• Credit insurance
  The only reason for not taking out credit insurance is of you are dealing with the Government. If banks can fail then your customers can fail. Credit insurance does not exist to pay for itself, it is there to protect one of the most valuable assets in your business: your debtors. 

• Spread your risk
  Better to have 50 customers owing you £1,000 each than one owing you £50,000. It is not always easy to spread your customer base, but if you are only dealing with a small number of customers then you must appreciate that your risk increases significantly. 

The most important advice is not to do nothing. Your motto should be "Act quickly, act strongly and believe that this recession will last twice as long as every thinks".

Mark Byrne is chief executive of invoice financing company Calverton Factors.  For more information call 01908 268 888 or email markbyrne@calvertonfactors.co.uk [1]