One thing I’ve learned freelancing over almost 20 years is that cash flow is one of the biggest issues facing the small and micro business. We freelancers have it comparatively easy; if someone fails to pay us some money our bank managers won’t like it, our creditors certainly won’t and don’t even talk to me about landlords or mortgage companies – but it’s not like being an employer, for example, in which a client’s negligence can have a material effect on a whole series of people.

This is part of the reason the Association of Chartered Accountants in association with Kingston Smith has set out its ten best tips for small and medium enterprises trying to avoid late payment.

1. Make it strategic

Trade credit and debt collection will keep your organisation alive. If you have enough people in your company try to keep it separate from sales, and make sure that getting the money you are owed – or “your money” to put it another way – is a strategic, planned part of your procedures. Make this accountable to senior management.

2. Connect sales with credit control

Separate though debt collection and sales need to be, the salespeople need to be aware of stuff like the credit status of the clients to whom they’re talking. There is nothing worse than having a sales executive spend a lot of time working towards closing a deal, including personal visits to the client, only to find when terms are about to be agreed that the client is on credit stop. This is about internal communication and should be easy to remedy with the aid of an accounts system that flags these issues before they reach critical point.

3. Agree credit terms up front

Many industries have very strong conventions about when people are paid – my own industry, publishing, often pays people within 30 day of publishing an article rather than 30 days of completion of the work, which is unusual. This aside, it’s worth stating terms out loud. If a client is in the habit of paying within 90 days and you haven’t mentioned that you allow only 30 and take them to court for late payment, unless you’ve made it explicitly clear that your terms are different (and “it says so on the invoice” doesn’t cut it) their terms could prevail.

Nobody ever minds having the discussion. We get very uptight in this country about money, but very few people object to clarity.

4. Get the right people in the right jobs, and get them communicating

Related to the second point, credit controllers can sometimes be seen as getting in the way of the business rather than helping it. This isn’t necessary – they’re there to prevent sales personnel wasting their time, and the salespeople need to understand this. Working together properly they should find each other a complementary asset.

5. Have a procedure for credit control

A fixed procedure is always better than an ad hoc “we ought to chase this up”. It helps the people putting the policy into operation as they know what they have to do and when, and they can also reassure people being asked for money that they are being treated the same as any other customer.

Also make sure you’re still responsive and offering services to companies you’re chasing until you’re certain there’s a problem – put this into the policy as well. If there’s been a genuine error people will work harder to resolve it for a company that’s being helpful and professional.

6. Invoice on time

Glad we got that straight. And check that an invoice has arrived. Email is trustworthy for, oh, quite a lot of the time. Also make sure you’re invoicing the right person. The MD of a contract publisher once had me writing a lot for one of his corporate magazines. I had to chase every invoice until the accounts department finally turned around and said, “don’t send invoices to the MD, he always loses them.”

Also check whether you need a PO number – the more you do to help an accounts department pay you, the more reason they have to put the paperwork through painlessly and quickly.

8. Make use of the right laws in terms of statutory interest

The ACCA urges people to charge the statutory interest to which they are entitled on every invoice. This means invoicing for it automatically and putting it into your terms and conditions – although since it’s statutory technically you don’t have to. I’m in two minds about this. Late payment costs you money, but in the real world insisting on extra invoicing and cash if there’s a slip-up for a month can cost you a client. Over to you.

9. Make a business case for credit decisions

This is a tricky one – base credit decisions on a solid business case rather than allowing extra credit to increase sales. Extra sales will always look good on paper but will the client be able to pay? This can of course mean having to turn business away, which always hurts – but if someone is unlikely to pay then of course it’s not really business at all.

10. Check your incentive scheme

Many salespeople are incentivised on sales, which seems reasonable enough until a per centage of the customers don’t pay for their goods or services. If you can base incentives on cash received you can imagine just how much more careful your staff will be about who they target as customers.

I could add a few tips of my own in terms of cash flow – and would welcome anyone else’s as comments to this article. But my tips would be:

• Never assume an invoice will be paid on time – try to have enough money spare to hedge against late payments.
• Never, ever, “borrow” from the money you’ve set aside for tax. Of course you mean to pay it back but then there’s another late payment, and another, then the first client who owed you money goes bust.
• Don’t mistake an issued invoice or debt for cash in the bank. Someone can dispute an invoice for spurious reasons just because they’ve realised they’ve screwed up their budgeting. This has certainly happened to me.

There’s good news as well. Late payment fell in the UK by a dramatic 19% in June 2010 compared to the year befor. However, the ACCA’s figures suggest small business in the UK is owed a total of £24.6bn in late payments right now. This isn’t a great figure, and managing any outstanding debt rather than complaining or not noticing it is the only way to bring it down.

Guy Clapperton