Maybe I am just biased but as an accountant you can have the best marketing, the greatest staff completely engaged in delivering the best product to the most satisfied customers but if your business is not collecting in the cash quick enough it can all disappear very quickly! CASH FLOW IS THE MOST IMPORTANT PART OF THE BUSINESS! If you don’t have enough cash none of the above will happen. As somebody once famously said, turnover is vanity, profit is sanity but cash is indeed king. Below I will outline ways to improve your cash flow from the things I have learnt over twenty years collecting cash from customers.
A lot of the content on this site is for members who subscribe (I need cash too) but I believe so strongly in cash flow that this post will always be free.
Let’s start with preserving cash and the best way is not to spend it.
Don’t spend cash you don’t need to, it sounds simple but as the old addage goes if you look after the pennies the pounds will take care of themselves. As a manager with budget responsibility spend it only if you need to. This will improve profits, make you look better and save the company cash.
Large corporations, when you set budgets for next year based on what is spent this year please remember you are encouraging budget holders to spend this years to make sure they will get the same cash next year if not more! It becomes a cycle of managers spending to hold onto their budget so they don’t have problems next year. As an accountant I have found myself accruing costs to keep that spend for my division just to preserve budget in future years.
Understand the difference between cost and value
Understand the difference between cost and value, I am writing a separate article on the difference which I will add the link to here when it is complete. For now though think of it like this, insurance seems like a cost when you don’t use it but it has a lot of value when you need it. Likewise a professional in a field may seem expensive but when an amateur get its wrong it will cost a lot more to put it right. It is about spending wisely and getting the best value that you can for the money you spend.
Try and pay people on time, obviously your staff, but as you expect to be paid on time then it is a courtesy to show it to others. This won’t always be easy and there may be times when you are let down by a payment and have to talk to suppliers and explain the situation, it does happen even to the best.
Receiving an order
When you receive an order in an ideal world you can charge the customer and receive the cash before giving them the goods or service. It works well for supermarkets.
Unless you are a shop getting instant cash always make sure there is a valid signed purchase order. NEVER, NEVER, NEVER take an order that is ‘verbal’, you will struggle to prove that one in court! It surprises me that I still see letters from the UK National Health Service in 2018 saying that every invoice must have a purchase order number on it, this is just simple good practice that should have been in place for years.
If you work in construction or provide services make sure your employees are aware of getting variations to order signed off before doing the work. It is very easy on site for the main contractor to ask for something to be done slightly differently, get this documented, signed and filed ready to claim payment for it. I’ve seen a £16,000 order turn into a seven figure job by means of variations to the original order. Beware!
The business world revolves on credit though and this is no bad thing. What you need to know is how credit worthy that customer is and make sure you don’t have too much credit risk (the risk that they will default and not pay you). For a new customer it makes sense to make them pay ‘pro-forma’ for the first couple of orders whilst you build a relationship with them, this means they pay up front before you give them the goods or service.
If it is a company buying from you (or maybe a member of the public in some cases) credit check them and make sure they are financially stable and credit worthy. Listen to the grapevine in the market, problems with bigger companies are often rumoured before they happen.
Set a credit limit reflecting their size as a customer and more importantly their ability to pay. Don’t let them make further purchases if this is exceeded until they have paid you.
Have robust sales terms and conditions and get the customer to accept them, this will include your terms of payment and make sure they know them and agree with.
If the order is for a large or complicated transaction, the installation of a new piece of capital equipment say, it is best to have a formal contract which specifies milestones for getting paid, if you have a £2,000,000 contract over 6 months you want to be paid along the way, you will have plenty of expenses and staff to pay! The contract ensures both sides are clear what is expected and when and what will happen if this doesn’t get followed.
Small companies beware of large contractors that have penalties for walking off site if they don’t pay you, I’ve seen these and they effectively hold you to ransom to complete jobs that they aren’t paying you for because the penalties will be more severe (they have expensive legal people who write the contracts in their favour).
So you have received an order and you are happy with it, you trust the customer to pay, what next?
Provide the goods or service.
Raise an invoice, raise it correctly and raise it in a timely manner.
If you are despatching goods you will raise this as you send the product, that is good.
Make sure that the invoice is raised to the correct person or company, I know it sounds stupid but it is possible to invoice the wrong person, you simply then have no right to be paid without rectifying the invoice to the right person. This will take time and increase the delays.
If you are working on an ongoing basis billing time or on stages of completion on a project make it a routine to do the invoicing as soon as it is due. The amount of time in my life I won’t get back that I have spent chasing managers to get a job invoiced because they ‘have been too busy’ has been far too much. If you have 30 or 60 day terms that clock doesn’t start ticking until that invoice is raised, the quicker you raise it the quicker you will get that cash.
