Poor cash flow is one of the main reasons for business failure. For small and medium sized businesses in particular the key to success is maintaining a good flow of cash through the business. In this article we provide some tips to help keep the cash flowing. Some of them may seem obvious but many businesses forget to apply these simple rules. Remember that winning the order is only half the story - getting paid is just as important.Set customers realistic credit limits. A new customer is often the result of a lengthy relationship building process. Checking the customer’s credit worthiness may seem to go against the spirit of the relationship. However, caution at this stage may help to avoid fraud. Sometimes a ‘too good to be true’ order will come from a customer who has exhausted lines of credit elsewhere. Aim to trade with customers who have a good track record of paying bills.
Make your business terms clear. It is good practice to have a standard written contract and your Trade Association or the Chartered Institute of Purchasing and Supply (01780 756777) can provide examples. Include your terms of trade with order confirmations, invoices etc.
Boring but necessary! Make sure they are accurately addressed and for the correct amount to avoid them being returned.
An obvious point but so easy to put off when you are busy chasing that next order. Try to invoice immediately on completion and even consider a phone call to check that it has been received.
Be aware of times when your customers start to behave differently. Suddenly they are hard to contact or send you post-dated cheques. In this situation forewarned is forearmed. If a customer has cash flow problems it is essential to recognise the problem early. Remember though that a remedy that costs money is not advisable unless your customer is able to pay at least part of the debt. For the future, consider ceasing to supply or requiring cash with order. You could consider a collection service (costing somewhere between 5% and 15% of the debt), a solicitor’s letter or court action.
Make sure you have a system whereby statements and reminder invoices are issued. Call your customers if they are late in paying.
Don’t hold more stock than you need - it is expensive. Try to get your suppliers to deliver more often so that you can keep lower stock levels.
How often do you shop around and try to negotiate longer credit terms or volume discounts?
| Following these tips should help to keep the cash flowing but in cases of late payment by customers remember the following: All businesses can now claim statutory interest at 8% over base rate for the late payment of debts. In addition businesses have the right to reasonable compensation for debt recovery costs incurred as a result of late payment. The VAT bad debt relief rules are being amended so that for supplies made from 1 January 2003 it will be possible to claim VAT bad debt relief automatically after six months without needing to write to the customer to let them know that VAT bad debt relief has been claimed. |