Snow patrol chased cars, we chase debts

Chasing your debts

John Davies, head of business law, ACCA

Cash flow has traditionally been an issue for many businesses and the recession has only intensified the problem. The Federation of Small Businesses recently surveyed its members (January 2010) and found that 41 per cent of them dipped into personal savings, 43 per cent used overdrafts and 21 per cent their credit card to stave off the recession.

Although there are definite signs of recovery, access to finance remains a challenge for business. So if external finance is to remain in such short and expensive supply, businesses will need to be extra careful in their management of working capital and all reasonable care needs to be taken in the management of trade credit.  

Minimising the risk

The overall purpose of sound credit management practice is to minimise the risk of a business being landed with bad debts. Businesses must ensure that, wherever credit is extended to customers, the amount of the credit offered, and the terms on which it is given, are appropriate given what is known about the customer’s ability to pay.

At the outset, any business, regardless of size, should consider taking these elementary steps to protect itself against the risk of bad or late debts (bearing in mind that it invariably costs less to pre-empt them than to try to recover them by legal means):

-      Consider what methods of payment you are happy to accept from customers. Retail businesses, more than other types of business, need to be flexible on this point but credit and debit card systems offer protection to the seller which is not affected by subsequent changes in the customer’s circumstances.  

-      For non-retail transactions, consider whether you should identify a monetary threshold beyond which you will make the extension of credit conditional on a new contact passing a credit reference check.

-      Decide in advance what your firm’s policy is to be with regard to late payment of amounts owed to you. Many firms incorporate interest clauses in their payment terms which provide for interest to be charged on debts paid late. Regardless of whether you do this, any business that is paid ‘late’ (which means beyond the contractual payment period) is entitled to charge statutory interest (8% above the prevailing base rate) on top of the amount owed.

-      Ensure that you send out any invoices promptly, with the name and address of your business clearly and accurately stated along with your payment terms. If you intend to take advantage of your statutory entitlement to charge interest on late debts, you do not need to formally announce this, although doing so may act as an additional incentive to the customer to pay promptly.

-      Keep an eye on your outstanding invoices and chase debtors up if your payment fails to turn up when it should. Resources permitting, it makes sense for a business to liaise with its debtors prior to the payment date and not just after.    

Collecting your debts

If despite your efforts you still have not been paid, what are your options?

-      You could ask your solicitor to send a letter to the debtor, stating or implying the consequences of a continuing failure to pay. A well worded letter will often produce the intended outcome.

-      You could sell your invoices to a factoring company or approach a debt recovery firm to chase the debt for you. This will relieve you of the debt and save the embarrassment of direct confrontation, but you will have to pay a fee for the privilege.  A list of recovery agencies can be found on the web site of the Credit Services Association, at www.csa-uk.com

-      You can take action to recover your debt through the courts. For debts of value up to £15,000, you will go through the county court. The court will allocate your claim to one of three streams, according to the value of the debt – claims of up to £5,000 will go through the small claims process, popularly known as the ‘small claims court’. Should you win your case in the small claims court, you may be allowed to claim costs, including legal costs, against the other side. Claims can be filed in person at your local county court or alternatively can be made out on-line via www.moneyclaim.gov.uk.

-      If all else fails, then, depending on the size of the debt owed, an unsatisfied creditor can initiate action to make the debtor insolvent. Where the outstanding amount is at least £750, an unpaid creditor can serve on the debtor a statutory demand for payment – if the demand is not paid within three weeks, you are entitled to present a petition for the debtor to be made bankrupt (in the case of an individual) or to be wound up (in the case of a company). This route is not dependent on the exhaustion of other recovery options and very often, the presentation of a statutory demand concentrates minds and causes the debtor company to pay up.

Stuck in the middle?

Managing cash flow will always involve juggling receipts and payments, and businesses will very often be debtor and creditor at the same time. Firms can find themselves in a difficult situation like this through no fault of their own – very often, smaller firms in particular are kept waiting for payment by a major debtor and as a direct consequence of that can struggle to pay their own creditors.

Where you are debtor and creditor to the same party at the same time, then you can negotiate the set-off of one the outstanding amounts against the other. Otherwise, the fact that you are awaiting payment yourself does not affect your liability to your own creditors and they will be entitled to exert pressure on you to pay up and if necessary resort to recovery procedures. This situation requires careful management, especially if the creditor is a person or business whose custom you value and with whom you wish to continue doing business.  

Cash-flow problems are an on-going challenge for businesses.  As with anything it is easier to prevent problems than resolve them, so I would advise any firm to discuss the adequacy of their credit and debt management practices with their accountants. 

