Cash In For Success: Lesson 4

Last time we were privileged to have Edwina Taylor, an expert in the field of credit risk, pass on some excellent advice on using credit reports, setting credit terms and credit control in general. I hope you found it useful.

We have two more lessons to go, as we look at how we can get cash in quicker. This time I want to look at two administrative issues that can trip you up, and next time I'll outline roughly what I see as a good credit control procedure. Then after that... well, I haven't thought that far ahead yet!

There is a kind of logic to the way I've been approaching this. Up to now we have majored on the issues to consider before you get to invoicing the customer/client - forecasting, credit limits, knowing your customer. This time we'll look at invoicing issues. Finally, we look at procedures once invoices have gone out.

What are the invoicing issues that can delay payments? Sometimes administrative issues can delay customers paying you. I have seen both sides of this - in other words, as both a supplier trying to get paid, and as a customer being asked to pay. And sometimes the administrative issues are genuine, and sometimes they are being used as delaying tactics. And sometimes it starts off with a genuine issue, which the customer's accounts team capitalises on to keep hold of your cash a bit longer. (Yes, it's your cash, not theirs, if the invoice is overdue. And seeing it as your cash will help you have the right mindset when chasing for payment.)

I just want to give two examples of where administrative sloppiness can cause delays in payments (actually, it may be better to call it "lack of attention to detail" or weak procedures, since "sloppiness" implies a criticism. Sloppiness is only a fair term where you know you should do something and you don't do it, or you can't be bothered, or don't see the point).

First, if the details on the invoice are incorrect then the customer is within their rights to query it and ask for a replacement invoice. An invoice is a legal document, with certain essential elements. If a customer may feel they will run into problems with tax (corporate or indirect/VAT) if they book/pay an invoice that is not legally correct. So they are entitled to an invoice that contains the right elements - whether that be a VAT registration number, the correct company name or specific wording in the description.

Some customers will be good at coming to you immediately to point the problems out and sort things out immediately. A lot of customers won't be so forthcoming, and won't tell you until you start chasing for payment. So make sure you know what an acceptable invoice would look like to the customer, and set your procedures so that you and your staff produce them like that.

Second, make sure you send the invoice to the correct person or department. Obviously this is particularly relevant to bigger companies, where the person you deliver the product or service to may not be one who processes the invoice for payment. If you don't send the invoice to the right person, address, department, email address (or you don't send it in the right format - paper or electronic) then, stating the obvious, the customer won't pay you because the right people won't know to pay you! And you potentially won't find out you made an error until you find they have not paid by the due date.

Make it a priority to make a relationship with a contact within the customer's finance and/or accounts payable team. People will normally go the extra mile for people they know and have built up a good relationship with, and they will normally be more honest too.

To sum up, if you have got all the invoice details right and are talking to the right person, then it will make chasing for payment so much easier.

And it's the chasing for payment procedures that we will come to next time.

Please let me know if any of these issues affect you, and if you have any tips of your own for getting round administrative issues with invoices.

All the best!

Cash In For Success: Lesson 3

By Edwina Taylor

Despite the UK Government's interventions and the succession of recent interest rate reductions, there seems little sign of a mellowing in the commercial banks' attitude to lending to businesses. Forecasts claim that it will be 2011 before any meaningful return of confidence in the banking system. If access to external finance remains difficult to obtain, businesses will need to be vigilant in their management of working capital during 2010. All reasonable care needs to be taken in the management of trade credit.

Sound credit management can minimise the risk of a business being landed with bad debts. Obviously that risk can never be completely eliminated, even in benign trading conditions, but in these cautious times, the aim of the exercise must be to ensure that the credit offered reflects the clients' ability to repay it.

SME's must consider taking elementary steps to protect against the risk of bad or late debts, so: -

• Consider what methods of payment you are happy to accept from customers. Retail businesses in particular need to be flexible here, but credit & debit card systems offer protection to the seller, which is less affected by subsequent changes in the customer's circumstances.
• For non-retail transactions, consider setting a threshold beyond which an extension of credit will be conditional upon a satisfactory credit reference check.
• Decide in advance what your firm's policy is to be with regard to late payments. Many firms incorporate interest clauses in their payment terms, but regardless of whether you do this, any business in the UK is entitled to charge statutory interest, currently set at 8%.
• Ensure that all invoices are sent out promptly, with the name and address of the business clearly and accurately stated along with your payment terms. Many firms believe that charging interest on late payments acts as a further incentive to customers to pay promptly.
• Keep an eye on outstanding invoices and chase debtors if payments do not arrive when expected.

