Mastering recessionary cash flow

AS A DEBT collection agency, we have heard every excuse in the book for withholding payment. The great British weather, often too hot or too cold, is blamed for dampening profitability and small and medium-sized enterprises’ abilities to pay; we even had a remembrance garden blame a shortage in deaths for its lack of cash flow. The most common reason, however, is simply that the business is awaiting payment from its client.

More than an inconvenience, this cyclical late payment culture is a major factor holding back SME growth. Large corporates are the worst offenders when it comes to late payment, according to the latest research from BACS, owing a massive £24bn. Its late payment study found that the average owed to SMEs at any one time is £27,000 and the length of time SMEs have to wait is an average of 39 days beyond agreed payment terms, an increase of nearly eight days since June 2009.

With such payment delays, it is crucial to properly manage credit. As an accountant and having worked for a number of SMEs, I thought I was pretty clued up on credit management. That was until I joined a debt collection agency, where credit control is our bread and butter.

The reality is that SMEs are not using all the tools available to them to make informed decisions when giving credit. It’s not as simple as sending a statement and following up with a letter or call.

• It is essential to perform credit checks when providing credit. We recommend checking out directors personally and asking for personal guarantees if there are irregularities. Don’t be afraid to ask for bank and trade references too.

• Act quickly to iron out any disputes. Effective credit control processes and clear customer guidance can help ensure potential payment problems are addressed early. Good practice in this area includes prompt invoicing, accurate statements explaining exactly when payment is due and regular liaison by phone when payments are late.

• Credit limits must be reviewed regularly. This should include follow-up credit checks. Watch out for signs of fraud: we often see cases where a company has placed a few small orders and paid with cash and then asked for much larger credit orders before absconding or becoming insolvent.

• All employees should be aware of the importance of credit control. For example, front-facing staff such as sales personnel who visit clients’ premises can provide valuable insight into how well a business is doing. Are they busy? Do they have good stock levels? What cars are parked in the car park?

• Do not stop chasing. Many SMEs are not aware that they have six years to pursue debts even if they have been written off. Even if a debt has been written off, it is worth continuing to chase it because if collection is subsequently successful then any VAT claimed can be repaid.

As a last resort, if a business is withholding payment, we find the threat of insolvency is far more effective than a County Court Judgement (CCJ). The majority of debtors are so worried about formal insolvency proceedings that, in the majority of cases, they pay up and there is no need to follow with an insolvency petition.

SMEs can run up huge legal fees through solicitors trying to secure and enforce court judgments. The average time for a small claims hearing (under £5,000) to take place is 31 weeks, which, coupled with solicitors’ fees is far too long. To make matters worse, many debtors are no longer afraid of a CCJ being registered against them, so even when a creditor is awarded judgement in their favour, there is no guarantee that they will ever recover the money owed to them.

Finally, do not give up unless a debtor is in bankruptcy or liquidation and only then if all their finances have been checked to ensure THAT there are no dividends to pay out.

Stephen Ward is finance director at debt collection agency Daniels Silverman.

Related reading