John Davies

ACCA Head of Business Law 

Making your business green

Building the case for a green work place

John Davies, head of business law, ACCA.

An environmentally friendly business is not hard to achieve. ACCA (the Association for Chartered Certified Accountants) believes now more than ever as politicians struggle to come to an agreement on climate change, businesses large and small could contribute greatly to efforts of becoming more sustainable.

The following ten points are practical solutions that we should be doing already, but sometimes we all need a gentle reminder. Getting the business to be that bit greener is all about changing people’s habits, so staff buy-in and involvement is the first step – and then the challenge is to keep the momentum going.

1.       Involve staff -– It’s no good a business having an environmental policy if staff don’t know what it is. Recycling efforts are often undermined by staff not knowing what goes in which bin, while attempts to cut paper usage may be scuppered by staff not using smaller fonts or not printing double-sided. Communicating with your staff about what is going on is a priority.

2.       Get the business’s carbon footprint measured - www.carbonneutral.co.uk can help carry out an environmental audit to identify carbon hotspots in a business. They can work with you to reduce the carbon footprint, and can recommend ways to offset carbon emissions.

3.       Trim paper usage – Cutting paper waste is vital. Each year, the amount of paper buried in the UK could fill more than 100,000 double decker buses. Always think twice before printing. And make sure the paper you do use is from a sustainable source.

4.       Label your recycling bins – Recycling bins need to be labelled clearly so cross contamination doesn’t happen, with paper, metal, plastic getting  mixed up. This defeats the recycling objective.

5.       A collective waste bin? – A single waste bin for the whole office floor is an option, but make sure everyone knows why this is being done. It’s almost office culture to have your own waste bin, but there’s no point in surprising staff with a change of direction without explaining it first.

6.       Control the air conditioning – Reducing the heating thermostat by one or two degrees can make a massive difference to the office environment and the bills; legally, temperatures in the workplace are covered by the Workplace (Health, Safety and Welfare) Regulations 1992, which place a legal obligation on employers to provide a “reasonable” temperature in the workplace. The Approved Code of Practice suggests a minimum temperature in workrooms should normally be at least 16 degrees Celsius, but some offices have the heating in the low 20s.

7.       Switch off Computers – One single computer left on all day will produce 1,500 pounds of CO2 in a year. Staff must down computers every night so it becomes the company’s culture to do so.

8.       Turn off the lights – Switching off unnecessary lights could reduce the average bill by up to 19%. And switching to energy efficient light bulbs will make a difference. The last one out of the building should turn out the lights. Movement sensitive lights that turn off automatically are a worthwhile consideration.

9.       Consider staff transport needs – For car users, you could introduce a car-sharing scheme, do a deal for supplying electric cars or provide shuttle buses to local transport links. Companies can promote cycling to their staff as an alternative as tax free bike loans are available through www.cyclescheme.co.uk

10.     Reappraise your business travel – A report by the World Wildlife Fund www.wwf.org.uk in 2008 revealed that 85% of FTSE350 companies believe video conferencing and other technologies could reduce dependence in business travel. You can also look at carbon offsetting travel, and making sure this is company policy.

How to talk to your bank manager...if you know who they are!

Talking to your bank manager – Accountants’ top tips

Emmanouil Schizas, SME policy adviser, ACCA

Accountants are the financial advisers of choice for small and medium sized enterprises (SMEs), so who better to ask for advice on how to get the bank manager to say yes? In this quick guide, ACCA (the Association of Chartered Certified Accountants) has combined research findings and the experience of their members into a few valuable tips for owners and managers of small businesses.

1. Learn the bank’s language

Unless you’re lucky enough to have a long-standing relationship with an experienced bank manager, getting a loan for your small business can be a fairly formulaic exercise. There’s no point telling your bank how profitable you are, how you’ve never missed a payment or how good your product is etc. if that’s not how they measure their risk.

Banks care about specific types of information, and their priorities have changed somewhat since before the financial crisis of 2008-9.

Table 1: What matters to SME lenders (top 5 types of information)
What mattered in 2007-8		What will matter in 2010-11
Item	Importance (1-5)	Item	Importance (1-5)
Cash flow information	4.4	Cash flow information	4.7
Transaction history/account behaviour	4.2	Transaction history/account behaviour	4.5
Key risk indicators	4.0	Collateral	4.4
Collateral	4.0	Key risk indicators	4.3
Financial statements	4.0	Industry trends	4.3
Source: The Banker / IFAC SME Lender Survey, September 2009

As you can see on Table 1, lenders now make more extensive use of information in order to decide on a loan application. Traditional financial statements and key risk indicators are less important than they used to be pre-crisis, whereas collateral and information on industry trends have become more important. Consistently at the top of the agenda, however, are cashflow and transaction histories.

