Victoria Delafaille, a Director at Exchequer Accountancy, offers a few words of advice about preventing poor payers from ruining your day… or worse.
We owe one of the most telling descriptions of running a business to the advertising guru, Charles Saatchi. “Running any business,” he argued, “is like holding a colander under a running tap.”
“The water pouring into the colander is like the income stream from sales. The water running out through the numerous holes is your expenditure. The value in your business is merely the constantly changing pool of water that’s temporarily accumulating in the bottom of the colander.”
“If too much liquid comes in, and spills over the rim, you’re overtrading and in big trouble, because you haven’t the resources to process the work fast enough. You need a bigger colander. If too little water comes in, or comes in too slowly, your pool of funds quickly shrinks – and you’re in even bigger trouble, with insufficient money to pay suppliers and overheads. You’re technically ‘trading while insolvent’.” Or bust, in other words.
In short, Charles is right. Proper management of your income and expenditure is critical to your survival as a business.
In the UK construction industry, where some £30 billion of unpaid invoices are sitting on file at any one time, this is doubly important. It’s in the nature of the industry that main contractors delegate work to sub-contractors and they, in turn, often delegate work to independent small trading firms or sole traders. This puts SMEs, which include many plumbing and heating businesses, at the back of the long queue for payment. And nobody’s in a hurry to pay.
Your terms of business may state clearly that you need to be paid within 14/28 days, but there are endless excuses and reasons for delaying payment; not least the precise date of completion of satisfactory work and the exact date you got around to invoicing for it.
The truth is that the waiting-time of 30 days for the payment can easily stretch to 60, 90 or even more. The big players know it pays to sit on cash balances – and aren’t afraid to do so. In the interim, you have to pay your suppliers, perhaps the HMRC and the usual catalogue of everyday outgoings. Wages, supplies, premises… the list is endless.
In effect this means you are subsidising your customers’ borrowings and getting no interest for your trouble. You can get help to smooth out cashflow bumps from various sources, of course, at a price. Invoice factoring can work for some, but it adds an unwelcome extra cost. Bank borrowings will require you to provide both interest and collateral; putting your home on-the-line is never ideal.
So, what are the answers?
Cashflow forecasting – modern day accountancy is not just about preparing historical sets of accounts. Your accountant should be proactive and help you plan for the future.
Be prepared for the peaks and troughs and make sure that you have a plan ‘b’ in place. Accountants can help you plan for the main tax liabilities and see when you will be stretched, which means you can prepare for unavoidable peaks in outgoings by setting aside adequate sums in the preceding months. Don’t bury your head in the sand!
Make your terms of business clear at the outset. Insist that you will exercise your right to charge interest on overdue receipts if that is what your terms state. Do it. Change your terms and collect the interest. It will concentrate your customers minds quite quickly.
Part-invoice precisely for work done, as frequently as possible. Don’t wait for the whole job to be completed. Agree at the outset that this is what you’ll be doing. If the customer won’t play ball, don’t play at all!
Make doing your paperwork and invoicing, on time, your first priority! There’s no point in moaning about late payments when you have been lax about doing your paperwork. Don’t accept your own excuses; overworked; too tired, playing golf with potential customers; not much good at figures… Get your invoices sent the minute they fall due, or a few days before, if you’re certain the job’s nearing satisfactory completion.
Arrange the most favourable terms with your main suppliers. If the job is going to involve major outlay on materials, make arrangements with your customer to buy the materials for you. Usually they will have suppliers who will give them a volume discount anyway, so you can argue that they’ll save money by helping you out. You won’t make a mark-up on the materials but your cashflow will be spared the burden.
Use digital forecasting tools to plan your annual income/expenditure cycle.