In his first column for Real Business, Young Entrepreneur of the Year finalist David Barker shares how he made a true difference to his company's cash flow and reputation - and how you could do it, too.
I want to share some tips that have made a significant difference to my company’s cash flow and also enhanced our reputation for having a well-run business. We implemented the following six-point plan, and after two months 99 per cent of clients’ invoices were being paid within 21 days
4D Data Centre was growing rapidly in early 2011. The management accounts were showing revenues well ahead of costs. However, for two consecutive months we had to take a short term loan from our majority shareholder to pay our suppliers, which meant that we had a potential cash flow crisis.
Most of the company’s revenues are in the form of recurring fixed monthly charges payable on the first of the month. These are similar to your monthly telephone land-line rental. The amounts involved and the due date are written into clients’ service contracts, and therefore both the timing and invoice value are fixed and not open to change. Sometimes we also invoice variable charges but these are relatively low value and always billed in arrears.
The problem was that some of our clients, particularly the larger ones, were delaying payment of the fixed recurring charges beyond our invoice due date – effectively, using us as a cheap source of credit. At our regular monthly finance meeting, we agreed an action plan: apply the same professional approach to credit management as we did to the technical side of our business
Our action plan
1. Change timings – We moved sending our invoices out to 30 days before the due date, instead of 14 days. (This is because many companies ignore due dates and pay invoices 30 days after receipt.) Many of our clients only have invoice payment runs once a week, and some only once a month. Sending invoices a month in advance gives the client the opportunity to include us in an invoice payment run well before the due date.
2. Change payment method – We introduced mandatory payment by direct debit for all new contracts.
3. Address slow-payers – We moved persistently late paying clients onto direct debit.
4. Get on top of overdue bills – We now telephone the client as soon as an invoice goes more than 10 days overdue, if there is no known reason for this. We have found that direct, one on one, non-threatening contact at this stage is key in getting overdue accounts paid before they become a problem.
5. Weekly review – We introduced a weekly review for over-21 days’ debtors with reasons for non-payment, then authorised appropriate follow-up action. 4D directors receive an aged debtors’ list and a rolling five-week cash flow forecast every Friday afternoon. The director responsible for the relationship with a client with an overdue account tells our finance manager if there is a known reason for a delay in payment, such as a recent change in the client’s service requirements.
6. Suspend service - For accounts that are more than 21 days overdue we now give notice of suspension. Our core data centre co-location business involves the supply of internet connectivity services. Under our standard terms and conditions, if an account is more than 21 days overdue, we can give notice of suspension of service, if payment is not received within five working days. Our subsequent experience has been that because of the other measures we've taken, very few of our accounts are overdue at 21 days, but in the case of those that are, the formal notice of suspension of service almost always produces a very prompt payment.
The results have been impressive. Within two months, 99 per cent were settled within 14 to 21 days. The handful of invoices remaining unpaid at the month end is almost always the result of variable charge queries.
Our monthly invoice revenues are now around £250,000 and at the end of most months, we typically only have a few debtors over 28 days with invoices totalling around £1000 -that’s less than 0.5 per cent of our monthly invoice run.
Many small businesses, particularly in the early stages of rapid growth, are reluctant to press for payment of overdue invoices for fear of alienating their customers. Our experience is that done in the right way, this doesn’t have a negative effect on the relationship. In fact, it demonstrates to the late paying client that they are dealing with a well-run business where the professionalism they see on the technical side is mirrored in the administration of the business.
David Barker is the technical director of 4D Data Centres, which he founded at age 14, while still at school. He is a finalist for the Growing Business Awards 2012 Young Entrepreneur of the Year category.