It is important to prepare realistic cashflow projections on a regular basis and to make sure the business can be cash positive in the long run. As for your transaction history, your bank manager will presumably have access to this and will be scrutinising it for signs of trouble as we speak. Make sure you can account for all transactions, especially abnormally large ones. The objective is to reassure your bank that your cashflow is steady and reasonably predictable, that you can pay on time when you need to and that you are not relying on windfalls to keep you afloat.

Most of all, remember that for your bank manager even bad news is better than no information. Be honest and forthcoming or you will risk damaging your banking relationships for ever.

2. Show them you are in control

Our more experienced members are always reminding us that more businesses go under during a recovery than during a recession. This is because businesses tend to over-trade as orders pick up again, committing to more work than they can safely deliver based on their working capital. Banks know this too, so your aim should be to show your bank how sustainably (not how fast) you can grow your business, and that means demonstrating you are in control.

This is one of the reasons why bank managers will want to see your cashflow projections alongside your business plan. The figures will almost certainly never turn out to be spot on, but if you can demonstrate that you understand how your business generates and uses cash, it really doesn’t matter – you’re automatically a slightly safer pair of hands.

Remember – this is not Dragons’ Den. Your bank manager is trying to figure out the downside, not the upside to their investment. There’s no point telling them how much money you are planning to make if there’s a good chance they will see none of it.

3. Think like a bank

Banks generally understand and accept that they must take some risk if they want to do business. But some types of risk they are happier with than others. The kind of risk banks really don’t want to take on is your trade credit risk – the chance that you will get into trouble because your customers can’t pay you in time – or at all.

If you’re extending credit to your customers, you are a bank. You may not think so but your bank manager does. And like a bank, in order to get anyone to lend you money, you have to convince them that you don’t need bailing out. Table 2 shows you how you, too, can think like a bank – without the jargon.

Table 2: A simple translation of bank-speak
Bank-speak	Small business English
Do we have robust and integrated risk management systems in place?	·       How much exposure do we have to key customers/clients? How much of our turnover and cashflow depends on them? Are they financially healthy? ·       How tight are our credit policies and how strictly do we adhere to them? ·       How good are we at chasing up invoices and other customer debt? ·       Have we made provision for bad debts? Do we know what shape we will be in if key customers start paying late or fail to pay at all?
Do we have enough capital to ensure solvency even under stress?	·       Do we have / will we have enough working capital to meet incoming orders? ·       Does our business have assets it could sell or borrow against? What are their values in today’s market? ·       Am I able to inject more of my own money into the business at short notice? Do I have personal property I could sell or borrow against?

4. Get a sounding board

According to research, small businesses find business plans and other forward-looking statements more useful in their efforts to raise finance if they have been prepared by a third party. It is possible for owner-managers to get too attached to their businesses and to their own plans, convinced that they can meet their objectives even against the odds. This can-do attitude often serves entrepreneurs well, but it’s not popular with their banks.

A recent survey by The Banker magazine and the International Federation of Accountants (IFAC) revealed that 59% of small business lenders were more likely to consider would-be borrowers if they had used a professional accountant, external to the business, to give them advice and support.

Alternatively, try to build a relationship with your bank manager and use them as a sounding board. An ongoing relationship provides banks with an abundance of information and can help build trust and empathy. The Government’s latest statistics suggest that, even in the good days of mid-2007, only 15% of all the SMEs seeking external finance relied primarily on their banks for financial advice. This is good news for ACCA members (28% relied primarily on accountants), but with trust in banks falling across the SME sector, businesses could be missing out on an important source of advice.

5. Think outside the box

Don’t assume that traditional term loans and overdrafts are the only things you can get from a bank. In addition to their own capital, banks can tap into government guarantees (the Enterprise Finance Guarantee) or funds from the European Investment Bank (EIB) when lending to small businesses. It is possible that if you’re not a major risk your bank could still lend you the money you need in either of these ways, because either the cost of these funds is lower or somebody else is sharing the risk with them. Bear in mind that some bank managers either don’t know about these products or will not go out of their way to inform you. Ask them about these and insist that they come back to you with alternatives to the loan you’re thinking of applying for.

This may seem like a lot of work and –at least the first time around- it will be. However, the effect on your business’ access to finance can be substantial. More importantly, the process can pay for itself by getting you to take control of your business and make it more rational and efficient. In fact, you may find you don’t need a loan at all, or perhaps that you need to think even further outside the box, from invoice finance to equity investment. Learning to talk to the bank manager is just the beginning.