Maximize cash flow minimize bad debt
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  • 1. Viewpoint Maximize Cash Flow Minimize Bad Debt Secrets to Guarding against Debtors (For Credit Customers) Have you been “turned-over” by customers who have dodged, delayed paying their bills or lost out to companies going into receivership – causing a subsequent strain on your cash flow and survival. It’s a fact, the single reason most businesses fail is due poor cash flow because of late payment and bad debt. If you haven’t been turned-over – Congratulations! However, with the growing economic crisis, there is an increasing probability that you will suffer a loss, within the next 12 months. The crisis has seen liquidity/cash „sucked‟ from the system – reducing individuals and companies ability to pay their bills! We are currently in the fastest economic slowdown since 1946, with associated impact on employment and bankruptcies. To protecting yourself, requires action almost from the first point of contact with prospective customers and certainly before any order is signed. New Mindset highlights 3 principle areas, based on experience:  Ensure your prospective customers are made aware of your Terms & Conditions, that they exist and or made available as required.  Impose strict credit control procedures  Introduce a proactive payment collection process Unfortunately many businesses play lip service to these three interlinked areas and suffer accordingly if things go wrong. This is particularly the case if „god-forbid‟ they end up in court, where the law seems to favour the defaulter. Terms and Conditions (T’s&C’s)  Terms and conditions define how you conduct your business, covering your customer‟s and your duties and responsibilities to each other. We recommend you involve a commercial lawyer to ensure that they are legally enforceable - it‟s an expense that is well worth it.  It‟s critical, from a legal perspective, customers are advised of the existence of T‟s&C‟s before a sale is made not afterwards. An advisory note or the T‟s&C‟s themselves should be on any estimate, quote or proposal. These documents should be signed by the customer prior to the sale, as they form the basis of the agreement. It‟s not sufficient for them to be detailed on your invoice post sale; this offers you little or no legal protection.  Estimates, quotes or proposals and subsequently invoices should clearly define the goods or services which are being provided and the price – after all these documents represent a contract and any ambiguity can lead to misunderstandings which can result in delayed/non payments AND your case being dismissed by the court.  It‟s recommended that you do NOT accept your customer‟s terms and conditions unless you have taken legal advice to ensure there is sufficient legal protection for you.  There other transactional issues including price, payment, delivery, etc which should be included in your terms and conditions depending on the complexity of the business transaction, value and timescales. We have created a check list for our clients to make sure all the necessary transactional issues are covered which you can request by email. T: 01276 537282 e: w: b:
  • 2. Viewpoint  Notwithstanding, any other terms or conditions you might consider, New Mindset recommends two that should be included without fail: o “Title to the goods or services remains the sellers until payment is received in full.” – allows you to seize the goods on non-payment and can ring fence the goods from the receiver in the event the customer going into administration. o “We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation “Late Payment Commercial Debts (Interest) Act 1998” if we are not paid according to agreed credit terms” Credit Control  Where credit terms are requested, undertake credit check on new customers plus check your existing customers, periodically. It‟s cheaper to turn down business if the customer is likely to delay or default payment. Also get them to complete a credit form including 3 trade references. o Unfortunately, for most SMEs you will get a report of relatively high credit risk but you will also unearth details of any Country Court Judgements (CCJs) – which will be more illuminating. o Don‟t deviate from your Credit Control process for any customer, this may seem harsh and disloyal to them but remember it‟s about being paid in full for your hard work.  Where customers that have a poor credit rating or an existing customer is regularly making late payments then consider imposing cash only payment terms to minimising your debt exposure. Delayed payment is a sign of potential financial difficulties.  It‟s also worthwhile monitoring your debt days against your industry average to ensure you are not overly exposed. Your accountant should advise what is reasonable. Payment Process  Ensure your terms and conditions are detailed on your invoices.  Issue the invoice alongside delivery/collection of the goods by your customer to ensure it immediately enters the payments process.  Phone your customers account department within 24 hours of goods dispatch to ensure there are no issues or problems with the invoice or goods, this reduces the scope for the customer to delay payment.  Call your customer a few days prior to payment date to ensure that there are no problems/potential delays – this acts as a gentle reminder and shows that you take payment seriously and actively monitor the situation.  If payment is late then call the customer every few days to chase. Follow each call with a formal letter and after period decided by your internal process send a formal final letter to the Managing Director copied to the Financial Director. In your final form letter it‟s essential to refer to the Late Payment of Commercial Debt (Interest) Act 1998 and arrange a meeting to discuss the outstanding debts and further consider stopping selling to them.  As matter of course send customers monthly statements and in addition ensure they contain your terms and conditions.  Ensure your accounts team advises your sales teams of any payment problems at the earliest opportunity so they don‟t accept further orders. T: 01276 537282 e: w: b:
  • 3. Viewpoint  If you feel uncomfortable about chasing payment then consider using the services of a debt recovery agency which will pursue the debt leaving you free to concentrate on building the business and customers who pay.  It is always best to try and reach agreement between your customer and yourselves directly. However, if after 4-8 weeks you have not been paid we recommend you escalate to legal recourse – it can take up to 18 months to pursue a defaulter through the small claims court (up to £5000 claim) and much longer for higher values. Whilst credit is almost expected, in today‟s business environment there are several payment options, which can increase cash flow and reduce risk. Methods of payment, in order of decreasing preference are: (i) cash at time of purchase, (ii) credit card at time of payment [after all your customer does get 30 days credit], (iii) deposit at time of purchase [preferably 50%] and (iv) credit terms. We have created check list for our clients to make sure all the necessary actions from selling to payment process are covered which you can request by email. Our Viewpoint in July 2008 “IS YOUR BUSINESS VULNERABLE” covers other issues that would protect your business against the challenges faced by companies in the current economic climate which you can request by email. New Mindset’s Risk Free 3 Point Fee Structure And Performance Guarantee – We are so confident of the program that we will:  Set 50% of fees against increased profits  Refund our fees if we do not deliver agreed profits and sales objectives targets  Refund our fees if your business doesn‟t grow enough to cover our fees within 12 months. Your business needs your full attention if it's to grow and prosper. Do you need help to improve your business, or perhaps you need to be held accountable to make things happen? If so, let's talk – 01276 537 282 or email. T: 01276 537282 e: w: b: