World heavyweight boxer Joe Frazier, once said: ‘The punch that knocks you
out is the one you didn’t see.’ If you saw that punch coming, then you would
probably have avoided it, or at least rolled with it.
Similarly, in business, if you don’t perceive the problem of cashflow
arising, then you are more likely to get floored when it does hit you.
Cashflow issues are not something that happen overnight, but a problem that
accumulates over time. But most businesses don’t forecast or plan their
cashflow, so they only see a problem when it’s too late.
Sooner rather than later
It doesn’t have to be that way, though. PricewaterhouseCoopers’ Business
Recovery Services partner, Peter Buckle, says the basis to maintaining good
cashflow is all about ‘getting the money from customers sooner and managing
‘Late payment is knocking £20bn a year from the UK economy,’ Buckle says,
quoting a survey by the Credit Management Research Centre.
The survey shows that a little more than one-third of companies consider late
payment as the biggest threat to their business, with 25% of all insolvencies
resulting from late paying customers.
The research also reveals that only 21% of businesses use statutory penalties
to enforce late payment.
Buckle said that in more than half of the cases, the reasons for late
payments were due to administrative inefficiency or deliberate late payment.
‘People tend to prioritise payments depending on who has asked them to pay. We
recommend a proactive call by the company a week before the invoice is due, to
ensure there is no late payment,’ he says.
He also recommends performing a due diligence credit check on any new clients
to assess any potential credit risk that they might pose.
Buckle also suggests that you ensure basic administration is set up properly
with clients from the outset. ‘When setting up a customer account, get the
basics right,’ says Buckle. ‘Details such as the wrong name, or an incorrect
address could mean a late payment, and enough of these will bite into cashflow.
Make sure terms and conditions are clearly communicated to the finance
Areas of attack
Low profits, working capital, and capital expenditure and investment could
all be associated with companies running out of cash. Here’s how to make them
work better for you:
1 Low profits should be tackled by improving the selling
price, improving the gross margin you sell on and reducing your cost base. In
doing so, don’t forget to improve your processes for lasting change because,
while change could be invaluable in crisis situations, it needs to be
fundamental enough to optimise earnings and cashflow.
2 You should have as little as possible invested in working
capital. This means you should have as little invested in stockholding as you
can Ð just enough to service your customer base. Collect from your debtors as
fast as you can and reach proper payment terms with suppliers. If suppliers
don’t deliver what you expected, then withhold payment until you’ve received
what you agreed on.
3 Capital expenditure is about an investment appraisal.
Examine whether the business has good governance processes around investment
decisions that are taken. Is it being invested in the right product or project
to get adequate turnaround? Or is it spending too much on something that will
not work, or is unlikely to turn around profits?
4 Most importantly, you should have a cashflow forecast. Too
many businesses don’t forecast their cash position. But it is valuable from the
point of view of meeting targets, ensuring that you have sufficient liquidity
and banking facilities for the business.
A good business will have cashflow forecast in place to map the impact of
ongoing business and forecast trading and the impact of investment decisions on
its future cash requirements. This will ensure it can operate within its
With a national business, it is important to ensure cashflow is forecasted
and controlled at individual entity level and not just group level. A local
business may be relying on local banking facilities and it is important to
understand the cashflow dynamics to give the group confidence of having the
right facilities in the right place.
Beating late payment
- Get the basic administration details right to ensure correct billing.
- Allocate cash to the correct accounts.
- Make sure invoices are sent in good time so you don’t miss your own payment
- Have systems in place to electronically bill customers.
- Reconcile the sales debtor ledger to the general ledger.
- Agree payment terms and times with suppliers. If you’re looking for a
discount, look at better payment times to obtain the discounts.
- Negotiate with your bank to have quick availability of cheques in your
- Make use of banking automated clearing system (BACS).
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