Kirk Rice Blog

Managing Cash Flow For Your Business: What You Need to KnowWritten on October 13, 2016 by Kirk Rice LLP

Winning a new contract is great news for your business, but when a customer fails to pay it can have a devastating effect on your bottom line and cash flow. So, what actions can be taken to minimise the instances of slow payers and the consequences of bad debts?

In this article we talk about a number of steps you can take to proactively manage your payment processes.

If you would prefer to listen to the podcast, please click below:

1.   Complete a New Customer Form

• Name and trading address.  Consider using the Company’s House checking service for this purpose.
• Type of business, for example sole trader, partnership or limited company.
• Names of proprietors and whether the company is unincorporated. Ask to see letter headed paper to support the information provided.
• Contact suppliers of the business to obtain references.
• Run a credit check on the company if large amounts of credit are involved.

Get to know your customer better by producing a new customer form template which should include as a minimum, the following information:

2.  Agree Payment Terms

Ensure you discuss and agree payment terms with your customer prior to the provision of any goods or services. Always put the payment terms in writing and review the documents returned by the customer to check for any alterations made. At this stage, it is a good idea to also review the payment terms with your suppliers in relation to the new project.

3.  Prepare a Cash Flow Forecast

If, upon reviewing your payment terms with the supplier, you find there is a gap between the customer and supplier payment terms, you will need to decide on how to finance this gap. Preparing a cash flow forecast can help you to highlight any potential issues before they arise.  We advise you take these steps when preparing a cash flow forecast:

• Include all expected income and expenses, particularly direct debits which leave your account on specific dates.
• Be prudent when it comes to estimating when customers will pay you. Inaccurate forecasts can have dire consequences for your cash flow.
• Regularly review your cash flow forecast to take into account changes in your circumstances.

4.  Invoice Regularly

When it comes to invoicing your customers, make sure you invoice them on a regular basis. An invoicing schedule prompts you to invoice in a timely manner and avoids unnecessary delays on payment.

5.  Check your invoices

Take time to make sure you include the order reference number / quotation number / customer reference number.  Accurate invoicing will reduce disputes later, which could otherwise cause a delay to your payment.

6. Treat Your Customers Fairly

This may seem an obvious one, but remember that treating your customers fairly will do wonders for your business relationship.  If you have a query with a supplier invoice, let them know as soon as possible.

7. Maintain Regular Credit Control

Hand in hand with treating your customers fairly is maintaining a regular credit control process: it is good business practice for you and lets the customer know where they stand with the financial process. Good quality credit control can make a huge difference to your cash flow and reduce the risk of bad debt, so make sure you make the time for it.

Create a fair credit control process with supporting documentation. It will save you time and help you to spot the warning signs of a customer in trouble.

Kirk Rice’s outsourcing department specialises in providing tailored credit control services. If you would like help in setting up your credit control procedures initially or want the whole job taking off your hands, feel free to give us a call.

8. Customer Late Payments – What to Do

When a customer payment becomes overdue, it’s important to know your rights. In some circumstances, you will have the right to apply a late payment charge, to charge interest and to reclaim debt recovery costs. In these instances, it may depend on how your customer contract is worded.

In the unfortunate event of a bad debt, you are entitled to make an adjustment to the VAT element. However, this option only applies if your business meets the following criteria:

• The VAT in question has been accounted for and paid to HMRC.
• Six months has elapsed since the date of supply and the due date for payment, whichever is later.
• All or part of the outstanding amount must have been written off in the accounting records as a bad debt.

If your business meets the criteria, a claim is made by entering the appropriate amount in your business VAT return for the period when the claim arises or in any admissible later period.
To conclude, good business practice must include a fair, well-documented and regularly maintained credit control process. A quality credit control process is a key tool in minimising late payers, bad debts and as a consequence, poor cash flow.

Kirsty Heslop is the Outsourcing Manager at Kirk Rice Accountants. If your business requires assistance with cash flow, credit control or other options such as assistance with arranging an overdraft or a review of invoice discount options, do feel free to give Kirsty a call on 01344 875000 or email info@kirkrice.co.uk .