Category Archives: Management Accounts Guide

Lucky Escape?

Just before Christmas a consulting firm that I had previously delivered some training for went bust. This was totally unexpected: the firm seemed to be doing well and had lots of new projects planned for 2020, but it was part of a bigger group and it appears that all was not well elsewhere in the group.

Obviously this was a tragic development for the staff who lost their jobs a couple of weeks before Christmas. In conversation with my contact just after the news she told me that she was impressed that I had insisted on invoice being paid promptly and therefore escaped being caught up in the insolvency.

I didn’t think too much of it at the time – the training was delivered in October and we had agreed that payment would be made during November – but her comments got me thinking.

Managing credit is always a challenge. In reality terms are often dictated by the customer and if you want to retain the contract you have to comply.

Once the product or service has been delivered it is difficult to apply pressure if payment is not forthcoming, even if you have included wording in your contract which states that goods have to be paid for before ownership transfers. Many businesses that I have encountered don’t even create a contract before they start supplying.

I am not bragging here about having escaped a bad debt; I firmly believe that this is more about luck, but in reality the only way to reduce your risk of not being paid is to be prepared.

Start out as you mean to proceed
Have a contract or at least terms of sale which outlines all of the responsibilities of both parties: it doesn’t need to be seriously legal: you could use an industry standard template but depending on what’s at stake it may make sense to speak to a solicitor.

This will cover the basics of what you’ll deliver and when, how much you’ll be paid and when, but also you might like to think about the worst cases of what could go wrong and what you’d be liable for if that happened. Are you planning to charge interest if you are not paid on time? What should happen if either party wants out of the contract – notice periods? reasonable compensation?

By setting out these points in advance (and highlighting them to the customer) you set the right expectations for your trading relationship, and you protect yourself against future issues, however unlikely they seem now. Crucially in the case above, my terms actually required payment at the end of October – so I was able to enquire about payment promptly and refer to the contract that the customer had committed to.

Unfortunately, having a contract alone doesn’t ensure that customers will pay on time. So what can you do to give yourself the best chance of being paid?

Make a conscious decision to give credit
Do you want to give your customer time to pay you? Wouldn’t the money be better in your bank? It may be common practice to offer credit, but that doesn’t mean that you need to offer every customer unlimited credit, for an unlimited period.

It is worth doing some research to ensure that the customer is who they say they are (identity theft is not just confined to individuals) and that they have a trading record that supports your faith in giving them goods without payment. At this point (when they want to buy from you, but haven’t got the goods yet) you have more power to ask them for accounts and supplier references “just for admin purposes”, so create a credit application process and follow it!

Follow up references and look for credit checks. This is not fool proof, it’s all historical information, but it can provide useful background and potential negotiating information.

Setting credit limits can be a useful tool in ongoing trading relationships – if you enforce them. Regardless of what payment terms have been agreed if you have decided that £5,000 is the maximum limit of credit that the customer can have, then you should not allow them to have more than that.

More importantly than anything else never give more credit than your comfortable with to a potential customer purely because they represent a “high profile” or “prestigious” opportunity. They may present marketing capital but what you need is money in the bank!

Keep good records
To keep on top of customer credit you need to have up to date information – how much has been sold, when payment is expected and the current outstanding debt. If you can’t trust the figures you have you will never be able to chase up payments with confidence and you may well miss warning signs.

As well as giving you information to use to control the risk of not being paid on time, up to date records also allow you to automatically send statements and payment reminders promptly – a simple and easy way of ensuring customers know how much is outstanding on their account.

Establish a relationship
In my experience the best way to ensure invoices are paid on time is to build good relationships with whoever pays the bill at the customer end. Whether this is the customer themselves or a member of their team, being friendly and helpful pays off.

For example, if you’ve given a new customer 30 days to pay why not call up a little while after the first invoice has been sent to introduce yourself?

Check up that you have the correct address details and that they have your bank details. You could try to find out more about how their system works: when should you expect to receive payment? How often do they make payments? (one of my clients pays everything on the 10th – chasing ahead of that is a waste of time)

This will help you feel more confident and if there is an issue it will be easier to find out about it and correct it.

Sometimes things will go wrong and there are not always warning signs, but if you have set up an easy to follow system that keeps you updated you can reduce the chances of being left with a bad debt and my favourite tool for improving cashflow. If you would like to enhance or review how you handle customer credit then drop me a line.

Taking stock of the value of stock

One of the most common questions I find myself helping businesses to answer is “Where did all the money go?”

Even in the most profitable businesses it can sometimes feel as though there just isn’t enough cash to pay all the bills.

Usually (* but not always) the culprits are increasing customer debts and increased levels of stock. I posted a blog about debtors previously; basically the key is to know what you’re owed and make sure the customers pay.

Stock can be harder to pin down. It’s easy to see, but it takes time to keep track of exactly what you’ve got and unless you know for sure what’s in stock how can you be sure it’s what you need.

Surely having stock is good?
Stock is an asset of your business – goods held so that you can sell them at a later date.
The problem comes when you have already paid for the stock, or paid for the stock to be made.
Until you sell the stock you can’t get your money back.

So you could think of having stock being like having piles of money locked up in a warehouse.

But I need stock to be able to meet my customers’ orders…
That’s right you do need some stock, and some businesses need a lot of stock. The key thing is to make sure you don’t have too much stock.

There are two parts to this:
1. First the only accurate way to know what you’ve got in stock is to go find it, and count it, and repeat regularly.

This might be time consuming to start with, but usually the more you count stock the easier it gets. You’ll have better awareness of what you have in stock and where it is.

Initially all you really need to know is the quantity of stock that you’re holding, but to see the whole picture you need to know the value too.

Be realistic about this – you need to know how much you paid for the stock, and also how much you can sell it for.

2. Next you need to have a forecast of how much stock you’ll need.
Forecasts don’t predict the future, so there’s no need to get hung up in too much detail. How much stock do you need to cover the time it takes for replacement stock to be ready or delivered?

But it’s cheaper to buy in bulk…
Sometimes suppliers offer cheaper prices for bulk orders, but it’s only a bargain if you actually need all that stock!

A bigger problem can be where suppliers set a minimum quantity per order. Depending on what your forecast says you need it may be worth paying much more to buy just what you need from a different supplier.

So managing stock will help cash flow, but it won’t make me any more profit…

Actually I think it will:
– It’s likely that you will waste less because you know exactly what you’ve got and what you need
– You won’t need as much space for storage, and you won’t need to ensure the stock either.
– You won’t be paying interest on a bank loan (say) to fund all the cash you’ve got invested in the stock.
– There’s less chance that you might be left holding stock that you can’t sell, for any number of reasons – maybe your customer changes to a different supplier.

If my sales increase I’ll need more stock…
That’s true. What often happens is that when sales increase you end up with more cash tied up in debtors and stock, so life gets more difficult.

If 50% of your costs of sales are in raw materials, and you find a new customer who buys £10,000 per month then you will have to find £5,000 extra to cover the cost of additional stock purchases.

This is when you really need a plan – the extra cash flow or “working capital” that you need will have to come from somewhere and life is easier if you plan in advance.

In short, if your business holds stock you need to make sure that you’ve got good information to hand so that you’re looking after your investment.