Cash flow is crucially important in running a profitable business. There are important steps you can take to minimise the risk of cash flow issues, and address the situation when problems arise.
Here are our top five steps to take:
1. Customer due diligence / Effective credit control
It is important to check a potential customer’s financial history and that of its directors and any companies associated with its directors or the business (including previous insolvency issues). By credit checking a customer you will be able to view details including the customer’s ownership, its accounts and level of credit risk. This will help you to determine their creditworthiness and ability to pay your invoices. It is good practice to collate as much information as possible about your potential customer from the outset, as this will increase your chances of successfully recovering a debt. To do this you may want to consider the following:
- Always take full details e.g. address and land line telephone numbers
- Collect identification documents and conduct a company search at Companies House in the case of customers who are limited companies
- Run credit checks and/or obtain trade or bank references before contracting with them
- Establish who will be your contact and who will be responsible for payment of your invoices
- Ensure that the entity you are contracted with is the one placing the orders. Be vigilant that a subsidiary or sister company does not try to place orders.
2. Clear payment terms
It is important to always have up to date terms and conditions as they offer protection from unpaid invoices and limit any liability you may face, and they should be kept under regular review. Without clear payment terms, a business may incur significant losses in both time and money. Slow payments can be prevented by having clear written terms specifying when payment is due by and any interest on late payment, ensuring clarity between your business and the customer.
3. Regular and timely invoicing
Ensure you invoice regularly and on time to avoid delay and a negative impact on your cash flow. Customers often appreciate timely invoicing as it serves as a reminder for them to organise payment. When invoices are issued late they are more likely to be queried or not paid in a timely manner, giving rise to potential disputes. You should make sure that your invoices contain the correct company name, reference number, date and a clear breakdown of which goods/services the invoice relates to. It should also include details of how to pay and refer to your terms and conditions.
4. Pursuing payment
Despite being careful, late payments can still occur and chasing them consumes your time. A clear and concise letter of demand, setting out details of how the debt has arisen, the full amount outstanding and a breakdown of this amount and the specific invoices is a good starting point in seeking payment. If applicable, include the up-to-date figure for interest and details of any future interest which is likely to be incurred to encourage prompt payment. To assist with this process, you should collate copies of all the relevant correspondence such as invoices, as this documentation will be required to evidence your claim.
5. Formal debt collection process
If, despite good efforts, formal steps must be taken then there are several options:
- If the customer is avoiding payment then issuing a court claim can help you obtain payment, either by settlement or in obtaining an enforceable judgment against the debtor.
- Alternatively, a statutory demand can be issued for an undisputed debt, depending on the amount of the debt. This is a formal written demand for payment of a debt in a prescribed form. Failure to comply with a statutory demand within 21 days of service means insolvency procedures can be commenced against the customer.