Get your cashflow back on track

Can’t get your customers to pay on time – or at all? We talk to accountants, financiers and debt collectors to learn how to get prompt payment, how to deal with common customer excuses, and when to bring in the lawyers.

We know there is one big issue keeping entrepreneurs up at night – cashflow.

According to a recent study by National Australia Bank, a whopping 93% of business owners and managers said they worried about cashflow, with a staggering 86% reporting that these cashflow concerns were affecting their personal or home lives.

We know from looking at the lessons of the last recession that as the economy slows, managing your cashflow will become crucial to the survival of your business. But the downturn makes this task extremely difficult. Sales dry up, loyal customers start dragging their heels, suppliers get more demanding – and the rent and wage bills still loom large every month.

Last week, we asked our readers to send in some of the big cashflow questions they were desperate to answer. Not surprisingly, the questions were focused around the issue of getting customers to pay up.

To answer these questions – and few from our own accounts team – we spoke to a range of experts to come up with a bumper SmartCompany Q&A.

Let’s get the cash flowing again!

I’m stressing out about my cashflow and am I really worried about how bad things are going to get. Please, where do I start with this mess?

The best place to start is with some cashflow scenario planning, to find out how bad things actually are and how bad they might get.

Now, this is a task that many entrepreneurs struggle with. But CPA Australia policy adviser Jan Barned says forecasting is something that will improve with practice and experience – the important thing is to just start doing it.

Here are Barned’s five tips for putting together a solid cashflow forecast:

1. Keep it simple: Focus first on the items that affect your cashflow most heavily, and add extras to the forecast if required.
2. Standardise: Ensure procedures for collecting and reporting cashflow data are consistent across all business units.
3. Measure your accuracy: Set the level of variance from your cashflow targets you are prepared to accept, and see how close you get each month. Where targets are missed, investigate the reasons and consider if changes are needed for next month’s forecast.
4. Reward those who help: For all but the smallest businesses, putting together a cashflow forecast requires significant input from staff. Make sure they know they will be rewarded for putting in the effort to provide accurate and timely data.
5. Automate and integrate: If possible, set up business reporting and accounting systems so they provide automatic inputs into your cash-flow forecast.

OK, that has helped a bit. I now know the complete cashflow position and I can see it’s going to get very ugly, very quickly if I don’t do something about it. What now?

Hit the phones! It’s never pleasant ringing a customer and demanding payment, particularly if you are friendly with them, but unfortunately the only way to get your money is to hassle, hassle, hassle.

Start before payment is due. HLB Mann Judd Melbourne managing partner Geoff Webster recommends a reminder letter in the week before an invoice is due, although Greg Charlwood, Asia Pacific chief executive of debtor finance company Bibby says a quick phone call might get better results.

As soon as a payment is overdue, hit the phones and start hassling. Charlwood’s other hassling tips include:

• Check customers have received invoices and that there are no queries.
• Deal with the same person each time you contact the company.
• Make the largest outstanding debts your priority.
• Send out statements monthly.

But you should hear the excuses they’ve come up with. “Sorry, haven’t received that invoice yet,” they say. “The cheque is in the mail,” they say. “I’ve got a problem with the invoice,” they say. How do I respond to this crap?

There’s always some excuse, isn’t there? To help us answer this question we’ve consulted Roger Mendelson, chief executive of debt collection agency Pruska, who deals with these sorts of excuses every day.

Mendelson says the use of excuses highlights why it is so important to chase debts with a call rather than a letter. “If you are on the phone it’s interactive and there is a lot less room to wriggle,” he says.

He says the first question you should always ask is: “Is there any reason you have not paid this invoice?” This often gives the late-payer nowhere to go, particularly if they don’t have a good reason for not coughing up.

But Mendelson says there has been a big rise in the number of customers disputing invoices. When this happens, try to quickly establish whether the dispute is genuine or spurious. If the problem is genuine, figure out an immediate solution to the product.

