27th Oct, 2016

Why cash flow is king for business

Evesham Editorial 2nd Apr, 2015 Updated: 20th Oct, 2016

Angela Fitch, Development Manager for Federation of Small Businesses in Shropshire, Herefordshire and Worcestershire writes for the Observer

STATISTICALLY, 60 per cent of small and medium sized businesses (SMEs) are affected by late payments; the average owed to an SME is a whopping £38,186.

Business to consumer sales are relatively simple; customers choose what they want and pay on the day. The big risk comes from business to business sales; you supply goods or services, but your customer pays on invoice, which usually gives them at least 28 days to pay.

Late and failed payments can present a huge risk to your business, however, smart housekeeping can significantly reduce the risk.

• Can your customers pay? Running credit checks on new and existing customers will give you a better understanding of their financial viability.

• If the credit check reveals a problem consider offering cash on delivery terms.

• Take up bank references.

• Automated payments are quicker than cheques, remove the ‘lost in the post’ excuse and banks usually handle them at a lower transaction fee.

• Set customer payment terms up for shorter periods than those offered by your own suppliers. This helps you to get the money in the bank before your own bills are due.

• Where possible, offer an incentive for early payment eg a discount or free delivery.

• Avoid extended payment periods eg 90 days. This is popular with large business customers, but can seriously affect your cash flow.

• Be prepared to chase late payments by phone and, if the first chase doesn’t work, do it again!

• You have a legal right to charge interest on monies owed, but to do this you risk losing your customer, however, losing a high maintenance customer may actually save you money! More information is available at www.gov.uk/late-commercial-payments-interest-debt-recovery

Cash flow is the oxygen of any business. Cut it off and the business will suffer and can even die.

The overall message is that prevention is better than cure; applying the above measures will helps you to keep the cash flowing and your business in good health.