Cash flow is the lifeblood of your business. If you are receiving less cash than you are spending, you cannot meet your immediate needs and you could risk insolvency. Due diligence and well drafted terms and conditions can reduce the risk of negative cash flow.
Some challenges for small business
There is a never-ending list of challenges for small businesses to negotiate to remain solvent. These include:
Late payment of bills
This is a primary cause of negative cash flow. Smaller businesses wield less bargaining power and suppliers and traders will look to take advantage.
Disputes with suppliers or customers (or shareholders)
Disputes can stem from late payment or could relate to your services or ownership of intellectual property. At best, they are an unwelcome inconvenience. At worst, they lead to court action the cost and effect of which could mean the end for your business.
Not knowing the identity of whom you are trading with
If you do not know the identity or status of your clients , you could render your business a hostage to fortune. For example, you may be providing services to a rogue trader or to a client that was insolvent before your contract.
These are all threats to cash flow but there are basic preventative measures that you can take.
Protect your business
With the right written agreements in place you can dramatically reduce the risk of these problems arising. The issue is that, while they may be recognised as things that need to be addressed, in the early stages of a business written contracts and terms are rarely prioritised.
Terms of business
This is an essential document. If you do not have suitable terms and conditions – for anyone you do business with, whether a supplier, a client or marketer – you put yourself at risk.
When it comes to cash flow, well drafted terms can help even the playing field for smaller businesses. For example, they can provide for:
Clear payment terms
o It sounds obvious but if you do not provide for this, or have no terms at all, then you will find it harder to demand and recover payment for your services.
o You can also provide for late payment. A basic provision that states interest will be payable in the event of late payment will not only compensate you for late payment, you can also add in a provision for contractual legal costs. This will also serve as encouragement for payment to be made on time.
o More effective yet, you might consider requiring money to be paid in advance. You may fear that this could be off-putting to prospective customers, however, it is not unusual and there is a clear commercial reasoning behind such a term.
> if a dispute arises, as the party with the money and contract terms, you will have an advantage.
>Director’s personal guarantee
o What if your company client goes insolvent and can no longer pay you? If a director personally guarantees the liability on the company’s behalf, you then have the option of pursuing that director.
o These will be off-putting to any director and will be difficult to agree. However, where you are dealing with a company with solvency issues or extending a larger sum of credit you will not want to enter into any agreement with that company without extra protection.
o It can be damaging, not to mention frustrating, to secure business from a customer and start incurring time and cost on the contract only for that customer to pull out before having paid anything. If they have paid something, they may claim their money back.
o Well drafted cancellation terms can protect your commercial interests in such a scenario by making it clear that in the event of early termination, an appropriate amount will still be due to you.
More generally, terms and conditions are essential for providing absolute clarity on who does what in a given situation. The more clarity there is, the less likely it is that a dispute will arise. For example, in addition to the above, here are some key terms to consider:
A clear description of the services / products you will provide;
Timelines for completion;
How the agreement may be terminated and the consequences of early termination;
What happens if a party breaches the agreement;
Which law will govern the contract and which country’s courts shall have jurisdiction.
Terms that will be appropriate will depend on the nature of your business. There is no “one size fits all” and shortcuts are not advisable. Legal advice should always be taken and the temptation to copy another business’s terms should always be avoided.
If doing business with overseas clients be sure to protect your ability to pursue a claim or debt recovery outside the UK, but subject them to our simple and fair efficient jurisdiction, where possible.
Know who you are dealing with
It is essential that you know who you are contracting with. For example, is it a company or an individual? There can be a tendency to assume the answer without the benefit of due diligence and this can lead to serious problems. Consumers have far more protections in place than business to business relationships that can cause you issues if this is unknown to you.
What you thought was a company might not exist or the individual you dealt with may be a rogue or not have due authority to bind the company.
If you are unsure, asking your point of contact at the outset is much simpler than doing so after the relationship has broken down or they have stopped responding to you. Carry out a quick company’s house check in the UK or overseas, if unsure enhanced due diligence is available, before you commit.
It is also important to establish whether they are solvent and/or have assets against which you could potentially enforce a judgment debt if a dispute did arise. This simple check is easy to undertake at the onset. This alone may well dictate the terms of your arrangement or whether you enter into an agreement at all. Especially for large, overseas or long-term agreements.
What are the warning signs of a customer in difficulty?
- Not answering the phone/difficult to contact people/calls not returned
- Changes in payment method
- Part payment made
- Part payment in round sums
- Customer always has a story
- Customer finding errors/ disputing quality
- Credit rating reduced
- Late filing of accountsPrevention is cheaper than the cure!
Legal documents are not only unsexy they also represent an additional expense you try to avoid. However, the cost of legal advice at the outset pales into insignificance compared to the costs of trying to resolve a civil dispute, whether that is chasing payments or a disagreement over the scope of services under contract.
As far as cash flow is concerned litigation, or court action, is a big no-no. Even, with case of a simple debt recovery not only are you without the money you are chasing, you could have the added outlay of court fees and legal costs with no promise of a speedy resolution. In summary, litigation is best avoided and the best way to avoid it is to have appropriate safeguards contained in written agreements allowing for mediation, termination and recovery.