For example, if they claim not to have received your bill, tell them you’ll fax or email one immediately, or, if they are a household, tell them you’ll put a copy in the post straight away. But don’t just leave it at that. While you’ve got them on the phone, tell them the amount of the invoice as ask them whether they are able to pay immediately.

“It’s crucial to try and get a promise out of them,” Mendelson says.

What if they say they don’t have any money?

Again, it’s a case of whether they are being genuine or just trying to get out of paying up.

Mendelson says the best way to test this is by offering to set up a payment plan. Yes, it’s annoying that you won’t get all your money in one go, but four instalments is better than nothing at all.

Any payment plan has to be comprehensive, confirmed in writing (especially the due dates) and acknowledged by the debtor. It is then crucial to follow these dates up – don’t give the late payer the impression you are weak.

If the debtor misses the first payment, then it’s time to start legal action.

That’s a big help, but I’ve still got a few deadbeats who just won’t pay a cent. What’s the next step with them?

First, it’s probably a good idea to suspend the supply of goods and services until they are willing to come to the party.

Already done that; it makes no difference.

Right, then it’s time to step things up. You have two options here – call in the professional debt collectors, or start legal action yourself.

Debt collectors? That’s going to cost me more money, isn’t it?

It will, although most debt collection agencies operate on a no-recovery, no-fee basis – if you don’t get any money back, they don’t get paid. The standard charge is 25% of the amount recovered, plus GST.

There are two big benefits. First, it takes the stress of debt chasing off your shoulders. Second, you are bringing in some professional heavy hitters who know all the hints and tricks to get cash out of people.

Any anyway, a phone call from a debt collector carries much more weight than a request from your bookkeeper.

What if I decide to go it alone?

Then you’ll need to bring in your lawyers, but be warned – these guys charge like wounded bulls and if you’re chasing a large number of debts, just sending lawyer’s letters is going to get very expensive, very quickly.

The chief executive of Dun & Bradstreet, Christine Christian, says every debt over $200 should be followed up with a letter threatening to bring in the lawyers.

The next step would be a tersely-worded letter from your lawyer, threatening legal action if the matter is not resolved as quickly as possible.

“Stop acting like a small business,” Christian says. “It’s going to be those businesses that hassle and change that that will survive through this period.”

Some of my debts are a bit bigger than $200. Can I bring in some heavier artillery?

For debtors who are businesses, that owe you more than $2000 and have no valid reason not for paying, you can issue a “statutory demand” against the company.

“The effect of the demand is that your customer has 21 days within which to pay your

claim in full, or alternatively enter into an arrangement with you,” Mendelson says. “If it fails to do this you can then proceed directly to a petition to wind up that company.”

Geez, that’s pretty drastic stuff.

Yes, but it’s also a good way to get the cash flowing. Mendelson says in most companies the threat of petition to wind up a company will need to be reported to the board, who will usually tell the accounts people to get the bill paid ASAP. It’s amazing how quickly a customer will pay up when they are confronted with the prospect of their company being closed down.

I am pretty reliant on one particularly large customer who is a notorious late payer. How can I get my money without damaging the relationship?

Christian says this is one of the most common problems amongst SMEs. “They just don’t have the confidence to be able to chase those debts,” she says. “But I think that’s sticking you head in the sand.”

The key to getting your money while keeping your customers onside is a professional approach. Christian says the first step is to call a meeting. If you’re feeling a little nervous, take along someone to help you negotiate – your accountant might be good candidate.

Explain to your big customer that this is an important issue for you and it is having an impact on your business. Don’t get too specific – they’ll get the drift – but put your foot down and make your point clear. “You’ve got to show them that you mean business,” Christian says.

If you can’t get them to agree to pay the entire invoice, at least get them to commit to instalments. To help smooth the waters, offer them discounts for early payment.

Christian says the key is standing up for yourself. “You’ll get more respect that way.”

When should I stop chasing a debt?

You need to weigh up whether the cost of the time spent chasing the debt is eclipsing the value of the debt itself.

But before you give up completely, it might be worth engaging a debt collector or lawyer for one final go.

Right; and how can I stop this mess from happening again?

