PracticeAccounting FirmsCash flow management: payback time

Cash flow management: payback time

The Crown is starting to call in its debts, which is putting yet more pressure on companies that are struggling with cash flow

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

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

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