5 tips for cultivating healthy cash flow

As lawyers we will often come across the following quandary – a client with a quality business delivering great products and services and working all hours to make it happen. Yet somehow they don’t seem to getting ahead. They will usually end up in our office either because they need help chasing payment or they are being chased.

Unfortunately hard work and quality product sometimes aren’t enough. Businesses can flounder due to poor credit practices leading to delays in getting paid. Problems often spiral as it is difficult to deliver the same quality when faced with mounting financial pressures.

These are some simple steps you can take to ensure your business isn’t at the end of the payment queue.

1. Know who you are dealing with.

Exciting news comes in – you’ve been contacted by a new prospect who would like a stack of work completed. Whilst, to ensure a healthy morale, you should first take a moment to congratulate yourself and your team, you should then quickly get to work on assessing who you are dealing with.

If it is a company, check their registration on the ASIC website. A basic search is free and will hopefully confirm the company exists. Documents registered against the company will also give an indication of whether it has previously been subject to any wind-up applications from unpaid creditors.

A paid ASIC search can also be valuable as it will provide details of the directors and shareholders. This can help you make sure that the person who says they represent the company, actually does represent the company.

Look for skeletons by doing a google search and asking any trusted mutual contacts as to their dealings with the prospective client. If you are comfortable you could also ask the prospect for details of a key supplier so that you can contact them for a reference.

In certain cases, you may also wish to do a credit check on the client before extending any credit. There are a number of online providers who offer this service at a reasonable cost.

As a general rule, the higher the risk to your business of non-payment, the more enquiries you should make to assess the ability of the client to pay.

2. Assess your limits and properly document.

When you have satisfied yourself as to the identity of the client and assessed their ability to pay, you then need to determine the basis on which you deal with them.

You may be a business that will never extend credit. This certainly ensures you will have no debtor control problems (and if you can get away with it is a great way to do business!) however it may also inhibit your business growth and deter potential clients.

It may be that you would like a few trial runs and require payment up front before offering to extend credit. Alternatively you may be satisfied that you can proceed straight to a credit arrangement.

You should also consider the security you will require in return for granting credit, particularly where the credit limit is high. For instance you may insist on a director’s guarantee, a mortgage over real property or a security interest in certain assets of the client.

Whatever the call you make, at this stage it is critical that you sort out the terms of your agreement with the new client. At first glance this may not seem directly related to cash flow, however the source of non-payment is often a misunderstanding between the business and their client as to the terms of the supply.

To minimise your risk and the drain on your resources we recommend that you establish standard agreements that you offer to new clients. This will minimise both the time taken in completing the paperwork and the risk to your business in getting it wrong or, worse, not doing it at all.

3. Invoice ASAP.

It’s a common scenario that you are snowed getting the work done and let the administration, including invoicing, drift. This is a trap.

If the invoice isn’t quickly rendered it may take a long time to realise that a client is not going to pay. In the meantime you have likely continued to complete further work, work for which you also aren’t going to be paid.

Invoice quickly. The quicker you invoice, the quicker you’ll be paid (or identify the non-paying client!).

4. Open the lines of communication.

If your invoicing templates are difficult to understand this can also impede prompt payment. Ensure that invoices, related letters and emails and your regular statements are all clear and concise. When a client receives an invoice or statement they should immediately understand the amount they owe and when they are required to pay by.

Get to know your client’s systems, how payments are processed and who is responsible. This can alleviate many of the problems that cause non-payment. For instance, if you are sending the invoice to the instructing employee however they are not passing it on to accounts this could be a simple cause of payment delay.

If you clarify who is responsible at your client’s office for processing payments, it is easier to follow up payments and gain an understanding of where things are up to. If you can identify lines of reporting, you can also determine where to go when your initial point of contact is not providing the information you need.

5. Regularly review and act fast.

Your business needs regular review of outstanding debtors. You need to identify the problem payers and cut supply quickly.

Whilst this can seem like a difficult decision in the short term, particularly if you aren’t operating at capacity, you are better to invest that capacity in other activities such as business development.

Ultimately the long-term health of your business relies on you sourcing desirable paying clients, an end that will only be hampered by continuing to work with those who won’t pay or who won’t pay within a reasonable time.

If you are interested in reviewing your current supply arrangements, setting up standard trading agreements or have some existing debts you want to pursue, contact us at Planning Development Commercial Lawyers for a no obligation discussion.