What if payment is not forthcoming?

• Send a letter to the debtor, stating or implying the consequences of a continuing failure to pay. You can always use a solicitor to write on your behalf, but there will then be further costs incurred.
• You could sell your invoices to a factoring company or approach a debt recovery firm to chase the debt for you. This will relieve you of the work of pursuing your debtors, but will have costs attributable to the collection.
• Court action can recover debts. In the UK, for debts of up to £15k you will go through the County Court who will allocate the claim to one of three different streams, including the small claims stream. You may be able to recover collection costs if you win.
• If all else fails, then, for debts over £750, an unpaid creditor can initiate formal insolvency action.

Chasing Payments

Most businesses have heard the old chestnuts: - "the cheque is in the post", and "may I have a copy invoice". These are generally delaying tactics, but don't let it rest, and don't be afraid to insist on immediate payment.

Be diligent with processes - follow through the system of chasing debts, perhaps using a similar pattern as follows:-

Courtesy call the customer enquiring as to whether there is a reason for payment not being made;

Deal with any disputes on the order - asking for payment of those items that are not disputed, advising that the disputed items will be sorted out;

Where there is a cash flow problem agree a payment structure;

Keep records of all conversations and correspondence, email, fax, letters;

If all else fails put the company on STOP until you have been paid.

Remember unpaid bills are a way of easing your customers' cash flow problems at the expense of yours.

Credit Where Credit Is Due

Customers are the lifeblood of any business, but it is worth remembering "a sale is not a sale until it has been paid for". Extending credit is always risky and any business is taking a chance of not being paid, ultimately resulting in loss of profit, valuable time wasted in chasing the debt, and unwanted expense in taking legal action, only to be left with the bill being left unpaid.

Extending credit is like lending customers your own money. Would you advance a cash loan to a complete stranger? I guess your answer is no, but that is exactly what you are doing when you provide goods or services on credit.

Credit checking is widely used, but is it being used correctly? How do you evaluate how safe a business is?

Do you really understand the credit report?

Do you scrutinise the figures or just merely check that there has been no recent adverse activity?

Do you have a financial expert analyse the report?

Do you take up trade references?

Do you offer every customer the same credit terms?

Do you talk to the customer's Bank?

Do you check out the Directors' personal credit ratings?

If you have answered NO to one or more of the above, your business may be at risk. Risk Assessment has become the way forward. Most businesses carry out some enquiries, but the majority are insufficient.

Remember Turnover is Vanity, Profit Is Sanity, Cash Is King

Taking the risk out of extending credit is a vitally important and prudent move to adopt. See our 10 tips to help limit the risk of advancing credit accounts: -

1) Conduct a credit report for each new customer preferably backed up with a financial analysis;

2) Ensure that you ask for 3 trade creditor references and take them up;

3) Ensure you ask for a Bank Reference and that you speak to the bank;

4) Obtain an annual credit report for all customers;

5) Review all customer credit limits annually and do not be afraid to amend the terms or limits;

6) Have clear credit control policies which are "cast in stone" irrespective of the customer;

7) Include a Retention of Title (ROT) clause in your terms and conditions. It can be worth having a Solicitor draw it up for your own protection;

8) If you are supplying a Limited Company, consider obtaining a Personal Guarantee (PG) which will afford protection and allow a claim to be made against the Directors personally if the company folds;

9) Set the credit limit YOU are comfortable with not what the customer is asking for. For orders in excess of the credit limit the balance may be paid for COD or prior to delivery;

10) Ensure customers understand your credit terms and get them to sign the terms and conditions confirming their agreement.

Before you open a credit account be absolutely certain that your company understands your customer's payment system. Some companies will not allow payments to you until you are established on their system. Some companies insist on 90 day payment terms. Be sure that you agree in writing with your customer that payment is to be on your terms, not theirs. It is worth noting the day your customer runs the "cheque run" especially larger companies, government departments, Councils etc. Many only have one "cheque run" each month. You must ensure invoices are sent at least 1 week in advance of this date.

How can Frost Risk Services Help?

With our help, you can:

• Know who you are doing business with;
• Find out who controls that business;
• Review their financial situation;
• Check their credit-worthiness.

You can check the credit status of any business online with Frost Credit Checking 24 hours a day - See www.frostcreditservices.com - It's easy to use, updated daily, and comes with a solvency assessment written by a licensed Insolvency Practitioner if required. Whatever your interest in a business, we can give you bespoke reports and solvency assessments. We'll look at your options and help protect your interests, if need be.

