Cash is king
4 Aug 08
Paul Hally suggests some legal strategies for making sure that cash flow continues strong in difficult economic conditions
by Paul Hally
Whether or not the current economic downturn will become a full recession remains to be seen but one thing is clear: the days of cheap credit are over.
Banks are tightening their belts and looking to improve their margins and this is impacting on the lending rates that they are offering to their customers.
No longer can businesses rely on the upward curve of growth in sales to finance current expenditure. Many businesses are facing a downturn and the drop in sales is forcing them to look closely at their financial management. Cutting costs is only one half of the exercise. It is also essential to ensure that proper cash management systems are in place and that management understands the legal remedies available to them when money is owed to the business.
Many businesses fail not because they do not have a good product or service, but because they run out of cash. One lesson from the dot-com collapse, which primarily affected innovative e-commerce businesses, was that “cash is king”. Without the cash to pay your overheads, you stop being able to operate and you close the doors or face your creditors doing so.
So what can businesses do to try and improve cash management? Do you know what proportion of your invoices are overdue? Do you know if customers are paying you on time? Are you incurring unnecessary bank charges by not being able to manage the cash flow in and out of your business? Do you have value tied up in stock that is no longer required? Managers need to have a handle on all these aspects of the cash management cycle.
A starting point is to look at your own payment terms. Are you incentivising your customers to pay promptly? Are you offering discounts for early payment of invoices? Do your terms of business still stipulate the standard 30 days for payment? Reviewing terms and conditions to tighten payment terms and to offer incentives is a good starting point.
The next stage is to know your customers. Long-standing customers may themselves be facing more difficult times. Are you monitoring the payment profiles of key customers? Is a pattern emerging that should alert you to trouble ahead? Sharing information within your industry can be useful to help identify risks.
Getting payment from a customer in difficulty is often a matter of getting yourself to the front of the queue and shouting the loudest. You need to get yourself noticed. Polite or standard-form reminders simply get ignored. More formal demand letters often do the trick. A warning letter threatening legal action can often be enough to get your cheque to the top of the cashier’s out tray.
Use your lawyer or debt collection agency to put extra pressure on debtors. For sizeable invoices, this can be money well spent and we are increasingly seeing businesses taking this more aggressive approach to debt collection.
You also need to alert your customers to the cost of not paying on time. Legislation has been in place for several years to enable businesses to claim interest (at 8 per cent over base rate) on overdue invoices from business customers. In our experience, many businesses are unaware of this entitlement.
Regular reviews of inventory should also alert companies to stock that is not moving. Can you afford to have your working capital tied up in stock that is not moving?
Take a hard look at this dormant stock. Do you need to keep it or is it really obsolete? If so, should you simply bite the bullet and sell it and generate some cash and rationalise your purchasing?
A few simple steps toimprove financial discipline and cash management can make all the difference.