One of the biggest challenges of running a business is managing the cash flow. While it is wonderful to see high sales figures it can prove extremely stressful if payments for goods or services sold are made late, putting increased pressure on the business finances.
Managing Cash Flow
Managing cash flow is crucial for a business's financial health and sustainability, it's something that all businesses, however large or small, have to grapple with. So what is it? Put simply it involves ensuring that the money coming in (inflows) is enough to cover the expenses (outflows) with enough cash left to maintain operations, pay staff and plan for future growth.
There are a number of ways to manage cash flow in the business, one of the biggest factors in doing so is to have effective credit control procedures in place to reduce late payments.
Here are some simple tips to help you:
Ensure you sales terms you have with your customers are shorter than the terms you have agreed with suppliers. This ensures the goods are paid for before you have to pay your suppliers. It may seem obvious, however I was working with a client who was giving their customers a generous 45 days to pay, but had to pay their suppliers in 30 days, which was negatively impacting their cash flow.
Put clear terms on your invoices otherwise your customers won't know when you expect to be paid so will often wait until you start to chase them.
Always add your bank details to your invoices, accepting payment by BACS will be convenient for your customers and can speed up payments coming to you.
Add other payment options to your invoice such as PayPal or Stripe with payment links, the more ways the customer has to pay the better. PayPal and Stripe links can easily be added to Xero invoices.
Early payment discounts is another way of encouraging your customer to be prompt with their payment. This has to be properly managed to ensure the customer is only taking the discount when they pay within the time frame agreed for the discounted price.
Use proper accounting software, so you can easily manage your debtors. Xero for example has the facility to send out email reminders automatically when a payment falls due, oftentimes invoices are paid after this gentle reminder negating the need for a phone call altogether.
For regular customers set up a payment service like GoCardless giving people the option to pay by Direct Debit.
Late Payments
If after all of this you are still paid late then then what? This is where the Late Payment of Commercial Debts Act 1998 comes into play.
The Act suggest the interest you can charge if another business is late paying for goods or services, this is referred to as 'Statutory Interest', and is calculated as 8% above the Bank of England base rate for business to business transactions. If you have a contract with your customer that states a different rate of interest then you will need to charge that rate on the contract instead of the statutory rate.
In addition to interest you can also charge a fixed sum for the cost of recovering a late commercial payment, the amount of the fixed charge will depend on the amount of the debt, this is detailed in the table lower down the page.
Calculating Statutory Interest
There is a simple formula for calculating statutory interest, which I have detailed in the example below:
If you are owed £1,000, this is overdue by 60 days and the Bank of England base rate is 5.25%
The annual statutory interest payable on this would be £135.00
The formula for calculating the annual interest payable is:
Gross Debt x (Bank of England base rate + 8%)
(£1000 x 0.135 = £135)
You will then need to further break this down by the number of days that the debt is overdue, to do this part of the calculation you would do the following:
Divide £135 by 365 days to get a daily interest of £0.37 and then times by the number of days overdue, in this case 60 days so the interest owed is £22.20 (£0.37 x 60)
As I previously mentioned there is also a fixed sum that can be charged as an additional cost of recovering the debt, this depends on the debt due.
Amount of Debt | What you can charge |
Up to £999.99 | £40 |
£1,000 to £9,999.99 | £70 |
£10,000 or more | £100 |
Therefore a debt of £10000 that is 60 days overdue would be charged £22.20 interest plus £70 admin fee giving you a total of £92.20. This amount can be invoiced to the customer.
There are, of course, many other ways of managing cash flow, for example setting budgets, cutting unnecessary costs, check your Direct Debits make sure you're not paying for subscriptions you no longer use. Don't carry to much stock which ties up cash and be aware of the seasonality of your business.
If you would like any support with managing your cash flow then please get in touch for a free no obligation chat.
Further Reading
https://www.gov.uk/late-commercial-payments-interest-debt-recovery/charging-interest-commercial-debt
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