Managing Your Cash Flow

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3 tips to ensure you don’t lose at payment terms

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But despite the pressure this puts on their businesses, SME owners often accept these demands, without question, in return for the larger organisation’s ability to purchase or shift a high volume of product. 

So what can SMEs do to ensure they protect their own interests and cash flow, and that changing payment terms don’t undermine their business operations?

Here are three things to think about.

Financial stability

Just because a brand is bigger doesn’t necessarily make it more stable, so investigate the reasons why it might be asking for longer payment terms. Is it a simple bid to better manage cash flow, or is your partner’s business struggling to make ends meet?

Often, simple credit scores and payment indicators are enough to reveal which invoices are at risk of not being addressed and increasingly, are free to access, at least in a basic form. 

For example, in October 2014, CreditHQ identified that the level of risk in trading with City Link had increased noticeably and warned users of the service that even if the company was paying its bills and operating at present, trouble may be in the wind. Those who took note and action were then better prepared than their competitors when City Link then went into administration over the Christmas holidays.

It’s unusual for established household names to experience sudden failures – Diageo and AB InBev both have perfect credit scores – but as the string of names disappearing from the high street in recent years reminds us, it does happen, and the impact can be significant.

Cash flow

Whether you’re a tiny start-up or a multinational corporation, cash flow forecasts are essential in helping businesses keep track of their finances and staying afloat. However, many small businesses experience problems after they sign seemingly profitable deals due to over-optimism leaving them short on available funds – such as assuming that customers will pay you on time, when in reality, many companies don’t.

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For example, looking again at CreditHQ insights, you can see that despite both Diageo and AB InBev routinely signing contracts where they insist on credit terms of around 90 days (or in other words, they have up to 90 days after an invoice is issued before it becomes due), their payment performance varies considerably.

Bringing together what you know about when your payments become due – be that on demand or 90 days – with what you can find out about a customer’s payment performance will give you the true picture of when you’re likely to actually get paid. After all, if you have a client who has a credit term of 30 days but pays on time versus a client who routinely flouts 14 day terms, this might turn the tables and lead to different decisions about where to focus your business.

Charging interest and chasing overdue debt

Once an invoice becomes overdue, it’s worth remembering that you are perfectly entitled to charge interest on the amount owing – and should feel free to exercise this right. This could either be at a rate of your choice included in your payment terms, or it could be at the statutory rate of interest, which is eight per cent plus the Bank of England base rate for B2B transactions.

It might seem like a bit of a daunting prospect when going up against a larger brand, but it’s ultimately your money that they’re stopping you accessing that could be invested to obtain further work or pay salaries or even your own creditors.

The government has assured small businesses that it will be introducing legislation later this year to ‘name and shame’ large firms demanding lengthy payment terms in a bid to make the payment process more transparent and enable SMEs to hold their partners to account. But changing the culture for good will take some time, so until then, ensure you don’t simply accept terms that could potentially jeopardise your finances. Isn’t it better to fight today than disappear without so much as a whimper tomorrow?

Martin Campbell is MD at Ormsby Street.

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