The most important aspect of running any business is managing the cash flow, as companies which fail to get a grip face insolvency and ultimately bankruptcy. This was the warning given by two keynote speakers at a seminar for the leaders of small and medium-sized businesses, who had gathered at Metro Bank last week. Adam Hignett reports...

Tina Clay, a chartered accountant at Tunbridge Wells-based firm Foot Davson, spoke, as did Philip Beavan, a senior account manager for cloud-based accountancy software firm Xero

Emphasising the best way to manage cash flow, Mrs Clay said: “You need to look at it in three ways, sales and debtors, purchases and lastly how you manage those balances.

“After agreeing clear payment terms so people know when to pay, make it easy for them to pay you by accepting credit or debit cards, then invoice quickly and not put it to one side and let ten days go by.”

‘It seems obvious businesses need to chase unpaid invoices’

Failing to be proactive in ensuring payment by the deadline will quickly sink a business, she said, especially start-ups, an issue made more relevant by what she believes to be the high number of start-ups in the area.

She added: “It seems very obvious, that businesses need to chase unpaid invoices, but it’s amazing how many people don’t.

“You have to keep track of who owes you money, who has paid and who hasn’t. It doesn’t matter what the system is, whether its computer software or just two piles of folders.

“Then keep track to get the money in as soon as you can, to reduce the impact on your capital.”

Mrs Clay explained the other ways of improving cash flow when it comes to paying suppliers.

She said: “Obviously you don’t want to go too far when it comes to delaying payments, but what you can do is see if you can get credit accounts with suppliers, and try and pay when you get to the due date, not when you get the invoice.”

“You should work out the pinch points your business faces to ensure you have enough capital, whether it is payment of salaries, the quarterly VAT bill or stocking of supplies.

“Day by day, keep track of the money coming in and going out, because if there is an issue, you can do something about it by prioritising payments and chasing up debtors.

“The key thing is really understanding what your business is like and having a plan for the what ifs, such as, what if my sales take longer to build than I thought or what if I have to reduce my prices to make sales?

“By ensuring a healthy and well worked out cash flow you will be better prepared for these eventualities.”

Philip Beavan, the senior account manager for Xero in the southeast, said he broadly agreed with most of what Mrs Clay said, but argued that in the long run, it is best to pay invoices as quickly as possible.

He said: “It is a legitimate position to take, for some businesses to wait until the maximum due date if money really is tight.

“But our approach is to always pay as early as possible and not try and delay for as long as you can.

“By proving you are reliable you can sometimes push for better terms or favourable rate. It is as much about reputation as anything – look at the damage to Tesco over their late payments.

“It also gums up the system, delaying your payments can have a knock-on effect down the line and end up being a vicious circle.”

But he said there was no doubt Mrs Clay was correct in her emphasis on ensuring any money owed to the business was chased up as quickly as possible.

He explained: “Too many businesses focus on the balance of cash rather than the drivers and mechanisms of pulling that cash on to the balance sheet.

“In terms of pushing back on spending cash, that’s quite easy, but people who are slow off the mark collecting cash face the biggest problems later.

“Those who chase up their money a week before the invoice is due on average collect 42 per cent more money within the terms of their agreement then those who only chase up once it is already due.

“The upside to collecting on time is a massive drop in bad debts, by around 17 per cent.”

‘With 13-day terms, you will get paid in 30 days’

On ensuring money is paid more promptly, he asked those attending to question why they felt obliged to give 30-day payment terms, just because it is the conventional thing to do.

He said: “If you offer a 30-day term, on average, you will get paid in 47 days.

“A company with a £200,000 turnover per annum, working on this model, at any one time including VAT will have about £31,000 outstanding.

“Of that, about about £11,000 will be beyond term. To reduce this, you must chase up money earlier and if possible ensure your terms of payment are shorter.

“About £24bn of invoices go through Xero every year, and from that data, we found that if you offer 13-day terms, you will get paid within 30 days.”

He said late payments in the past two years had been behind almost a quarter of business failures.

He added: “This is not because of bad debt, the money is there, it’s due, but they just didn’t collect it fast enough.

“About a fifth of small businesses we surveyed only had overdrafts, or had invoice financing or some other credit line, because of late payment.

“So the debt they have is not there for investment, or growth but simply to cover the fact they cannot get paid on time.”

He also believes businesses should routinely take into account running credit checks on clients, an issue he believes is particularly bad in the southeast.

He said: “Many companies down here are very lax on checking, or do it once and never again. But if your client has a bad credit score you need to know and take appropriate steps.”

Tunbridge Wells Cash Flow

Neil Emmerson, local director of Metro Bank, thought the advice to small businesses was invaluable.

He said: “What they touched on with regards to shortening payment terms from 30 days to 13 was very interesting. Usually if you are starting up, cash flow is one of the biggest problems and businesses need to ensure there is always money around. People need to understand that for every pound you spend on the business, it does not mean you will always generate another pound in return.  If you do not ensure you get this balance right, your company will suffer.”

John Sayer, of the Invicta Chamber of Commerce, said ensuring a steady cash flow is always a top priority for their members.

He said: “It is always there as an issue. Our members are often concerned about is as it can make or break a company so we recommend they get on top of it as quickly as possible.”