According to Charlwood from Bibby, one of the first things you should do for every customer – no exceptions here – is a credit check. While it can be tempting to get carried away when you win new business (especially in this environment), Charlwood says credit checks should never be forgotten. They are quick and relatively cheap too, although make sure you get the customer’s name and status (for example, limited company or sole trader) correct before you go to a credit agency.

Done. What’s next?

Christian says that all small businesses should get out and get contracts in place as quickly as possible.

Set out your trading terms very carefully and clearly, so you and your customers know exactly where they stand.

Tell customers exactly when they need to pay (for example, 14 days or 30 days), explain how they should pay (for example, cheque, bank transfer, credit card) and clearly set out the consequences for non-payment.

Mendelson recommends the following clauses should be a part of every company’s trading terms:

• A clause setting out interest charges in the event they do not pay on time.
• A retention-of-title clause, so that you have the right to enter your customer’s premises and take back unpaid goods in the unfortunate event that they go into liquidation. This is often known as a Romalpa clause.
• A clause that makes the customer liable for all collection costs and legal costs (that is, these costs get added to the debt).
• A clause that prevents your customer offsetting another claim against a debt. That is, if the customer owes $4000 but have a claim for $2000 worth of defective goods, they must keep these two issues separate and pay the bill.
• Define the partners properly.
• A clause that specifies which state or territory disputes will be handled in (crucial for cross-border companies).

Wow. That’s a long list. Anything else?

Mendelson’s big finale is to demand a guarantee from the directors of your customer companies. In the event that the customer company doesn’t pay up, the directors will be held personally liable for the debt – there’s nothing like a bit of self interest to get the cash flowing.

“There is no reason why businesses cannot ask for guarantees from existing corporate customers,” Mendelson says.

Is there anything I can do to encourage payment that is a little less threatening?

Offering discounts to customers who pay early is a great way to build up a bit of goodwill and make your cashflow a bit more secure. You might even use a sliding scale – the early the payment, the bigger the discount.

If discounts don’t appeal, offering the option of an instalment plan might be a way to help encourage prompt payment. It’s also a great way make cashflow a lot more predictable for you and your customers.

Good ideas. Well, we’ve had a look at our situation and we are keen to change our payment terms from 30 days to 14 days. What’s the best way to go about that?

Hmmm; we’ve asked around and the consensus is you might be struggling to get this one through. “The problem is the commercial standard is 30 days,” Christian says. “You’ve got to have a pretty strong relationship with your customer to ask for shorter than that.”

Also, keep in mind that demanding payment in 14 days will be pretty tough on many of your customers – you want them to survive the downturn too, don’t you?

Fair point. You’ve given us tonnes of good tips for getting money in the door, any tips for slowing the rush of money out the door?

Roger Mendelson says you need to negotiate with your creditors – just like they do with you. If possible, try to extend your payment terms (if they ask for payment within 30 days, see if you can push it to 60 or 90 days) and get some breathing space.

Another option is to negotiate instalment plans where possible, if only to make your cashflow scenario planning a bit easier.

Otherwise, the best advice is start looking very closely at your cost base, and particularly your costs. That’s a topic for another time, but this article on redundancy will provide you with some tips if you decide you need to trim staff.

Thanks very much. Any final words of wisdom?

Yep. Here are three final tips from our experts.

Hit me.

Roger Mendelson says it’s crucial to make cashflow management a priority. Make one person responsible for the job, give them proper resources and support, and make sure they chase, chase, chase.

Got it, next.

Take the advice of our blogger Gail Geronimos (the weekly Show Me the Money blog) and check your cashflow position at least once a week in these difficult times. “If you are not tracking your cashflow every week then you may find that you can’t pay the wages,” she says. “It’s not just a matter of checking your bank balance. You’ll need to see what bills need to be paid in the next four weeks and making sure that your debtors pay their invoices on time.”

And finally?

Christine Christian says that you need a long-term commitment to cashflow and you must be consistent in your message. “There’s no point coming down heavy one month and then not bothering the next month.”