For further information on this or any other debt related matter please call Edwina Taylor on 0845 260 0101 or 07515 334 251. Email edwinat@frostbr.co.uk

www.frostbr.co.uk Offices in Croydon, Dorset,Manchester, London

Forthcoming Article on Credit Management

I am very pleased to say that Edwina Taylor of Frost Credit Services has agreed to write an article for us, giving some tips on setting credit terms for customers and on how to get paid on time by your customers.

The article will be posted here late in November 2009, but if you want it hot off the press then subscribe to the Creative Finance & Management newsletter by giving us your email address in the sign up box on the right of this page.

Cheers,

Andrew

Cash In For Success - Lesson 1

So, cash is king. If you want good cashflow you speed up your receipts and slow down your payments. Simple! Well, perhaps simpler to say than to do. And the payments side of the equation is actually a lot easier to improve than the receipts, because you have control over payments. You have the money and you will decide when to pay it out and how much to pay. The receipts side of the equation is under someone else's control, namely your customers or clients. And just like you, they can decide when to pay and how much to pay. That makes it difficult for you trying to manage your cash.

In fact I would say that getting customers to pay reliably on time is one of the biggest headaches a small business will face, if not the biggest. But there are things that you can do to reduce the problem, even if you can't quite eradicate it. Let me encourage you. I have seen a small business, with less than £10m turnover, reduce its overdue customer invoices to a handful. It takes persistence and concentrated effort, tough credit control and good honest communication with customers. But it is possible to get good control of your customer receipts.

Over the next few editions of CF&M I am going to give several tips that will help you to do this. It's possible that you have heard these things before, but cashflow is so important that it bears repeating.

The things I'll cover will include:

• Credit checks
• Credit Limits
• Getting details right
• Invoice timing
• Credit control procedures
• Chasing invoices for payment
• Payment methods

But first I want to re-emphasise the importance of cashflow forecasts. Cashflow forecasts do not need to be complicated. But they are invaluable when you are trying to make sure you keep enough money in the bank. They give you confidence in the payments you are making, because you know how much cash will be left for the future. It gives you a chance of building up cash reserves to make an investment in new equipment or similar things. It shows you whether there is capacity to take money out of the business in dividends or bonuses. And it gives you early warnings of any problems that you may want to seek help with from your bank or investors.

One of the barriers that small business owners sometimes come up against in doing cashflow forecasts is that they don't know how to set one up on a spreadsheet. They don't have the confidence to do it. If they had a template they might be able to have a stab at doing it.

Well, if you subscribed to the Creative Finance & Management newsletter, you will have no excuse! You will have received from me a free cashflow forecast spreadsheet template.

If you haven't yet subscribed and you want the template, then go to the top of this page and in the sidebar there is form where you can input your name and email address. This will add you to the mailing list. You will receive an email to confirm you want to join the mailing list. After you have clicked on the "opt-in" link, you will receive an email with a link to a download page. On that page are the two free full-length articles I give to all new subscribers, and the cashflow forecast template will be on there too.

Got it? OK. I won't give you too many tips here for completing it. I think it's quite self-explanatory. Just fill in the yellow boxes. Why don't you spend an hour or two giving it a try to see how you get on?

Ok, my only three tips to get you started:

1. Start by going through the lines that don't relate to customer receipts or supplier payments (by supplier payments I mean payments of invoices that are on your AP/purchase ledger). Those are the hardest and you will get a lot of encouragement by getting the easier ones ticked off first.
2. When you forecast customer receipts you will need to have your up to date debtors list handy, and first go through it and make sure that you forecast the receipt of everything currently owed to you. Then forecast your sales (including VAT) and predict when those forecast sales will be paid for. Then add them to the receipts you have already forecast.
3. Use exact numbers wherever you can. But don't get hung up on getting it down to the last penny. You need to be able to update this every week in less than an hour. There's a balance to be struck. If you are estimating everything just to get it done, then you need to slow down and make sure you think about where you can possibly put in something more exact. If you are spending hours sifting through purchase ledger invoices to check payment terms and exact amounts, then you should probably step back and consider whether you will actually see the big picture any more clearly for all that hard work.

If you take this seriously I guarantee that two things will happen:

a) You will learn something about the financial dynamics of your business that will help you make decisions. You may even yourself adjusting some of your actions and decisions as you go through the exercise. And,

b) You will gain confidence in the payments you have to make and the actions you need to take to get customers to pay.

