Using trade debts creatively

Good management of the money due for goods and services already provided can help a company to survive.

As the number of business failures continues to rise, and venture capital becomes scarcer, UK companies continue to face tough times. But managing receivables (the money due for goods and services provided) will help them to survive.

The extra cash they need is often in their own balance sheet. Trade debt is frequently the most valuable asset, accounting for as much as 40 per cent.

But cash collection can often be drawn out and difficult, and few companies have the resources to do it properly.

This is particularly true of small and medium-sized enterprises (SMEs). According to research by Gerling NCM, more than 80 per cent of SMEs are very concerned about incurring bad debts. And almost 70 per cent say that too many of their customers are taking longer to pay.

The answer is to outsource cash collection to the professionals, which allows in-house managers to concentrate on running their core business.

It is never easy for a small firm to ask a much larger one to pay up. However, a good receivables management company works in partnership with the client, recommending the best approach for an amicable collection of money owed.

But cash collection is just a stepping stone. The extra working capital should make it much easier to keep cash flow healthy.

A receivables management service might, for example, include a mixture of ledger management, debtor tracing, creditworthiness checking, credit insurance or even secondment management.

Each of these services has its own advantages, but cumulatively they help to tighten up a company's credit control, bringing real improvement in the average age of debts and putting money back into the business.

In setting up credit controls it is important to remember the following:

• Set a Dunning Protocol (a cash collection procedure) and stick to it.
• Stop delivery to a customer when an amount becomes badly overdue.
• Set credit limits for your customers, and do not exceed them.
• Benchmark your days' sales outstanding against industry norms.

At the same time try to avoid the following:

• Threatening to take someone to court unless you're prepared to do it.
• Being afraid to outsource to a ledger management provider.
• Providing your customers with finance facilities. If you give a customer 30 days' credit and then take another 45 days to collect, think how much you'll be paying in interest and bank charges.
• Spending the same amount of time and resources pursuing all invoices.
• Waiting until a customer has filed for bankruptcy to call in a collection agency.

Gary Hicks is head of public affairs at Gerling NCM UK.