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Keeping your cash flow on an even keel

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Cash flow keeps businesses going. It’s the lifeblood of any business. But simply holding on to cash for as long as you can might create its own knock on problems. This article examines the way in which a small business should best interact with its suppliers and help its cash flow.  

Firstly, if you don’t pay your suppliers on time you risk damaging their business, or even contributing to, their failure. You want your invoices paid on time, and you should do the same when paying your invoices. It’s not just good business practice and ethical behavior; it also demonstrates corporate social responsibility. There may be no need to pay bills before the due date but if you have a query with an invoice, its good practice to tell your supplier so that they can resolve the problem and still be paid on time. Closer to home, small businesses should make sure payments due are in your cash flow forecast so they don’t catch you by surprise. 

Of course, the fact that a business is here today, and is creditworthy, does not mean that it will be around tomorrow, next week or next year – or in fact that it will still be in business. If a customer becomes insolvent and cannot pay your invoice it may create significant problems for your business, especially if the amount involved is large.

Insurance companies and brokers offer credit insurance to meet the specific needs of clients, industry sectors and specific transactions to protect against non-payment by your customers and their insolvency. Credit insurers can often provide detailed information on prospective customers, and they can sometimes provide access to cheaper business financing. 

Small businesses should check regularly that their most important customers are not at risk of failure. If your business is successful and growing, there will be many exciting challenges to take care of – but can your business achieve sufficient and profitable growth while taking all the risk itself? If your business would be more comfortable trading with protection against bad debts or, in certain circumstances, late or non-payment then credit insurance is worth considering. Credit insurers have access to more up-to-date and detailed information than is readily and publicly available. This can open up larger credit lines or more flexible payment terms allowing your business to grow its profitable sales.

There are also Invoice Finance and Asset Based Lending Options. Extending credit to customers usually requires some form of finance for the business to be able to extend credit. Timing between when the business collects cash, and when it pays it back out, can cause issues if the business is not well equipped to support itself in situations when the balancing cash is not paid back. Managing cash flow effectively means staying on top of finance and ensuring funds are available when needed and there are quite a range of potential solutions:

  1. Factoring – under this model, a factor agrees to pay a percentage of approved debts as soon as the customer receives a copy of the invoice; 80-85 percent is common. The balance, less charges, is paid when the customer pays. The Factor will undertake all credit management and collections activity in line with an agreed credit policy. The advance is usually ‘with recourse’ (meaning the factor will be able to reclaim its money from you if your customer does not pay) so the option of bad debt protection from the Factor should be strongly considered.
  2. Invoice Discounting – this model is similar to factoring with immediate cash for up to 80-85 percent of the approved invoice value being typically available. However, responsibility for the sales ledger operation and credit management activity remains with you and the service is usually undisclosed to your customers. Payments received are paid into a bank account in your name but administered by the invoice discounter, after which you are credited with the balance, less charges. Again, this advance is likely to be ‘with recourse’ (meaning that the discounter will be able to reclaim its money from you if the customer does not pay) so the option of bad debt protection should be strongly considered.
  3. Asset Based lending – This is usually linked to Invoice Finance – where funding is provided, in addition to invoice finance, secured against the property, plant, machinery, stock, or sometimes even the brand name, of a business – especially useful in Merger and Acquisitions and restructuring.

Always remember – most businesses which fail do so for cash reasons. Revenue and profit are vitally important, but cash is king!

How can FSB help with debt recovery?

To help businesses recover debts, FSB offers access to a debt recovery service as part of its Business Essentials package.

This service includes a range of features designed to help businesses with debt recovery, including:

  • Full UK and global collection service
  • Exclusive FSB Debt Recovery platform, accessible seven days a week, all year round
  • Additional services, including collection, recovery, tracing and insolvency services 
  • Ability to load multiple debts and view progress of cases
  • A dedicated debt recovery helpline

To find out more about how FSB could help your business deal with late or lapsed payments, visit our FSB Debt Recovery page. To see how else our Business Essentials package could help your business continue to grow and improve, visit our package comparison page.

Further Reading

Helpful Guide - How to avoid late payments

FSB Debt Recovery from FSB

FSB Debt Recovery gives you the opportunity to recover 100% of the money you are owed and in most cases this costs absolutely nothing

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