Tips to improve cash flow
One of the main reasons for business failure during recession is late or non payment of debts. If you are struggling to persuade your customers to pay, there are a number of actions you can take to get them to part with their cash.
One of the main reasons for business failure during recession is late or non payment of debts. If your customers pay very late or not at all, this may put your business in an extremely difficult financial position. In turn, you may need to delay payment to your suppliers and so the problem moves on through the economy.
Here are some tips to persuade your customers to part with their cash.
- Get your solicitor to write a letter before action (LBA)
A Letter Before Action is really a written warning to your debtor of the action you are prepared to take if your debt is not paid. The letter will normally imply that court proceedings will be issued and costs and interest (see below) added to the debt. Involving a solicitor will incur cost, but the reality is that debtors take a solicitors letter more seriously where they may ignore a threatening letter written simply on your company’s letter head. - Include interest in your claim
The Late Payment of Commercial Debts (interest) Act 1998 is not well known, but gives businesses a statutory right to claim interest from other businesses for the late payment of commercial debt. If you do not already have provisions for adding interest in your standard payment terms, you can add such under this legislation. Your calculation of interest should be included in any letter before action that you send to debtors. - Pursue County Court Proceedings
Depending on the size of the debt this may be cost effective. If you do decide to instruct recovery experts, the advice is always do this sooner rather than later. It is likely that the firm you are pursuing for payment also owes money elsewhere. However, be mindful that if a County Court Judgement is agreed in your favour, the debtor may choose to ignore it and continue to avoid payment. - Threaten a winding up order
The threat of a winding up order has become much more prevalent as a debt collection tool in the past 12-18 months. Any individual or business owed more than GBP750 can petition for the winding up of a company. This threat has significant teeth.
If the petition is granted by the court, this will be advertised in the London Gazette. The advertisement will be picked up by the businesses bank. As a result the bank is likely to freeze the company bank accounts until the petition is either withdrawn or the winding up procedure ordered by the court. Clearly to have a bank account frozen is a massive inconvenience for any business. With this threat, a debtor is more likely to repay what they owe than if they were to simply face a county court judgement.
In the current economic environment, it is extremely likely that you will face the late or non payment of invoices. If your business is owed money, it is of course preferable to come to an amicable informal agreement for this to be repaid. However, where this is not possible, it is important that you take action to collect debts and as far as possible, protect your own business’s financial position. The best advice is to act swiftly and do not be afraid to use the threat of court action where this is necessary.
Resources:
Derek Cooper is Managing Director of Cooper Matthews Limited, and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services Advice and Business Refinancing, providing straight forward insolvency advice for businesses with financial problems. They have significant experience in working with small to medium sized businesses.
Find out more about Insolvency Recovery Options at http://coopermatthews.com/business-recovery-services-advice.html
Prior to Cooper Matthews Derek Cooper was the Managing Director of Wilson Philips specializing in personal insolvency and financial restructuring. He previously worked for 11 years as a financial advisor for Allied Dunbar, and later the J Rothschild Partnership.
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