An interesting article in The Times today about smaller companies facing a cash squeeze as bigger customers hold on to their cash.
Companies face cash squeeze as late payment of bills grows - Times Online It seems to indicate that late payment is becoming a trend and this has very worrying repercussions for smaller businesses.
Late payments has been a problem in the UK for many years now - it is not new
The FSB has tried many times to introduce legislation to force 'on time payments' but what does that mean ? It is recognized that a reasonable period of credit is 30 days (from the average number of days in a month) but there are lots of reasons that can be put forward for a Customer not being able to meet that allowed time
The accounting profession has adopted a principle that delaying payments for as long as you can has a positive affect on cash flow. This arose during the early '80s when interest rates were very high and the major accounting firms were telling everyone to run their businesses on as much 'free cash' as they could - in other words finance their operation by their suppliers. That principle has stuck
SMEs are generally afraid to push for their money and will have to wait until their invoices are included in the monthly 'cheque run' if ever. The larger Companies will only pay what they have to, for critical supplies and the 'squeaky wheels' and it is there that the trouble starts in the whole cash flow chain
We recommend our clients to get with the accounts people right at the beginning of a relationship with a Customer and get to understand their method of dealing with their payables. That way they can agree to payments terms that invariably will be met. This might mean extending credit for as much as 60 days but with an understanding of how the Customer's system works a more reasonable period can generally be agreed
We also recommend that our clients invoices contain a 'Please by' date instead of the meaningless '30 days nett' and where a Customer can only pay on a statement we have them head their invoices as 'Invoice & Statement'
IIn Europe there are many members whose normal terms allow for an attractive discount for early payment (within the 30 day limit) and some even have laws that provide for a supplier to apply to have a Customer's bank account frozen until they receive payment. There are not many late payers out there !!
Without a law to force people to pay their bills on time we in the UK are stuck with how the accountants see the application of money. Collecting your receivables is the major part of your cash flow planning and unless you get that right you are dead in the shark infested waters of doing business. Remember there are good Customers that you want to develop your business with and there are bad Customers that will, inevitably, put you out of business. Recognize and dump the bad ones quickly
Sid Wales
Do Your Own Accounts
