As it is nearing the end of the year, it is a good time to look back and reflect on what mistakes have been made and learn from these. A lot of clients I meet wish that they had the benefit of hindsight, hopefully by sharing some of their mistakes it can help others to not make them. Avoiding cashflow problems does not have to be difficult, it just needs some simple cashflow management tools in place. Whilst debt management tools will differ from company to company, there are some basic tips which I believe should be followed.
Act now to avoid cash flow problems
1. Collect in your debts
Whilst this seems obvious, I met a director who wished to enter in to a twelve month time to pay arrangement with HM Revenue and Customs as the debt owed by the company could no longer be afforded. A review of the company’s financial position and cashflow projections showed that the amount the company was owed by customers was actually higher than the debt due to HM Revenue and Customs. With some debt collection assistance, and an agreement from HMRC to pay the debt owed over three months, the company was quickly and cost effectively able to sort out its debt issues.
Directors are reluctant to chase their debts, through a fear that the customer will take their business elsewhere. In reality, good debt collection will not scare off your customers, it will simply generate cash. What needs to be considered is who should do the debt collection, debt collection is regularly left to someone who now has some spare time. The secretary, who no longer deals with so much post, may not be the best person to deal with your credit control, particularly if untrained. The debt collection may be left until there is absolutely no more putting it off, then some chasing e-mails are sent. A phone call to the customer may be all that is needed. It could be a case that they are waiting for information, or that they have simply forgotten.
If the issue is that they refuse to pay, then it may be time to instruct debt collectors to collect in the money owed. Consideration also needs to be given to whether the customer is actually worth keeping. This leads on to my second tip…
2. Don’t be afraid to sack your customers
For most, this will seem a very strange suggestion. Your customers are the ones that generate your income, so why on earth would you sack them? Well, put yourself in the shoes of one of my clients, they had a customer who was continuously asking for extra work to be done for free. Every job would end up with a base cost with a small margin for the company, but then after all the extras the company was actually paying to do work for its customer. The customer was no longer income generating and had become a liability. In this case, the directors were reluctant to push back on a large customer, however, once they had analysed it, they realised that although the customer contributed a lot to turnover, they contributed nothing to the bottom line. They met with the customer and explained that all extras would need to be paid for. The customer refused and the directors took the brave step to no longer work with the customer and profits have increased as a result. The company is able to apply its resources to more profitable projects.
There are also situations where customers refuse to pay on time, and although the work is profitable, after taking in to account the time it takes to get paid, and the resources needed to get the payment, the customer is costing the company significant cash. Not working with these customers is probably not the best outcome, instead speaking to the customer to find out what the issue is, is key. So often business correspondence is limited to impersonal e-mails which are simply ignored, the time taken to chat to a customer about the account could be invaluable. If the customer still refuses to pay, it may be the time to replace them.
3. Review your terms and conditions
Whilst it may seem obvious, it is important to review terms and conditions regularly. Too often companies produce terms and conditions on day one of the company commencing to trade, and then never go back and review them. During this time, the company may have changed what it does, or legislation may have changed. I often see retention of title clauses written in to terms and conditions which are out of date and invalid. If the worst happens, and the debt does have to be pursued or if it is not being paid, these suppliers find themselves in a situation where they are unable to collect goods due to poorly written terms and conditions.
It is very easy to get templates online now, however, what needs to be considered is whether these are fit for purpose. Whilst they may work for a simple business that is trading on a limited scale, what happens when things change? The answer to this is very often nothing. The terms and conditions are never thought about again and out of date, too basic versions are used, which provide no company with any protection if there is a bad debt. Investing time and resources in to reviewing contracts and standard terms will likely pay for itself, in a very short timeframe.
4. Match your debtors and creditors
Whilst the focus so far has been on debtors, directors also need to manage creditors. Those that pay invoices as soon as they arrive may believe that they have the best cashflow, this however may not be the case. It is useful to review the terms of these and the terms of your own invoices. If suppliers give 30 days for payment and the company is paying on day one, but at the same time, debtors are given 60 days, and don’t pay until day 60, the company has 59 days of potential cashflow issues. The answer is not to simply ignore all supplier invoices and only pay once chased to do so, but instead to try to bring the two in line with each other. Newer work could be invoiced on a 30 day basis, and supplier payments made on a fortnightly or even monthly basis if possible. As well as assisting cashflow, this could also free up time for the person processing payments on a daily basis.
This is not something that will happen overnight, but it is something that should be built in to the company’s business plan. The balance needs to be correct, being fair to your suppliers and at the same time ensuring that customers are being fair to your company. Better credit control and management tools should assist with this.
5. Don’t use the money for HM Revenue and Customs to fund trading
This is an issue I see with nearly every client I see. When times are hard, it appears HM Revenue and Customs are the easiest target not to pay. For a printer for example, not paying the company which supplies the ink cartridges could likely result in no new ink being supplied and the company being unable to trade. Not paying HMRC however doesn’t have any immediate implications. The issue here is that for many companies this non-payment seems too easy. Having not paid for one month, the following month it seems too easy to simply not pay or to underpay the following month, when other creditors are pushing. However, this trap can have serious consequences, HMRC have powers to distrain over assets if they are not paid or worst still could issue a winding up petition.
If there is one missed payment, this can easily be caught up. If it has become more serious, then entering in to dialogue with HMRC is key. By using a professional as an intermediary, getting a ‘Time to pay arrangement’ in place can allow a business to spread the debt over time.
So what would I say is the top tip to avoid cash flow problems?
The top tip is actually very simple. Talk more. By having open communication with customers, suppliers and HMRC, issues can be resolved quickly and easily. A conservation explaining issues and asking for a bit more time to pay an invoice is likely to be met a lot better than an e-mail. A call to a customer to check whether an invoice has been received and if anything else is needed to get it paid, could result in that payment coming in earlier and could even avoid the call before! Communication is key.
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