Maximising cash flow and reducing bad debt

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Pearson Hinchliffe Urges Businesses to Get Cost Wise

<< News archive May 2008

8th May 2008

Maximising cash flow and reducing bad debt is now more important than ever if businesses wish to avoid insolvency during the credit crunch.

The number of firms going into administration rose more than 54% to 858 in the first three months of 2008 from 557 in the final quarter of 2007 according to the Insolvency Service. Company liquidations overall were up 2% on the previous three months and rose by 4% compared with the same period a year ago, at 3,210.

The number of people declared insolvent in England and Wales rose for the first time in a year. There were 25,264 individual insolvencies in the first quarter of 2008, an increase of 1.7% on the previous quarter.

In the current climate therefore, it is imperative that businesses ensure that strict credit control procedures are in put place to minimise the risk of late or non payment and maximise the prospect of recovering bad debts.

Chris Burke is Head of Pearson Hinchliffe Commercial Law’s Litigation team, and a specialist in debt recovery. He has highlighted a number of simple steps businesses can take to reduce the risk of bad debt. “A healthy cash flow is vital if a business is to succeed, particularly in a difficult economic climate and debt management plays a major role. All too often businesses find themselves heading for financial disaster through the lack of employing some basic financial management tools.

“It is fairly common for businesses to factor their debts with the factoring company taking a percentage share of the overall invoice. In addition, some insurance companies also offer credit insurance against bad debt, thus removing the painful consequences of a customer becoming insolvent. However, some businesses may find the cost of factoring and/or credit insurance to be prohibitive. It is therefore vital that businesses tighten up their own credit control procedures.”

Chris is keen to stress that these procedures should be put in place before a business agrees to supply to a new or existing customer. “Credit reference checks can be carried out at relatively low cost and should flag up any problems that a proposed customer may have had or any uncertainty as to its financial stability. Steps can then be taken to either walk away from the customer or ask for added protection, such as insisting that the directors of a limited company provide a personal guarantee.

“It is also important to identify precisely who the customer is. Are you dealing with a private individual, a company or partnership? It is surprising how many businesses still operate on trust. Try to record the terms of any agreement in writing to avoid the risk of dispute at a later date, even if this is by way of a purchase order or a simple letter. Set out precisely what you have agreed to supply and for what price, etc.”

The terms and conditions of doing business should be given careful consideration, as this can be a further mechanism by which companies can reduce potential exposure should a debtor company become insolvent. As Chris explains, “A strongly worded retention of title clause can mean that you still own the goods you supplied until they are fully paid for, and can recover them, even if your customer has become insolvent.”

Other tips include raising an invoice for goods and services supplied as soon as possible. The invoice should clearly state when payment should be made, and this does not automatically have to be 30 days. Once the goods have been supplied it is good practice to contact the customer to ensure the goods have been received in satisfactory condition.

It is important to enforce the time limit set out in the invoice and Chris explains the steps to be taken if these terms are not adhered to. “If the customer does not make a payment in accordance with the time limit set out on your invoice, you should contact the customer immediately. If payment is still not received, or satisfactory proposals of payment not made, then a ‘letter before action’ should be sent demanding payment within a short period of time, failing which Court / Insolvency proceedings will be brought.

“At that stage, many businesses are fearful of employing solicitors to pursue the debt, as they believe this could lead to substantial costs being incurred. However, like ourselves at Pearson Hinchliffe Commercial, many solicitors offer flexible payment terms and operate, by agreement, a ‘No Recovery ,No Fee’ service.”

It is also vital to instruct a solicitor or debt recovery specialist that ensures the customer’s full entitlement is recovered. “If you successfully recover your debt from your debtor you should ensure that you recover not only your invoice, but also interest on that invoice, costs and administration fees which you are entitled to by law, under the Late Payment of Commercial Debts (Interest) Act 1997.

Unfortunately, some debtors will still not pay even after Court proceedings have been brought and a judgment obtained against them. At that stage a business needs to seek legal advice to ensure that the appropriate and most cost effective method of enforcement action is taken. This could involve County Court or insolvency proceedings, charging orders, attachment of earnings, bailiffs or third part debt order.

As economic conditions become increasingly challenging and credit deals more difficult to secure effective in-house cash flow and debt management are key to overall success. Chris concludes, “It is inevitable in recessionary times that some debtors will simply not be able to pay because they are insolvent. However, it is in these times that businesses need to consider their credit control policy and systems to ensure that the risk to their own business is minimised. Some careful planning, combined with good old common sense can make the difference between success and failure.”

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