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Delayed or non-payment is the most serious problem facing small and medium sized businesses today, according to one of the North West’s top commercial litigators.
According to Christopher Burke, commercial litigation partner, an even greater threat than the current tight credit conditions is firms’ inability to get invoices paid for the goods they have sold or services provided.
“So many firms invest time, money and personal energy in their supply chain, from R&D through to marketing and production but inexplicably fall at the last, most crucial, hurdle and that is actually getting payment. Cash is the lifeblood of any business and a shortage can quickly kill it off. This is why there are, on the face of it, good businesses with healthy sales that become insolvent simply because they lack robust credit control procedures”, Christopher Burke says.
A recent study by Leeds University found that one in four insolvencies in Europe is caused as a direct result of late payment. The research also found late payment on the increase, with a 500 per cent rise in county court judgements over the past two years. Their gloomy conclusion was an estimated 66,000 businesses going under by December 2009, a 3-fold increase on 2008.
“Smaller businesses tend to have a greater reliance on short-term bank and trade credit which makes them more vulnerable in a tight credit environment.” says Mr Burke.
He adds, “There are several simple things a business owner can do to put their business on a steady cash flow footing. I have heard of accounts departments using techniques like hand-delivering bills and even sending out invoices on brightly coloured paper, but by observing these 3 good basic practices business can take control of their cash flow.
1. Understand ‘cash flow forecasting’ - This is accountant’s speak for predicting how much you think you will spend on acquiring and servicing a client and how much you are likely to receive in return. It has many elements to do with your budgeting encompassing all your investment versus income in a given financial period.
2. Bill promptly - Remember credit is a privilege not a right so set deadlines so the customer knows what’s expected of him. You might even offer small discounts for early payment which can be enough to incentivise him to put the cheque in the post today rather than 10 days from now.
3. Know your clients - Research a new company before you agree to supply to them; trade references can shed light on a company’s reputation. Credit reference checks can be carried out at relatively low cost and should flag up any problems. 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. Also be alert to existing clients’ behaviour. When previously prompt payers start to delay, it can be a sign of trouble ahead.
However, when your procedures fail to recover the more troublesome commercial debts and it comes time to bring in the lawyers, a solicitor’s ‘Letter Before Action’ threatening court action is normally the first line of attack. The cost of these is normally low enough to still make it worthwhile and they carry a lot of weight, more often than not bringing a quick settlement. In the more substantial cases, if your case is strong, solicitors will proceed on a ‘no win no fee’ basis.
As a gesture of support to businesses, Pearson Hinchliffe Commercial Law is offering their Letter Before Action service for £5 + vat per letter, which is 75% off the normal cost. For more information, please use the contact details provided below.
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0161 785 3500
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