UK Government Advice On Successful Cash Flow Management
Cash flow is critical to business survival but all too often the day-to-day challenge of running a business, particularly a smaller business, can mean losing sight of some of the skills for successful cashflow management. This series of guides, developed in partnership with the Institute of Credit Management, is part of a series of initiatives providing practical support to help businesses help themselves through these difficult times. They are designed to provide straightforward and speedy advice with simple checklists and top tips. I hope you find them useful.
If you don’t raise an invoice, you won’t get paid.
Invoicing should not be seen as a back-office administrative nuisance. Rather, it is a vital first-step in achieving healthy cashflow.
Can you answer yes to all these questions?
• Do you raise an invoice immediately after you have supplied the goods or service?
• Do you make sure that everything the customer requires appears on the invoice?
• Do you have an effective accounting system and have you considered using dedicated accounting software?
• Do you have a process for investigating and resolving disputed invoices immediately after the query is raised?
• Do you log the details of disputes so you can fix any avoidable root causes?
• Do you keep documentation relating to disputes as evidence in case the problem escalates?
• Do you keep a record of the customers that dispute invoices so you can spot any who do so regularly as a way of avoiding prompt payment?
• Do you ensure your sales invoices are fully compliant with HMRC requirement for VAT if you are VAT registered?
Payment Terms
1. Set out and agree payment terms in advance and in writing. It’s better to know what to expect than to leave things to chance and wonder why the money hasn’t arrived later.
2. Watch out for any wording in documents from your customer that changes the agreed payment terms. If you accept their order, you might also be accepting their changed payment terms. If their documents contain terms that are different to yours and you fail to challenge them, their terms will take precedence.
3. Whenever you write about payment terms, and on your invoices, include the words: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms.” Even if you don’t intend to do so, it can be a useful deterrent against late payment.
4. Raising a further invoice for interest and late payment charges is an excellent way of gaining your customer’s attention and raising the profile of your outstanding invoices.
5. If your customer unilaterally tells you they are going to take longer to pay in future, you will have to decide how important their orders are to your business. If they’re claiming the extended payment terms for invoices already raised, you should demand payment under the previously agreed terms for goods or services previously supplied.
Invoicing
1. The sooner you ask, the sooner you can get paid; send by first class post or, better still, by email.
2. Get invoices right first time; raising credit notes and reissuing invoices takes up resources and time better spent elsewhere. It also changes the payment due date.
3. Ask customers what they need on the invoice in order to approve it simply and quickly. Include at least the following:
• Your full name and address
• Your VAT registration number
• Invoice date
• Correct customer name
• Correct customer address
• Delivery address (if different)
• Delivery date and method
• Customer Purchase Order number
• A clear description of the goods or service supplied
• Accurate quantities, prices, discounts and total amount due
• Payment terms and due date
• How payment should be made with bank details (including sort-code and account number from bank statement)
4. Include the words: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms” on every invoice, and print your terms and conditions on the back.
5. Have a system for resolving disputed invoices promptly, especially if a customer is using a small query to withhold payment of a much larger invoice.
Treating Suppliers Fairly
1. Make sure payments due are in your cash flow forecast so they don’t catch you by surprise.
2. Talk to suppliers early if you have a problem preventing prompt payment.
3. Paying promptly:
•earns your business respect
•may allow you to negotiate better deals or agree a prompt payment discount
•helps you avoid late payment or interest charges
•ensures supplies don’t get stopped
•improves your trading relationships
•makes you a more valued customer.
4. Give your key customers a copy of this guide.
5. Treat your suppliers as you want your customers to treat you.
Credit Insurance
1. If your business would be more comfortable trading with protection against bad debts or, in certain circumstances, late or non-payment; then credit insurance is worth considering.
2. Credit insurance can give you a stronger balance sheet and (because the risk of bad debts is reduced) it can make finance through traditional overdraft, factoring, or invoice discounting more readily available (possibly at a cheaper rate).
3. Credit insurers have access to more up-to-date and detailed information than is readily and publicly available. This can open up larger credit lines or more flexible payment terms allowing your business to grow its profitable sales.
4. There are a number of credit insurers and insurance brokers, who offer a variety of insurance products. It’s always worth shopping around for the most suitable type of policy and best rates, just as it is for any other insurance product.
5. Credit insurers can be a real asset in helping you introduce good credit management practice into your business.
Factoring & Finance Problems
If you can’t answer yes to all the questions opposite, you might need to consider these alternatives in financing your business.
1. Don’t wait until things become critical. You need time to put arrangements in place and it’s easier when you’re not under too much pressure.
2. Factoring – the factor agrees to pay an agreed percentage of approved debts as soon as they receive a copy of the invoice; 80-85% is common. The balance, less charges, is paid when the customer pays and the factor will undertake all credit management and collections activity following an agreed credit policy. The advance is
likely to be ‘with recourse’ (meaning that the factor will be able to reclaim its money from you if your customer does not pay) so the option of bad debt protection should be strongly considered.
3. Invoice Discounting - immediate cash for up to 80-85% of the approved invoice value is available. However, responsibility for the sales ledger operation and credit management activity remains with the organisation and the service is normally undisclosed to its customers. Payments received are paid into a bank account administered by the invoice discounter, after which the company is credited with the balance, less charges. Again, this advance is likely to be ‘with recourse’ (meaning that the discounter will be able to reclaim its money from you if the customer does not pay) so the option of bad debt protection should be strongly considered.
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4. Supplier Finance – sometimes called ‘Reverse Factoring’, is an option if you are a regular supplier to a large organisation that has an appropriate arrangement in place. Invoices are paid immediately (and ahead of terms) when the buyer confirms it has approved the invoice for settlement. The buyer then repays the financier
according to the original contract payment terms. This allows you to receive an immediate cash payment, less a discount that is based on the buyer’s credit rating and is without recourse (meaning that money will not be reclaimed from you if your customer fails to pay).
5. Project Bank Accounts – ensure that the
contractor and their supply chain receive promptly monies rightfully due through certified interim payments. The Project Bank Account is set up in trust for the whole supply chain and is the medium through which payments are made. The Project Bank Account makes payment on receipt of an instruction signed by both the
project client and contractor, and the supply chain is notified of the day they will receive payment from the Project Bank Account. Project Bank Accounts have Trust Status which prevents a receiver seizing the proceeds of the account in the event that the contractor goes into receivership.
6. Asset Based Lending – where funding is provided, secured against the property, plant, machinery, stock, or sometimes even the brand name, of a business.
Chasing Payment
1. If the invoice is large, call the customer before the payment due date to make sure it has been received and there is no query; this is good customer service.
2. Make immediate contact when payment has not arrived, be assertive about what you expect and when you expect it, and make the consequences of non-payment clear. Follow up promises to make sure they’re met.
3. If a customer persistently pays you late or makes excuses, check them out (see ‘Knowing your customer’ guide in this series) and consider whether you’re prepared to continue supplying on credit terms. It may be better to lose an order, or even the customer, than supply goods, not get paid and suffer a bad debt (when
that happens you lose the goods and the money you’re due).
4. Be polite, professional and persistent; do what you say you’re going to do when you said you were going to do it.
5. Try to get customers to pay by electronic transfer or Direct Debit to avoid waiting for the cheque to arrive.
Cash Shortage
1. Plan your cashflow requirements carefully allowing for differences in the payment terms you receive from your suppliers and those you give to your customers. Regularly update cash flow forecasts to ensure you stay within your financing facilities
2. Monitor stringently against the plan so that you spot any variance as early as possible.
3. If you think you might have a cashflow problem, talk to your bank or financier immediately. They might be able to help and the earlier you speak to them, the more options there will be.
4. If you can’t pay a supplier on the due date, talk to them as soon as you know you cannot do so. Again, the earlier you talk to them, the more flexibility they’ll be able to show and the more likely they are to be able to accommodate an extension to payment arrangements.
5. Remember, early communication is key – if you avoid talking to suppliers, your bank and other
parties, you might find supplies or finance have been withdrawn or legal action has started and things will quickly escalate. There were over 70 corporate failures every working day between May and July 2008, many of these through lack of cash; you need to make sure your business doesn’t become a statistic.
Legal Action
1. Make sure the invoice details are accurate before you consider taking further action.
2. Always write and advise your customer that you will be exercising your statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation and that you will be taking further action – this might be enough to prompt them to pay.
3. If you can’t get paid for the outstanding debt, don’t let it grow. Stop supplying any further goods or services. If your product or service is important to your customer, it might be just the lever you need to get payment.
4. Always consider the commercial reality – if the customer is insolvent or has no available funds, further action is unlikely to help, and consider the costs of any action against the size of the debt.
5. Check out any solicitor or agency before you instruct them; make sure they belong to their appropriate trade association or professional body and check that their background and expertise matches your needs. |