3.3. Finance - Cashflow management

Survival and growth

A business can survive for a short time without sales or profits, but not without cash. It is cash which pays the bills and allows trading to continue. And if you are growing, and extending credit to more customers, the need for cash is even greater.

This briefing explains:

• The main components of cashflow.
• How to forecast and control your cashflow.
• Tactics for generating more cash.
• Tips on using the right types of finance for your needs.

Worth getting right

Optimising cashflow and avoiding bad debts are two key objectives of any successful business. Setting up a good credit control system is the starting point for both.

Having read this briefing you should be able to decide what approach is appropriate for your type of business - and how you should handle different customers.

The briefing explains how to:

• Decide on credit terms for customers.
• Prevent late payment.
• Deal with customers who cannot - or will not - pay.

All businesses have a legal right to claim interest from late-paying customers.

The statutory right to interest, introduced under the Late Payment of Commercial Debts (Interest) Act 1998, applies to all contracts agreed after 7 August 2002.

Late payments create cashflow problems and expose businesses to the risk that they will never be paid.

This briefing covers:

• Who can charge interest on late payments.
• How to decide whether or not to claim statutory interest.
• How to calculate how much interest to charge.
• How to claim what you are entitled to.

Better late than never

Most businesses experience problems getting paid on time by their customers. Good credit control helps to prevent this becoming a serious problem (see Credit control, FI 16).

However, there are also occasions when a customer cannot or will not pay an invoice. To avoid a bad debt (non-payment by a customer) you may need to use a third party or take legal action to recover the money you are owed.

This briefing explains:

• The key issues to consider when deciding how to proceed.
• How debt collection agencies, solicitors and arbitration can help you.
• Which legal remedies might be the most appropriate.

Managing your cashflow

You rely on good relations with creditors for the smooth operation of your business. Suppliers (trade creditors), the bank, and statutory bodies such as Inland Revenue all have a major effect on the cashflow of most businesses.

When your cashflow is tight, you may not be able to pay your bills on time. If you manage the situation well, your creditors will have more trust and confidence in you than before. But managed badly, the situation can quickly develop into a major crisis.

This briefing covers:

• Deciding your objectives for each creditor.
• Identifying your key creditors.
• Handling your bank and the taxman.
• Dealing with creditors if you are in financial difficulties.

Companies or individuals with debts they are unable to pay are said to be insolvent. By the time a business starts thinking about insolvency, things are already going badly. Simply allowing yourself to run out of money is the worst possible way of handling it. If you understand your options, you can take steps to improve the situation.

This briefing covers ways to:

• Reduce the risk of insolvency.
• Manage company insolvency.
• Deal with personal insolvency.