credit control | YHBA - Practical advice for business

UK Business Advisors is highlighting the importance of cash, and is urging SME’s to fully understand the cash position, in the wake of reports that suggest over 30 per cent of companies in the UK are suffering from cash flow issues.

UK Business Advisors has produced a cash flow review checklist to help ensure a company’s liquidity remains robust. SMEs are advised to:

1. Plan the cash flow year – If the business experiences peaks and troughs in demand, prepare for these and put in place measures to ensure the cash flow reflects the changes.

2. Don’t bulk buy – hold as little stock as possible and turn it over quickly. Agree with suppliers a right of return of unsold stock. Look at getting ‘stock on consignment’ (you do not pay before it is sold). Can suppliers deliver to customers on the company’s behalf? Careful planning should eliminate this potential drain on cash.

3. Keep costs down – Review all cost items (including products and energy) and relate this to efficiency. Turning off one PC overnight can save over £50 a year.

4. Run a credit check on customers and potential customers – look at the credit histories with a view to eliminating late or non-payment. Try to instil in staff the thought that ‘a sale is only valid when the cash is in the bank’. Before accepting an order ensure the customer/potential customer accepts the payment terms – in writing. It is also essential to enforce payment terms and if a customer doesn’t pay, put them on a stop.

5. Invoice promptly – issue them as soon as is practical. Soon after they are issued contact the customer by phone or email ensuring they have the invoice in their system and that they have no problems with the supply – record this. Get them used to paying on time. Remember “a sale is only valid…”

6. Ensure that systems advise you of late customer payments – keep an eye on debtors’ days (trade debtors’ ÷ sales for the previous 12 months) × 365). An increase could indicate a credit control issue.

7. Take precautions – consider taking out insurance to cover all trading with a large or doubtful customers or even against individual invoices.

8. Negotiate or re-negotiate credit terms with suppliers – Ask for early settlement discounts (if cash is available) and try to split annual costs into monthly payments. This will probably be easier than paying a large bill at the end of the year. Consider what would happen to the business if a supplier failed? Too much reliance on any one supplier could leave the company extremely vulnerable. Use credit checks and find alternate source(s).

9. Review wages and salaries – In times where cash is tight, these (usually) monthly payments are strain on cashflow.

10. Consider invoice finance – These facilities can bring in a value of up to 90 per cent issued invoices – but it has a cost. It can assist as the cashflow income then grows in line with sales, and bridges the gap between issuing an invoice and receiving payment.

Barry Hill, a Finance Specialist at UK Business Advisors commented “The old adage of ‘Sales are flattery, profits are sanity, but cash is king’ is even more relevant in these tough economic times. Control of cash can make all the difference between survival and failure”.

Barry Hill is a business advisor within TVBA, the Thames Valley region of the UK Business Advisors network, and can be contacted at barry.hill@tgba.co.uk. For full details visit the UK Business Advisors website www.ukba.co.uk

We all understand that not collecting payments on time has as a severe impact on your cash flow, but let’s not forget also that you are effectively giving your clients, your debtors, interest-free credit, and this also has an impact on your cash flow and your profit.

Whatever the size of your business – start-up, sole trader, micro business, small business or SME – the remedies are the same. Follow these four steps and you will reduce the amount of money owed to you:

send out the invoice as soon as you ship the goods;
call the client the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
call the client 5 days later to carry out the same checks, so that there no excuses on that front; and
call the client 5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run.

Pretty obvious really, but it is surprising how many companies are not doing that.

DSO – Days Sales Outstanding

Also known as debtor days, this is the average number of days your clients take to pay their invoices.

Let’s take a business that has a turnover of £1,000 per day, typical of many small businesses with a couple of employees. If its clients owe them £75,000 then their DSO is 75 days – 75 days at £1,000 per day – that is what it means.

So the DSO for your business is just the total debt owed to you divided by your average daily sales.

What does DSO tell us?

Well, the £1,000 a day turnover company traded on 30 days terms so it could reasonably expect to get paid in 45 days – the end of the month following the month of the invoice – and it should have debtors of £45,000.

Just imagine the impact on cash flow of reducing the DSO to 45 days – a £30,000 improvement. Even a 10 day reduction in DSO would improve cash flow by £10,000 – certainly worth going for.

Effect on overdraft

One factor that is often ignored is that companies may find they have to borrow to fund the excess credit they give to their customers. Our sample company could have an overdraft of £30,000 – essentially funding the gap between 45 days and 75 days DSO.

The cost to them of funding that gap at an interest rate of 12% would be an additional £3,600 in bank interest, not counting the bank charges that go with it. That is an extra £3,600 cost to their business for giving their clients excess credit on interest-free terms – reducing net profit – madness really.

You could save the cost of bank interest and increase your profit by improving your DSO and reducing your borrowing.

Invoice on time

Strictly speaking DSO does not include your delay in sending out your invoices, but the impact is the same and the easiest way to eliminate that is to send the invoice out as soon as you have shipped the goods or supplied the service.

Manage your clients’ payment expectations

Talking to Graham Sands, a credit control specialist with Amril Ltd, he advises contacting the client at least three times between invoicing and collecting the money:

the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
5 days later to carry out the same checks, so that there no excuses on that front; and
5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run

That way your customers will get to know when you expect to get paid.

They will often delay paying their suppliers where they can get away with it to improve their own cash flow, but if you chase them – nicely – they will get to know you expect to be paid on time and they should begin to act accordingly.

We can help

Even if you follow these steps – invoice on time and contact your clients regularly to ensure payment on time – you may still be left with number of significant debts that are proving difficult to collect. We can help you collect the overdue payments and ensure such debts are less likely to occur in the future.

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

We would like to thank Graham Sands of Amril Ltd for his significant contribution to this article.

UKBA recommend robust cash management for SME survival

Four steps to make sure your clients pay on time

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