In the realm of business, maintaining financial hygiene is an often critical first step to winning the confidence and trust of lenders. Many entrepreneurs overlook the importance of financial hygiene, focusing instead on the day-to-day operations or chasing growth opportunities. Fortunately, improving your business's financial hygiene doesn't have to be daunting. By following these 12 easy steps, you can enhance the prospects of any future engagements with lenders:
- Pay suppliers on time - aside from avoiding costly and distracting litigation/CCJ, credit rating agencies mine networks of suppliers as well as open-source financial data. Paying suppliers on time shows the business has resources to trade comfortably and sets the business favourably against its peer group.
- Reconcile your bank daily/weekly - all too often the business treats its accounting environment as a secondary concern to operations. A regularly reconciled accounts system will ensure accuracy of data when shared and build confidence over control.
- Avoid entering into unplanned overdrawn positions - any breach of a credit facility however small and brief will result in detrimental impact on the companies credit score. By ensuring adequacy of facilities the risk of accidental breach is minimised.
- Avoiding making too many hard credit searches - all credit searches leave a footprint and too regularly searching for financial products is often interpreted by credit rating agencies as a sign of distress and financial fatigue.
- Avoid using personal credit cards for business expenses - financial footprint is vital for SME especially as they often have limited data points compared with their larger peers. Using personal credit places both the borrower at risk as well as limiting the business from benefiting from its financial footprint.
- File accounts & confirmation statements always on time - any delay to filing and (or) extension of filing deadline will give rise to risk that credit scores are reduced. If possible (and especially if results are positive and ahead of prior year) file early.
- Ensure your accounting system is updated for year-end adjustments - often the measure of quality of an accounting environment is the difference between what the accounts of the business say and what they look like when filed? The gap between the two is a reconciling adjustment (often posted by your accountant) but posting it in a timely fashion will ensure your numbers are accurate and can be relied upon.
- Ensure your SIC code reflects your businesses trade - SIC codes are often chosen on incorporation and then never really considered by the business afterwards. All credit rating agencies and lenders have policies and matrices which depend on SIC code, so ensure that the SIC reflects the business avoids suffering due to mismatch.
- Maintaining credit and repaying on time - 30% of UK SME have no debt at all and if they required some in future would suffer from no benchmarkable credit footprint. By having taken on small credit facilities (company credit card, overdraft etc) and repaid to terms (or not drawn) a companies score will be enhanced, improving future offers.
- Avoid customer accruing aged debts -
- Minimise processing errors in your accounting environment (credits and adjustments are messy and noisy and lenders will infer they result from deficient controls)
- Track your credit score/report
By maintaining these 12 simple steps the business will stand to not only benefit from improved availability and terms of future lending but also the increased visibility and control of its own trading such that operational and strategic decisions can more effectively also be made.