There are many factors which lead to a business failing. However at the point where a business ultimately fails the common factor will always be cash-flow. How many companies are forced into liquidation with a healthy bank balance? Good cash-flow management is essential, especially during difficult times. The old adage of “Cash is King” has never been truer.

Good cash-flow management is primarily driven from a business’ credit control function and the management of debts. The importance of good credit control is illustrated by the following simple example: “A company with turnover of £1m could effectively increase cash balances by nearly £15,000 if it is able to reduce the average number of days credit taken by customers by five days.”

Good credit requires established procedures, sound working practices and good communication.  The key principles to achieving these are set out below:

• An established policy – Ensure there is an internal policy which details specific timings for taking action on outstanding debts. This may be a timetable for phone calls, letters and legal action. 
• Exercise caution with new customers – Credit checks should be obtained for all new clients. During initial trading, tread carefully with new customers and be conscious of your exposure and your lack of trading history with this customer. If someone has not paid other suppliers there is a good chance they will not pay you either. If you have any doubts, request payment up front or consider introducing a strict credit limit at the start of the relationship. Alternatively, you can always ask for a third party guarantee.
• Communicate regularly with your customer - Issue clear and accurate invoices as early as possible, as this helps avoid uncertainty and ensures any contractual changes are identified early. You should also send statements and reminder letters on a regular basis so that the customer knows you have a consistent approach to cash collection. Credit control is an ongoing process, so don't live in a wilderness and ignore the problem. Should a customer not meet your terms, it is even more important that you keep lines of communication open and try to reach an amicable arrangement. This not only keeps cash flowing through your business, but will help maintain relationships with the customer. Legal action should only be taken as a last resort after all other communication has failed.
• Establish a separate credit control function - Where possible, create an independent credit control function. If the size of the business permits, this credit control function should be divorced from the regular customer/client management. It is easier to look objectively upon the level of debts if not directly involved in the client relationship. It is also easier for an independent party to chase the debt.
• Regular reviews - Aged debts should be reviewed on a regular basis to identify accounts which need to be chased. A weekly review should be undertaken and this should prompt regular chasing of balances to keep applying pressure to debtors.  During difficult times it is often a case of “he who shouts loudest, gets paid first”
• Credit limits - Establish realistic credit limits for all customers and ensure that these are observed. Credit limits should be there to manage exposure - if a client has reached their credit limit, do not continue to supply until the debt is cleared. Use the customer’s requirement for continuing supplies as leverage to get outstanding debts cleared.
• Monitor clients - Be conscious of customer payments and look for possible changes in patterns that could indicate problems.
• Communicate credit terms on invoices – Customers must know what your terms are. Detailing bank details on invoices can encourage direct payments into bank accounts.
• Avoid disputes - Ensure invoices are agreed with clients before sending. During difficult times, customers will look for excuses not to pay bills, to delay paying bills and to hold onto their cash for longer. Set out your terms and conditions in writing. They should cover price, delivery, payment terms and credit limits. They should also state clearly how any dispute will be dealt with. Obtain the customer’s agreement to the terms and conditions in writing if possible.
• Timely invoices – Customers will certainly not pay until they have received an invoice, so the sooner the invoice is despatched the sooner you can start to chase.

Aside from the credit control function there are other simple basic principles that can be observed to assist with cash flow management:

• Take advantage of credit facilities offered by suppliers – there is often no benefit in paying early, unless there are reasonable early settlement discounts offered.
• As part of routine planning, the business should be forecasting cash balances and ensuring any problems are identified early.
• Keep a close working relationship with your bank manager.
• Ensure other elements of working capital are controlled. Do not hold excessive stock levels.
• Be aware of breaks that may be available to you. If cash-flow is tight, HMRC may well look favourably upon a request for time to pay (either VAT or corporation tax). This is something that the government are trying to encourage.
• Ensure bank facilities are adequate, again the government are trying to encourage banks to lend through the downturn. If your facility is not sufficient, and your business is viable there may be additional bank funding available for you.

If you have any questions, or would like to discuss this article in more detail please contact Tim Dunn by email at tdunn@menzies.co.uk.