accounting & finances

Getting paid on time is a never-ending concern for small businesses. An SFA surveys show that, on average, it takes 62 days to get paid, even though the majority of payment terms are 30 days. This causes serious cash flow problems, requires firms to extend overdraft facilities, and consumes a great deal of management time. The European Payment Report 2015 found that half of Irish companies say that late payments threaten their survival. So, what can you do to get paid on time?

How can you protect your company against the scourge of late payers and bad debts? Dealing with late payments is a question of the policies and practices of individual businesses, but also of the broader payments culture in Ireland.

Should I offer my customers credit?

Firstly, if credit is not required, don’t give it.

If you do extend credit to customers, make sure you do your homework. Assess the risk by gathering information from the company itself as well as from external and independent sources. These could include trade references, bank references and even credit agency reports. Remember, in the management of credit, information is power.

Categorise new customers according to risk. Vary the credit limit and payment terms accordingly. Be wary of letting the purchaser impose their own terms and conditions of trade.

Ideally, put contracts in writing and ensure they contain a fair payment period that both sides can live with, details of interest to be paid and a mechanism to deal with disputes.

Don’t forget to monitor and review existing customer limits. Consider their payment performance, the value of the trading relationship and its profitability. On this basis you may decide to offer them exclusive terms as a valued customer, maintain the existing relationship or put them on a stop list.

How should I manage that credit?

Proper credit management practices are a must in all businesses. Know who owes you what and when they should pay by continuously tracking the type, amount and due date of invoices.

Statements, regular telephone calls, emails and reminder letters should be used routinely in the collection process, even before the account is considered to be overdue.

When phoning, always try to speak to the person responsible for payments. Find out their payment system (e.g. the frequency of online payment or cheque runs). Take a note of the conversation and the commitments made and put a note in your calendar to follow up.

If a final reminder is required, it should be addressed to a senior official, such as the Finance Director, notifying them that if the debt is not paid by a certain date, it will be passed to a solicitor or collection agent.

Can I charge interest on late payments?

Interest can be applied to late payments – although almost three quarters of Irish firms decide not to do so. This can be from fear of losing business, gaining a reputation as a difficult supplier or because the customer is perceived as too big to challenge.

Remember, if they are allowed, others will use you as their cheapest source of credit. Decide your policy on late payment interest and stick to it.

Interest can be charged automatically if the supplier has not been paid within 30 days (if there is no written contract) under the Late Payment in Commercial Transactions Regulations 2012. The rate is set for six months based on the European Central Bank interest rate on 1st January/July, plus 8%. The current late payment interest rate is 8.05% until the end of 2015. Penalty interest should be calculated on a daily basis and equates to a current daily rate of 0.022%.

Aren’t late payments just part of Irish culture?

The European Payment Report 2015 shows that Irish companies suffer more late payments and bad debts than their European counterparts. Irish companies write off an average of 7% of their yearly revenue, compared to a European average of 3%. So, getting paid on time also depends on the prevailing payment culture.

An important new initiative was launched by Government this month, supported by the Small Firms Association, which aims to drive Ireland towards a culture of paying bills on time – the Prompt Payment Code.

By signing up to the code, companies agree to pay on time and give clear guidance to suppliers on payment procedures. The ultimate aim is that companies will choose who to do business with on the basis of whether or not they have signed up to the code.

Mostly, when small businesses fail, they don’t run out of ideas, customers or products – they simply run out of money. Managing cash flow and credit is a challenge for any small business; but by putting in place clear policies and adhering to them, you can put your company at the top of your debtors’ payment lists. And by signing up to the Prompt Payment Code and checking if your customers have signed up, you can steer Ireland towards a payment culture based on certainty for all parties.

As entrepreneurs, it can be tempting to take every piece of work or contract we are offered. It’s exciting to see sales growing and growing each month, or week; but sometimes this can be a bad thing. Often, companies that are experiencing rapid growth can be at risk of overtrading.

Before I started my own company, I spent five years dealing with businesses in financial difficulty. There were a few successful turnarounds, but more often than not I saw promising business in the position of having taken on far too much work that they just couldn’t handle. In spite everyone’s best efforts, they usually ended up in liquidation.

Overtrading means carrying out too large a volume of trading in relation to the amount of long-term reserves in the business. A business that is overtrading doesn’t have enough capital for the amount of trading it’s carrying out.

