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Five Proactive Measures To Prevent Cash-Flow Issues

Cash-flow is the lifeblood of a business and one of the key reasons for failure is the lack of available funds when required. Even successful businesses, with full order books, can risk going out of business due to lack of immediately available funds. With late payments being a major cause of cash-flow issues, debt collection expert Darren Harmer looks at proactive measures you can put in place to prevent such a situation.   

When it comes to cash-flow, the old saying ‘prevention is better than the cure’ rings true. I’m going to highlight a number of measures you can implement to ensure your accounts are paid on time.

 

1. Set out a clear internal policy

Many of the problems encountered when chasing an overdue account occurred somewhere in the sales, delivery or manufacturing process and stem from human error or simple misunderstanding of what was required.

By implementing a short concise set of procedures many such misunderstandings can be avoided. This could include, for example:

  • Credit Application form to be completed
  • Trade Credit and Bank references to be taken
  • Your terms of trading to be provided to the client (prior to the commencement of trading)
  • Proof of delivery – How You prove delivery was made and accepted
  • Warranties offered by you or your suppliers
  • Packaging (For safe delivery)
  • Any items specific to your particular products or services

All of this will, of course, be irrelevant if no one implements it. Make sure your staff are properly briefed and trained on your internal process.

 

2. Know with whom you’re dealing with

While the rogue trader is relatively rare they do exist, so it is always important to make sure you know who your client is. Are they a limited company, a sole trader, a limited liability partnership or standard partnership? In the case of limited companies and limited liability partnerships, a search of Companies House will provide detailed and valuable information.

Does the person with whom you are dealing have the authority to make the purchase? Are they authorised to purchase on behalf of the company? If they are a sole trader checking their personal identity is worth considering. A simple check of their driving licence or passport shouldn’t cause an issue if they are a legitimate trader. You can also do a simple search on Google to gather information about a company.

 

3. Set clear unambiguous terms of trading

Regardless of the complexities of your arrangement, trading terms should be set out and agreed before trading commences. Your agreement does not need to be lengthy and can be set out in an email but you need to formally establish all the issues that are important. If, for example, your business has a 30-day payment term policy, but your client routinely pays on 60 days, simply placing your terms on your invoice will not compel your client to pay sooner than they intend to.

Payment terms are of course only one aspect of the agreement, additionally, you may wish to consider the following:

  • Retention of ownership of any goods supplied until paid for.
  • Your preferred payment method including bank details for online payments.
  • Both parties rights to terminate the agreement.
  • Expectations regarding delivery and proof that delivery has taken place.
  • Liability – yours and theirs.
  • Your pricing policy.
  • Return of goods policy/procedure.
  • Anything else that you expect of them and what they should expect of you.

This is not an exhaustive list and details required in your own agreements will, of course, depend on the nature of your goods and/or services.

 

4. Clear unambiguous paperwork

A regular feature in the payment dodger’s arsenal of reasons not to pay you is that there is an issue somewhere in the documentation. For example, the invoice omitted your bank details or it wasn’t clear where cheques were to be forwarded. Occasionally it’s something a little more creative such as instructions to use the goods supplied were not clear. Don’t make it easy for them, make sure dates and reference numbers and agreed terms are clearly visible.

Whilst this is mainly common sense, it’s often the simple things that are forgotten that later turn in to a much larger issue. Whether the issue raised is genuine or an excuse, by getting it right at the outset you will save the time and expense trying to resolve it later.

 

5. A well-defined process for follow-up

Regardless of whether you bill your clients regularly or intermittently, you should have a clear policy for following up payment of your invoices. One of the prime reasons for late payment is the supplier’s failure to ask for it!

You should issue regular client statements, at least monthly, and have a policy for following up any overdue items. There’s nothing wrong with contacting the client’s accounts team prior to the payment due date. This can serve as both a reminder and let them know to inform you if there are any issues.

Having simple procedures in place can significantly reduce the anxiety caused when a client has fallen behind with payment.

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Darren Harmer MCICM (g) runs Harmer Collection Services, a Debt Collection Agency. If you have any concerns or wish to discuss credit control or debt recovery in further detail, please do not hesitate to contact him by email or call him on 020 7249 3888.

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