You start off by doing a good day?s business. Life is marvellous, you are in profit, the sun is shining, you?re in profit, God is in his heaven, you?re in profit, dammit. What more could you want?
Until you take another look at your bottom line. Sure, you should be in profit. Anyone who has sold as much product as you have over the past couple of months ought to be a) recruiting, b) celebrating, and c) agonising about exactly what sort of yacht you?re going to go for when the rush stops. But you?re not. You?re actually worrying about how your business is going to survive the next couple of months and never mind about the yacht, can you afford a pair of roller skates to get you to work on time after they?ve repossessed the car?
So what has gone wrong in this little scenario? What has gone wrong is that some inconsiderate scumbag has failed to pay up on time. The cheque?s in the post, honest, but you?ve used that line too often yourself not to be fooled by it. Says the bloke submitting his feature late to PC Dealer because of a system crash ...
But this is precisely the point. People do have genuine cash flow problems and if you?re honest with yourself you?ll have been among them at one stage or another. There are a number of ways of dealing with this before falling foul of the dreaded and fearsome species known as the bank manager.
Whenever the spectre of poor cash flow raises itself, a number of people start wringing their hands and muttering about factoring. This can be a good idea, depending on your circumstances, but then so can everything. It basically consists of sending your invoice to a factoring company which will pay you 80 per cent (normally) of its value so that you don?t hang around waiting for payments. Depending on the size of the invoice, a 20 per cent cut can be quite substantial, but if you need the money fast it can be a valid option.
Or not. Barry Raynes, MD of training and consultancy organisation Reconstruct, felt the 80 per cent was a relatively small chunk of what he would be owed anyway, but then found he was not eligible for this sort of financing. ?They only lend to companies with tangible products ? my training and consultancy company didn?t fit the bill. It?s boring, but the best way to improve cash flow is to take out less than the profit.?
Independent health food distributor Joy Healey found the same thing when she needed help with the IT-based side of her business. The bespoke software she was selling didn?t count as tangible, so the factorers weren?t prepared to take much of a risk.
Not that they take much of a risk in the first place. There?s a popular myth that you?ll get everything you are owed after their fifth of the take, but this isn?t true. If a debt goes bad they take the cash back, so you need to establish just how much of your money you are giving away in the first place, and what for.
So hold on a mo. These factoring companies chase your debts and send you four-fifths of the money, but what?s in it for them? It?s not just a question that occurs in the IT industry, as Nick Moon, who manages manufacturer ABS Cases, can verify. He is jaded by the idea that factoring is basically an expensive loan, and as with any loan it is in the interests of the lender that you should borrow as much as they reckon you can afford ? so you must ask yourself just how hard they are likely to chase any debts on your behalf. ?There isn?t much incentive for them to push to get the money in,? he says. ?If your business has a worse than average record on bad debts they probably won?t want your business.?
For most people in the low- margin business that is selling computers, factoring is a costly option. Mr 20 per cent doesn?t bear any of the risk, so if you only have the occasional slack payer in your customer list it can be difficult to see where his value actually comes into it. In fact, 20 per cent immediately for no risk ... we?re in the wrong business, folks.
So, factoring aside, and assuming you don?t want to talk to the bank immediately ? incidentally you should be asking yourself why not ? a business overdraft facility or credit zone arrangement could be the least costly means of keeping a business running. If the problem is cash flow and not the absence of work coming in, you need to look at how to prevent cash flow becoming problematic in the first place.
The easiest answer to this is offered by bespoke software company Banxia Software, which makes decision support systems. Managing director Matthew Jones has found that since his wife insisted they should get cash with every order there has been no cash flow problem at all. Understandable ? but perhaps more interestingly there has been no noticeable tailing off in business. ?We send them a pro-forma invoice and when we receive the payment we ship the goods. Funny how accounts departments can put out cheque-with-order payments within a week ...?
Hysterical, no doubt, but by Jones? own admission this is not an option for everyone. There are more universally applicable means of minimising debt damage as outlined by, for example, dealer Micro Rent?s futures director, Alexander Skeaping. ?Our decision was to spend more on credit control and make sure people were carefully briefed.? He has had no reason to doubt the wisdom of this move since. A realistic business philosophy is useful at this point, too. Skeaping has never lost sight of the fact that every sale is a potential bad debt, and needs active monitoring.
