A CHAP who helps businesses in the toughest of times once told me that September is the worst time of the year for failures among small companies.
People who run small firms that are already struggling, he said, tend to bury their heads in the sand and go off on holiday.
But once they come back from the sun and sand, they find – surprise, surprise – that the realities of their situation haven’t gone away.
Managing cashflow, even in the summer months is absolutely key. And Business Link, the government’s help organisation, say there are various ways – and strategies – to encourage customers to pay on time.
If customers pay late, Business Link reckons the best bet is to contact the late payer and try to resolve the issue. It’s also an opportunity to review procedures to reduce the possibility of others paying late.
Companies have the right to add interest and debt recovery costs on to bills, but this is a power that can be exercised with discretion. It may not be worth upsetting a major customer if a payment is only a few days late.
Firms can agree any credit period they want with customers and it can be verbal, but it is preferable if it is in writing.
The law sets a default period of 30 days if there is no agreement or custom in place.
Purchasers cannot contract out of late payment legislation – that means they cannot deny the supplier their right to, for example, charge statutory interest, says Business Link.
Firms can calculate the interest payable on overdue bills by taking the relevant reference rate and adding eight per cent.
But firms will need to make sure invoices have amended terms and conditions and that customers clearly know plans – even if interest won’t normally be charged.
Businesses that sign up to the Prompt Payment Code commit to paying their suppliers on time and to providing clear guidance on payment procedures. The code is endorsed by several major banks and business organisations.
Late payment is often revealed as a main bugbear for businesses, so getting to grips with it is one way of managing cashflow.
Invoice financing can help make sure working capital is not affected by late payments.
It works by financeers, typically banks, advancing the value of issued loans. As such they can bridge the gap between requesting and receiving payment. This may be especially useful for firms trading abroad where payment times can reach toward 100 days.
Small businesses can also increase the likelihood of getting credit by improving their credit ratings, in the same way that individuals can.
The Institute of Credit Management (ICM) says a positive rating gives confidence to suppliers – and especially new suppliers – that a company is worth doing business with.
A poor rating, conversely, can seriously hamper a company’s future access to credit.
The ICM says being open and honest is the best policy as a lack of data can often be interpreted negatively.
Agencies are looking for a healthy balance sheet and good supplier relationships – in short, pay your existing suppliers on time.
Lateness in filing accounts invariably gives the wrong impression, too.
Retaining profit in a business demonstrates an ongoing investment and enhances credit rating.
The ICM also says all businesses should maintain a positive net worth and help themselves by filing a profit and loss account that explains movements and helps prevent wrong assumptions being made.
Information such as the nature of the business and VAT registration numbers should be readily available to ensure a business is easily and accurately identified.
Businesses can also help themselves by creating a dialogue with their suppliers and credit reference agencies about any specific requirements.
Every agency and credit-granting organisation uses slightly different decision-making methodology and criteria, so it can pay to know what type of information will help improve credit rating, and so help improve business performance.”