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How to stay in control of your cash flow
If there’s one thing that can bring a small business to its knees, it’s a bad debt. A bad debt is an amount owing to the business that is paid late, paid only in part or not paid at all. If you invoice for services or provide goods on account, then you are liable to debts: all sales and invoices raised are in effect debts to your company until they are paid.
There are always good times and bad times in business, but when cashflow stalls, businesses can go to the wall. For small businesses, such as builders and other tradesmen, the cost of materials to do a job as well as contracted labour, needs to be carefully balanced against cash coming in to reduce the risk of a customer defaulting on payment and leaving you with unpaid accounts with your suppliers. If you are a service provider, like an accountant or architect, an overdue account can give you problems especially if you have rent and wages to pay.
To avoid a bad debt there are a number of things you can do to reduce the risk.
1. Check up on customers you are extending credit to
Are they who they say they are Companies are registered at companies house and you can check up on who the directors are and look at company returns. You might also want ask around in your own business network, if you have any doubts about taking on a big job for a new client. If you are in doubt about a personal customer, you can run a credit check on them, if they don’t score well you can ask them to pay for materials on the spot, or agree stage payments for work.
2. Be clear on your terms and conditions
If you are raising an invoice, how many days credit are you offering before payment becomes due. Thirty days used to be standard, but increasingly companies are asking for payment within shorter time frames, from seven days to 21 days. State what happens if payment is late – you could charge interest or late charges. If you are supplying goods, you can include a clause stating that the goods remain your property until paid for in full. If you are unsure of your terms and conditions, get the help of a solicitor.
3. Put a limit on their credit
You are under no obligation to keep on supplying goods or services beyond a level that you are happy with. If you are providing a service you need to decide at what point you stop work after an invoice has run over its period of credit. If you are working for the client regularly this can be very difficult but ask yourself if you can afford to lose the money? If you have any doubts about offering credit to a customer or client don’t do it. It’s not worth the risk, if they are serious about employing you or buying from you ask them to pay on account or upfront.
4. Invoice on time and accurately
Make sure your invoices are accurate and bill for goods and services delivered. Specify what you have done or supplied in detail. Do not give any reason to the client or customer to disagree or question your invoice. Put your terms on your invoice or include with the invoice when you send it.
5. Put a credit control system in place
This is simply a system that lets you identify anyone with an account or invoice that has gone overdue according to your own terms. If a customer or client has an overdue account you need to send a statement – statements also need to be sent out regularly. You can send out a statement even if an account is not overdue if you extend more than a month’s credit – in which case send the statement just before the due date falls as a way to remind your customer to pay on time.
6. Keep in touch with your debtors
Don’t’ be shy, pick up the phone and talk to them. They may have a genuine problem in which case you may be able to negotiate part payment or a series of payments they can manage. If you can keep communication going and keep a reasonably good relationship you stand a better chance of getting paid.
7. Find out if they are happy with the product or service
There may be a problem in which case you need to sort it out. If they have a genuine complaint of any kind does your best to deal with it and resolve it as quickly as possible. When the customer is happy they should pay you.
8. Keep a record of all your contact
Make sure you have an up to date record of what’s been said. This way you can deal with excuses or hold people to their word. And if the worst comes to the worst you will have evidence of your efforts to reasonably recover the debt should you have to go to court.
9. Walk your talk
Don’t threaten legal action if you don’t mean it. If you say you are going to do something, do it. If someone owes you money the problem should be theirs, not yours, so make sure you keep it that way!