Cash flow management: payback time

The importance of cash flow – and its successful management – has been highlighted dramatically in the past two years. Loan facilities at traditional banks and lenders have been greatly reduced or cut altogether, while suppliers have become increasingly unreliable at paying invoices on time, in many cases because of their own cash flow problems. In business, cash is king, but for too many the king was dethroned some time ago.

The situation has deteriorated even further in recent months, as the Crown, which introduced Time to Pay arrangements to afford struggling businesses some breathing space with their PAYE, NI and VAT payments, has started to call in its debts proactively, despite many businesses still being in a precarious financial position. The result is that already struggling companies are now being taken to breaking point.

In fairness, HMRC is not being deliberately difficult, but rather its hand is being forced by the well-publicised deficit. As we all know, the government needs as much money as it can get, and fast. In a sense, by clamping down in this way, it is merely seeking payment of what is due to it just like any other creditor would. As much as we all like to have a dig at the government, if calling in its debts pushes a company under, it’s not really the fault of HMRC.

There is an ongoing debate as to whether Time to Pay arrangements were simply throwing good money after bad, or delaying the inevitable. In some cases, there is no doubt this is true. But, at the same time, it is also true that Time to Pay arrangements have been very useful for many perfectly viable companies with genuine cash flow problems that had difficulties securing borrowing. They have subsequently repaid their debts to the Crown and have moved on.

The reality, though, is that for many companies the current cash flow problems they are experiencing didn’t start during the recent economic downturn and subsequent recession. In many cases, they were always there but have simply become more pronounced in the extreme circumstances of the past two years.

The problem is that many of the struggling companies we deal with – especially the smaller ones – have consistently failed to implement proper, week-to-week cash flow management and forecasting. Instead, they have relied on very rudimentary cash flow and broader management tools, which means they don’t have the necessary financial information – on wages, business suppliers, HMRC – that is essential to establish their overall financial health and to foresee looming problems. Of course, even if the necessary information has been available, in some cases it has not been acted on.

Many companies spend too little time analyzing their cash flow, which is, after all, the lifeblood of any business. And even when they do, businesses sometimes mistake losses and far more fundamental issues for cash flow problems. The reality is that cash flow problems are often the symptom of losses rather than the problem itself.

If you have clients that currently owe the Crown and are being placed under pressure to pay, they need to act fast. Directors have ultimate responsibility to ensure all creditors are paid and HMRC is a creditor like any other. Traditionally, many businesses short of cash will pay essential suppliers or those that shout loudest, and leave HMRC waiting, but they need to be aware of the possible wrongful trading implications of accumulating and not repaying Crown debt.

If the cash flow situation at a client is complex or looking like it could prove problematic or worse, it is important to take action as soon as possible. Insolvency practitioners are able to rapidly assess a company’s particular situation and advise as to the most appropriate way forward. Most IPs offer an initial consultation free of charge so, if you or your client have noticed cash flow issues, it is essential not to delay. When cash flow problems rear their head, the only thing that comes to those who wait is regret.

How to keep the cash flowing

With a recent survey showing that 71% of businesses have suffered from late payments in the last year with more than 4,000 businesses failing in 2008 due to late payments, Matt Lees of Basware UK offers some tips on keeping you cash house in order

Dot your ‘I’s and cross your ‘T’s

Making sure you’ve entered all your details correctly can save you a lot of hassle in the long run. Missing information and inaccurate data on invoices can often cause payments to be delayed and you may not know anything is wrong until the payment has passed its due date.

Think ahead

Efficient and accurate use of purchase orders can help improve financial planning and control of spend. If all purchases are documented and approved on a regular basis, you will have visibility over your current liabilities, meaning fewer surprises in the form of invoices turning up for large purchases that the finance department weren’t aware of.

Set expectations

Don’t sit on invoices; send them out immediately and be careful to clearly state your payment terms. Don’t feel pressured to set 30-day terms. There’s no reason why you can’t set 7 or 14 days (unless negotiated otherwise by a customer) and you are likely to find that even if the payment is late, you will receive it within 14 or 28 days.

Do not be afraid to ask for payment

Do not ignore overdue invoices in the hope that they will magically be paid the next day. Make contact with the customer as soon as the invoice becomes overdue. Businesses sometimes worry that by demanding payment as soon as the credit terms have expired, they may lose future custom, but this is rarely the case.

Establish a paper trail

Set out formal terms of business or a booking form for all of your customers. It is also worth considering a provision for late payment penalties if invoices are not paid on time. They can be a strong deterrent against late payment and compensate you should invoices be paid late.

Choosing the right method for your business

It’s worth checking if any of your customers are using e-invoicing methods, so you know what your options are. Then consider which method works for your customers and request that they activate you on it.

It’s time to pay

In a recent survey by Tomlinsons, 74% of accountants surveyed said that HMRC has started to apply pressure on companies that are behind with their PAYE, NI and VAT payments. While there is growing optimism in the business community that the worst of the economic crisis may be over, many businesses will be concerned that HMRC is reacting too quickly to reports and forecasts rather than reality, particularly as more companies fail exiting a recession than during one. This concern is substantiated by the survey, with 86% of accountants polled confirming they have clients they believe will go out of business in the next six months. And even though the UK has technically exited recession, more than half of those accountants surveyed (54%) said they hadn’t seen any noticeable signs of economic recovery in the past quarter.

Alan Tomlinson is partner at licensed insolvency practitioners Tomlinsons