How do you know if you’re overtrading?

• High rate of sales growth
• Low profitability – Are you reducing your gross profit margin to increase your sales? Are your expenses getting too high (e.g. administration costs) in relation to the increase in sales.
• Insufficient reserves – Are retained profits low?
• Large increase in inventory and trade receivables – Systems that worked well to control inventory and receivables may not work efficiently with a larger business. Inventory takes longer to clear and collections take longer.
• Financing the company using current liabilities – Are you taking much longer to pay suppliers, or is your overdraft increasing significantly?

Why is overtrading a problem?

In a word, insolvency. If your sales keep growing, and your company cannot finance that growth from its own resources, your bank may refuse credit and suppliers may refuse to deal with you. Also, suppliers that provide you with goods on credit may get frustrated and stop supplying you with the key products you need to continue trading.

If your company can’t pay its bills and invoices as they fall due, you may be insolvent. All of this could be because your company has inadequate liquidity due to insufficient long-term capital funding and reserves.

How to fix overtrading

There are two key ways to reduce the risk of insolvency by overtrading, namely:

1. Increase your capital: Take on additional investment or long-term borrowings.
2. Reduce the volume of business you’re conducting: Although this sounds counter-intuitive, if your business can’t support the level of business you’re currently getting, it’s a good idea to slow things down a little. Focus on more profitable contracts or pieces of work. This will allow your company to increase its reserves in a timely manner, and go for the bigger jobs when it has the resources to take them on comfortably. Use this time to plan out how you will cope with larger quantities of work, so that your costs don’t dramatically increase with additional sales.

Whatever method you do take, make sure you keep your bankers and suppliers on side at all times. Because no remedial action will be enough if they decide to pull the plug.

Startups need cash to keep going – it’s a simple case of having money so that you can make money. Most entrepreneurs get preoccupied with finding sources for large scale funding, rather than concentrating on how to make the money they have go as far as possible. By accurately identifying how your money can best be utilised, you can plan how much funding you actually need and improve your chances of raising capital.

Money is the lifeblood of any bootstrapping entrepreneur and usually the thing in shortest supply when starting up. In fact, many startup failures can be attributed to poor cashflow, so getting your financial planning and management right is crucial to success.

Thinking ahead is the way to success

Participating on the New Frontiers programme provides entrepreneurs a six-month financial lifeline. But too many startup entrepreneurs focus on getting the BIG investment and forget about the day-to-day costs that can’t be put on hold. Investors always take longer than you think; they don’t just drop the money in your bank account.

So, while you’ve spent the last six months developing a compelling business plan and investor pitch, you’ve also spent all your cash getting to this point. For the best chance of survival, you need to have a game plan for what happens next, at least three months before the end of any support/cash.

Starting a business always takes more time than people imagine and things don’t always go according to plan, so you should work on a strategy for paying the bills (both business & personal) for at least another six to 12 months (as it can take that long for investment to materialise).

To make a compelling case, you need accurate forecasts that are backed up with sound reasoning:

What for?

You need to be clear as to what you will use any funds for – further product development, testing or trialling, customer prospecting, equipment, office facilities, inventory/stock, staff. Make a wish list, with a timeline (at least monthly) beside each item, just as you would for your business roll-out plan.

How much?

Beside each item on your wish list, give an accurate cost and identify if it is a one-off or ongoing expenditure. Add these together and you get a total – which is probably way too high!
Now go back and review every item on the list.
Ask yourself the following questions:

1. Do you really need it?
2. What benefit will it be to your business now?
3. Could you defer buying it until later?

Prune your wish list as necessary and revisit that total amount, with a strong justification or business case for each line.

I’ve included a template you can use to plan for your short-term funding needs. (Word document).

Make a balanced case for your funding needs

With this work done, you have a better chance of identifying who could support that kind of expenditure for a startup. That is, what mix of sources will you now approach in order to keep going, while at the same time setting up bigger investment channels for the long-term future of your enterprise?

The main thing to bear in mind when looking for money is preparation. If you leave it to the last minute to ask for money, it’s the easiest thing in the world for someone to say ‘No’. You want to give them more reasons to say ‘Yes’. Then you can keep going, in the short-term, while planning for a bigger, brighter future – which is the next part of your journey from startup to scaling business. The New Frontiers programme provides just the set up to enable you to do that successfully.