How often have you seen a seemingly solid company go under – not because it hadn’t a wealth of assets, nor because it was not making healthy profits, but merely because it had been caught by cash flow? Some tips to keep the bailiffs at bay...
It is significantly more important to plan for cash flow than for profits. But short of hiring men in heavy overcoats, what can you do to improve the flow of life-blood into your company?
First, calculate your average customer payment time – your debtor days – by dividing your sales debts by your yearly turnover (including VAT). Ideally, this figure should be 1:12, meaning that your debtors take 30 days to pay, assuming constant sales throughout the year. Realistically though, this may be 3:12, meaning they take an average of 90 days.
Armed with this average figure,
how do you go about reducing it?
Your terms of business
Your payment terms should generally not exceed 30 days.
Ensure you have accurate up-to-date accounting systems – monthly management accounts, monthly sales ledger control account summaries and aged debtor analyses.
On long term contracts, increase the stage payments from 1/3 at the start of the job, 1/3 in the middle and 1/3 on completion, to 1/2 up front plus 1/4 and a final 1/4.
Know your customer
Many organisations pay all suppliers by BACS (Banks Automated Clearing System) on a set day each month, so dispatch your invoice promptly to ensure it gets paid this month rather than next.
Resort to law
A company can be forced into liquidation if it owes more than £750. No one likes bankrupting a customer, but if you come to the conclusion that this is the only resort then don’t delay: there may well be nothing to liquidate later.
What about your creditors?
Are you paying too soon?
Behaving honourably and responsibly is one thing. Jeopardizing your business is quite another.
Keep creditors informed
If you are having cash flow problems, do not ignore your creditors. Explain the position and agree a revised payment schedule – one that is realistic and with which you can comply.
Remember, you may have a profitable, well-managed business providing an excellent service, but the reality is that unless you place the highest priority on managing your money, you could suddenly find yourself in serious, even terminal, trouble.
Chris Wilkins FCCA is a partner in Wilkins Southworth, registered auditors.