I'm interested to hear how you get on. Let me know at newsletter@charisfd.com.

Cash is King

First the basics - some would say the obvious – the fundamental requirement in keeping a business alive is cash. Not customers, and not profit – you can have both of those things and still have a business failure. Cash is like the lifeblood of a business. That’s why the maxim, “Cash in King” is so true.

Anyone in business should have heard this. But it may still seem confusing to you how you can be profitable and run out of cash and fail. If that’s the case then you can think more clearly about this by remembering one word – timing. Very simple example – I buy a car for £5,000 and sell it for £10,000. There is no question that I have a good customer and I have made a profit. But if I have to pay for the car tomorrow, and I am not going to get money from the customer until next week, then my business will fail if I don’t have £5,000 cash to pay for the car tomorrow.

The basics of cash flow management, really, are that to maintain the level of cash required to survive (zero or, perhaps, less if you have an overdraft facility) you must have more cash coming in than going out.

Sometimes the business is so consistently loss-making that it requires constant propping up by lenders and investors. Cash going out is more than sales receipts coming in, so more and more capital is required to ensure that the cash does not run out.

I worked with one such small business. The thing that amazed me at the time was that even after the last lot of capital had been used up, even though each month’s accounts showed a loss, even with no overdraft facility, the business managed to continue two months longer than anyone thought possible... and long enough to allow a rescue.

How did we do that? I think there were three key things that we did (apart from the obvious cost control actions that were necessary):

First, we produced cashflow forecasts in detail every week. The forecasts went forward 6 months - weekly for the first 3 months, then monthly after that. The base forecast detail was based on the same assumptions as the profit and loss forecast and went to quite a low level of detail. It showed very clearly when the shortage of cash would occur, how long it would last and how big the shortfall would be.

To get a feel for the level of detail, on the income side we forecasted three categories – i) receipts from debtors (i.e. cash for invoices already raised, based on payment terms and specific knowledge of each customer); ii) receipts from customers on projects not yet started, but the work has been ordered (i.e. so we know roughly when we should be invoicing for the work, how much and how long it will take to collect the cash); iii) receipts from deals in the sales pipeline and therefore may or may not come to fruition (i.e. there have to be probability judgments around which proposals will be successful, what the agreed prices will be, what invoicing timing will be agreed, and when the projects will start).

On the expenses side we forecasted different types of expenditure depending on its materiality and timing. Salaries, bonuses and commissions were monthly and fairly predictable. Rent was payable quarterly. PAYE and VAT also had a predictable pattern. Loan interest payments were fixed. Then staff expenses and other invoice payments were the variable elements. We knew from the profit and loss forecast and budget, compared to the actual P&L for the previous year, what a reasonable assumption of monthly expenditure would be. But we also knew that some of that had VAT added to it, some with foreign GST, some with no tax, and we knew we could flex the timing and size of the payment runs to a certain extent.

Second, we relentlessly monitored the bank account and the debtor list. The CFO would get copies of the bank transaction prints every day and check against what we forecasted. If customers did not pay when they were expected to, we would chase the project managers and customer account directors as soon as the invoices became overdue. As a result of that we got to the point where we had only a handful of invoices overdue for collection from customers.

Also, since our forecast of receipts went down to customer and invoice level, we were able to tick off what we had received compared to what we were expecting.

Thirdly, we knew what payments we could flex and therefore what our limitations were on payment runs. The extent to which we had cash to pay suppliers was determined by whether the inflows came in as expected. We knew we could flex PAYE payments by a few weeks, but there was a limit. And we knew that to keep the business going we had to keep paying the payroll, keep paying the loan interest, keep paying the suppliers. But we also knew that unless we started to make a profit we had to be careful with the timing of those supplier payments, and so we had a fairly tense few months when we only just stayed on the right side of some of our key suppliers.

Conclusions: Accelerate the inflow and slow down the outflow and you can make the cash go a lot further. Also, with careful, detailed monitoring and forecasting you can see a lot more accurately exactly when you need the rescuer to come in, when the investors need to increase their contribution, or (heaven forbid) you need to call the administrators. That's putting it negatively, but it applies positively as well - having surplus cash is not just a safety cushion. Surplus cash allows you to invest in the future without having to ask for extra investment from shareholders or ask for more borrowing. It also allows you to pay bigger dividends to the shareholders. Knowing how big the surplus will be and when it will occur will help to plan investments or dividends or the like.

So whether your business is loss-making or making a healthy profit, detailed, regular cashflow forecasts are essential.