Anita Brook is founder of Accounts Assist a growing firm of Chartered Accountants. She’s been advising small business, sole traders and consultants for 12 years
Sometimes the cash doesn’t flow and at one point or another many businesses will experience money troubles, which could result in insolvency, and in the worst-case scenario, bankruptcy. This week I’m looking at ways to safeguard against financial disaster.
The latest insolvency index by credit checking agency, Experian http://www.experian.co.uk shows that compared to the same month last year, the number of business insolvencies fell by 20% this April. That equates to 1818 companies suffering in April 2010 compared with 2,274 in April 2009. This is great news overall for UK businesses.
To prevent your company falling into the unlucky few, there are a number of ways to protect from insolvency. Even if things are going great, it’s important to have a safety net in place.
Let the cash flow in
When everything’s going to plan, your business should have more money coming in than going out. If this is the case put extra funds aside; on call to plug cash flow gaps, allow your business to expand and reassure the bank that the balance is looking healthy.
In order to keep your cash flow a happy one, the aim should be to speed up the inflows and slow down the outflows. Many regular payments are fixed and you must ensure that you can meet these. Your employees, lenders and the taxman don’t want to be kept waiting and no business needs a staff uprising or hefty fines.
To improve the everyday cash flow, there are a number of steps you can take:
Don’t wait to invoice
There is no law that says you have to stockpile invoices until the end of the month. Send them out as soon as a job is complete, which should result in a steady stream of funds.
Sort out your T’s & C’s: Make your terms and conditions clear and ensure that your customers are aware of them. For invoice payment, the law sets a default of 30 days and in certain industries, up to 60 may be standard. This doesn’t mean you can’t make your own rules you’ll just have to draw up a separate, written agreement. Giving 15 days to provide payment, particularly in the early stages of a client relationship, will mean you’re not waiting so long for cash.
Take a deposit
Ask for a percentage of the cost upfront, especially if you’ve never worked with someone before, or a job has a high value, with bought-in costs paid for by your business. Depending on the length of the work, stage payments thereafter will help prevent being stung at the end. This should also be beneficial to your customer – assisting in their cash flow management by avoiding large lump sum payouts.
Chase late payments
If you’re waiting for payment outside of the terms of your agreement then it’s late. Rather than jumping straight on the phone to your solicitor, talking to the party at fault is the best course of action – they may have forgotten and simply need a nudge. If they are having trouble coming up with the cash, and your relationship with them is important, try to negotiate an agreement where they pay you back in instalments.
You can charge interest on late payments, either as part of your own T’s & C’s, or based on the reference rate, which is valid for six-months. This is the Bank of England base rate plus 8%. To incentivise prompt payment, depending on the nature of your business, you can offer discounts or some other benefit for people that pay on time.
Consider borrowing
If your cash flow problems are temporary, with a definite end in sight, it might be worth borrowing funds to cover the deficit. This shouldn’t form the basis of your cash strategy however – only borrow what you know you will be able to pay back.
The government’s Business Link has recently issued new guidance on avoiding and dealing with financial difficulty and insolvency here.
Experian’s news is really positive, it means that the UK’s businesses are getting back on track following a period of difficult economic times. Make sure your company contributes to the continuation of this upward trend and keep cash flowing in the right direction.
No Comments on this post