George Dale, Director of Business Recovery and Insolvency at Thomson Cooper shares his insight into managing cash flow within an organisation.
Positive cash flow is essential for all businesses if they are destined to survive and continue to trade. In essence, it is a stronger inflow of payments compared with the outflow of cash to fund ongoing business operations.
Consequently, when customers are expected to pay, there is an anticipation that it will be on delivery, or within 7-14 days, or perhaps 30 days or longer. When that doesn’t happen as expected, it can impact on your ability to meet your financial commitments. Of course, the finance manager or finance director will have a cash flow forecast designed to identify problems early and plan remedial action, but in my experience, surprisingly not all businesses do this.
A strict credit control procedure is essential if you are to effectively manage your cash flow and avoid the possibility of bad debts.
So, what can be done if you are to minimise your exposure to late payment?
1. Know your customer
Due diligence is critical. Verify thoroughly who you are dealing with. Understand their financial strength or lack of it. Use external credit reference agencies for background credit reports (and review periodically for changes to their creditworthiness), but don’t place sole reliance on the information they provide. Set sensible credit limits which mirror the risk you are asked to undertake. Consider asking for a deposit if the risk profile looks marginal.
In the pursuit of turnover, this stage in the process is often it is handled too casually, but it needs to be robust. Tread carefully, as notwithstanding potential fraud (which is much more prevalent and sophisticated than you might think) you may be providing goods and services for which you may not ultimately be paid. In my role I regularly see debt recovery professionals chasing directors or businesses which disappeared long ago. Occasionally you find serial offenders who have multiple directorships and structures which are opaque, designed to deceive the unwary!
2. Establish relationshipsÂ
It may not always be possible but building relationships and establishing good communications with your customers allows you to understand the issues they face. You will be able to identify potential problems early and act accordingly. It can take the form of a telephone call to confirm receipt of goods or a reminder a few days before the due date for payment. It also conveys a professional, polite and helpful attitude which can retain good clients. It can also avoid disputes at a later stage.
3. InvoicingÂ
Modern financial software typically speeds up the invoicing process by emailing invoices rather than postal delivery, but input accuracy and transparency are essential. Invoices should be issued consistently once the order is delivered or services provided. Include an identifying reference number, together with your bank details and instructions for payment, with options as to how payment can be made. If a purchase order has been issued, then it should be referenced for ease of identification.
Ensure credit limits are not being breached as a result of the new order.
4. Credit controlÂ
This can take many forms of communication, but essentially, it’s simply designed to ensure payment is made. As a minimum, customers should know your terms of business from the outset, including how you deal with late payment and disputes. Issuing regular statements of account showing the age of the debt is advisable. When an invoice becomes overdue an email or letter should serve as a reminder. This should be followed up 7 days later if no response. Thereafter a telephone call should be made to the customer and if no payment is made or a realistic payment plan offered, then consider immediately passing the debt over to professional debt collection agents for recovery. All contact with the customer should be fully documented.
Many legal firms offer a debt collection service and are characteristically robust in their pursuit. They are of course well versed in the legal remedies available in the circumstances and regularly consult insolvency practitioners when a more formal insolvency process is contemplated, often seen as a last resort.
Operating within these general guidelines will have the benefit of identifying and prioritizing persistent late payers, non-payers or increased risk generally in your customer base or sector. Ignoring such developments or delaying corrective action is rarely a viable option in trying to recover a debt.