Michael Mounteney, MD of Landscraft Computing, is also of the ?manage from the ground up? school, and believes that a lot of the problems suffered by smaller companies come from a lackadaisical attitude from the client companies. ?Maybe there is no genuine malice in their lethargy, but they make no effort to set up systems to ensure that payments are made when they should be,? he says. ?Basically, they leave the admin up to you, by expecting you to chase the money through their system. The usual story given out to creditors is that there is no one on site who can sign a cheque, a theory that Mounteney treats with scepticism. The experience is not uncommon. ?I know a number of companies who don?t pay until you start chasing,? says Paul Lynch of Next consultancy PL Systems. ?And a few more who are ineffective enough, deliberately so or otherwise, that chasing gets you paid a lot sooner.?
The only answer in these cases is to build the chasing into your routine, and allocate resources accordingly, as Micro Rent does. There is a system at the DTI for chasing late payers but it is very new, and the experience of people PC Dealer spoke to was that incoming calls are treated as much as sources of in- formation as prompts for action.
None of the above needs to be taken as a substitute for having solid business systems in place, nor can it work in place of having the courage and gumption to tell people when they owe you money. Mounteney says he has seen businesses suffering simply because they can?t admit to customers that they have a problem and need someone to cough up early. Several individuals spoken to admitted to fearing the loss of customers if they chased them too hard.
This last point is something of an illusion in fact; a good customer won?t mind being reminded of an outstanding debt ? the last thing they want is for it to turn up in the next financial year and throw their internal systems.
The other thing that is a terrible mistake is to resort to any of the above strategies only as a means of fire-fighting ? they need to be in there at the start.
No factoring company will want your business if you already have a serious problem (or ?if you actually need them? as we cynics tend to put it), and the experience of Jack Duckworth in Coronation Street recently, illustrates neatly, if bumptiously, that asking people for money after your crisis has hit is a bit of a non-starter. If you want factoring, build it into your business plan and it should work for you. There are companies, and Mounteney has seen several, which start flurrying around sending invoices out whenever there is a cash flow problem ? the solution is to plan a flow of work and invoicing in the first place.
In spite of all this there is always going to be someone who is late paying. It may be a large company which can be hit by small claims court orders, garnishee orders or any of the other legal means available to you, but if it?s a small trader this might not always be the most efficient route.
A final thought is the effect your cash flow difficulty is likely to have on your suppliers. You can?t pay them money you don?t have or can?t borrow. Mounteney has a useful tip: ?If I can, I pay small suppliers with whom I have a trading relationship by return. The brownie points are always useful.? Especially when you want them to be patient with you later.
Prevention is better
An old colleague used to make a habit of getting into the red. The banks became tired of this and sent the usual standard letters, which had no effect. Eventually his manager submitted a letter that said, ?Dear Mr X, Let me explain the basic principles of banking. You are supposed to bank with us. We appear to have had several thousands on deposit with you for some time and we?re sure this can?t be right ...?
Not all banks are gifted with such a sense of humour, and in this age of computerisation some of them actually end up lacking the human touch quite badly. Nevertheless, when PC Dealer did a quick ring around the main high street banks they all came out with similar advice if you want to avoid the men in suits knocking on your door. First, bear in mind the banks all want to help, (and do bear in mind we were asking for on-the-record, quotable stuff, so they would say that, wouldn?t they?), but they can only do so if you keep them in touch at every stage.
Perhaps oddly, it isn?t a bank but Micro Rent?s Skeaping who sums it up best when he points out that a lot of banks only hear from their customers when there is a problem, so there is no relationship established while things are better. ?When we went to the bank a while ago asking for help the manager said, ?of course, we?ve known you guys for 10 years and you?ve never put a foot wrong?. This wasn?t quite true but we let it go.?
The small claims court
If a debt starts getting out of control, one option is to go to the small claims court to get it back. There is a one-off charge and your local county court will be happy to help talk you through the form you need to fill in. There are obvious advantages to this, and if someone fails to pay afterwards you have the option to serve a winding up order on them. Many people would pay up after this or, if they can?t pay, you might argue they shouldn?t be in business anyway and after you?ve finished, they won?t be.
But if the debt is particularly small, it?s worth bearing in mind the time these things take as opposed to the likelihood of getting your money back. Is it worth the gamble, compared with the amount you could be earning while you?d otherwise be in court? And suing can do one of two things for your image. First, it can put people off trading with you because you have a reputation for litigation. On the other hand, if they?re going to be put off by the idea that they might have to pay, who needs them?
A note, though. Some people have been known to try filling the court form in and faxing it to the debtor, with a cover saying ?this goes off at the end of the week if you don?t cough up?. This might sound a good idea and indeed it might just do the trick ? but if you get found out using court-headed paper when you?re not a court you will face a hefty fine. This counts as passing off, and is illegal.
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