Invoice must haves:
The correct Purchase Order number stated clearly
Made out to the right person/company
The right goods/service description at the right price.
VAT number as required
Someone to contact and their details in case of a query
Bank details for payment (Contentious in this day and age of fraud maybe, but as a business your bank accounts details will be in lots of different places and systems out of your control)
Just as you will make it as easy as possible to get your customer to buy, make it very easy for them to pay you! The easier it is for the customer to pay you or make genuine queries the quicker you will get paid, don’t make it hard for them.
If you have an invoice with lots of line items on it may make sense to raise more than one invoice if possible, there is nothing worse than a customer holding up payment of a £50,000 invoice because you there is a problem with one line for £30. I’ve seen it done!
Controlling aged debt
So you have sent out your invoices, unfortunately experience says they don’t just get paid. Some of them will and there are customers out there that will routinely pay but not all will.
You need to monitor and actively chase up those that do not. A lot of people will pay you when you ring up and chase, they just wait for you to chase, it’s like if you can’t be bothered to chase, they can’t be bothered to pay.
Chase up routinely every week if possible, chase problem debtors daily if necessary. Don’t just accept the cheque is in the post, get a date you will have the money in your bank by, if it is not there ring them again, keep contacting and rightly be a nuisance.
Have a stop list and refuse to supply people on it until the money they owe you is paid.
Make your debtor days a Key Performance Indicator that is reported monthly. Debtor days or DSO is simply
sales ledger owed to you/12 months sales x 365
It effectively expresses your debt as a number of days, the lower the number the better. Watch for trends over time and pay attention to the problem accounts.
Resolve problems on accounts as quickly as possible and keep the ledger as clear as possible. Cash should be posted accurately and routinely, the person posting it if possible should be well trained and understand the problems if cash is mis-posted. Bad posting can be nightmare to unpick if invoice amounts are for similar values because you sell large quantities of something in routine amounts at the same price.
Send in the sales department
Experience tells me some companies will do what they can not to pay, or rather to drag the process out, sometimes you need to send in the project manager for the job or their sales relationship manager to have a quiet word
If you have worked with a German company you may know they love a good skonto, or in English a prompt payment discount. If offered one weight up the benefit of the money saved against not taking it (you may be short on cash and if it takes you into overdraft it probably isn’t worth taking). I have in the past seen 2% discounts for paying in 2 weeks, at the time this was a bigger discount than interest from the bank so it was worth it. You can also offer a prompt payment discount but work out the figures to make sure you are benefitting more from the cash coming in than the discount you give away.
Still no payment?
There are companies that will chase your debts for you although I have never used them, at this point I have always gone to court. This is a value judgement, you need to be saving more money and time compared to what you are paying them.
If all else fails then you are off to court however this works in your jurisdiction. In the UK generally I would send a 7 day letter with copies of the invoices, purchase orders and proof of delivery/work done. Send it all giving seven days to pay or you will be left with no other option to go to court. Send it recorded delivery so you know it has been received.
Getting a court judgement is not a guarantee of payment but in the UK then allows you to send in the High Court Sheriffs to seize goods or to collect cash assuming there is some to collect. I have been through this process where it has taken 12 months or more to finally get the cash, at that point never deal with the customer again!
This is where you ‘sell’ part of your sales ledger for upfront payment of the debt but you are paying a fee for doing so, having part of the cash released early aids cash flow. Then either you collect the debt and declare it to the third party or the third party then owns the debt and they collect it. It is a way of getting cash quicker but to me it seems an expensive way of doing so and it’s not a route I have ever gone down with any of the businesses I have been associated with. It exists, and it may be right for some but my personal opinion is that I am not a fan and I would be looking for a route out of doing it from the start.
As an accountant the information above is the most important I can give, it is as simple as no cash = no business, cash flow is the be all and end all.
If you are a business owner have a look again and see if there is anything above you can implement to improve your processes.
Do a regular cash flow forecast, update this daily if necessary, this will highlight any shortfalls before they become due. Don’t just leave this to chance!
If a manager, always think of the cash flow of the budget you are responsible for, cash flow is different to accounting entries which match costs and revenues into the same period. Help your
In general following the collapse of Carillion in the UK and it dragging out payments to small suppliers to 120 days, from experience that is 120 days if signed off, there are some companies that won’t even get that far. It is shameful to say but there are companies who shouldn’t be in existence because of the way they pay or rather avoid paying people and some of them are very big and exploitation is the best word for their practices.
Let’s sort it out, it is disgraceful how SME’s are sometimes treated, if legislation is needed lets get it in place and make the playing field level for all.