Managing cash flow

Below is a list of tips that will show you how to manage finances in your business and prepare you for any cash shortages.

1. Know your customer

• Check out the exact name and legal status of the business you are supplying. If it’s a sole trader or partnership, the proprietor or partners are personally liable, so make sure you have their full details. Businesses can disappear much more quickly and easily than individuals.
• For limited companies, you can perform a free check on a limited company’s basic details using the Companies House WebCheck service.
• Invest in credit reference information – it could save you bad debt in future.

2. Payment terms

• Set out and agree on payment terms in advance and in writing. It’s better to know what to expect than to leave things to chance and wonder why the money hasn't arrived later.
• Whenever you write about payment terms or write on your invoices, include the words: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms." Even if you don’t intend to do so, it can be a useful deterrent against late payment.
• Raising a further invoice for interest and late payment charges is an excellent way of gaining your customer’s attention and raising the profile of your outstanding invoices.

5. When cash runs short

• Plan your cash flow requirements carefully, allowing for differences in the payment terms you receive from your suppliers and those you give to your customers. Regularly update cash flow forecasts to ensure you stay within your financing facilities.
• Remember, early communication is key – if you avoid talking to suppliers, your bank and other parties, you might find supplies or finance withdrawn or legal action commencing if cash runs short; things will escalate quickly.

6. When all else fails

• If you can’t get paid for the outstanding debt, don’t let it grow. Stop supplying any further goods or services. If your product or service is important to your customer, it might be just the lever you need to get payment.
• Always consider the commercial reality – if the customer is insolvent or has no available funds, further action is unlikely to help. Consider the costs of any action against the size of the debt.
• Consider taking legal action either yourself or using a solicitor to do so – commencing legal action yourself is relatively easy but takes time and effort. You can take action through the courts or consider issuing a statutory demand that you can follow up 21 days later with a bankruptcy order.