July 30, 2014 by Paul Goldsmith
Cashflow is king for a business. One of the first things that I try and get over to students when I teach about entrepreneurship is the fact that a business can go bankrupt even whilst making profits. You can make a sale without receiving cash, because in reality most companies have ‘payment terms’, which in the case of the business that I ran for two years before I became a teacher was usually 30 days.
The key to keeping your business alive and going forward is to receive money as soon as you can, and pay as late as you can. In an ideal world this would mean firms simply keeping to their contracted payment terms and always paying each other at the end of, say, the 30 days. But if you have an important client that doesn’t play ball on this, your firm can die. You may not be able to buy stock to sell, pay bills, pay back any loans, and this can literally feel like your firm being choked.
I was reminded of this when listening to a radio programme the other day that had got shoved into a space on radio 4 at the end of a Test cricket match that had ended early. It was about late payments by the NHS to a firm called Q technologies. Q technologies isn’t a big firm, it has a turnover of about £3 million, so these things make a difference. They had been waiting 7 months for a payment of £76000 that was supposed to have been paid within 30 days. The CEO also talked of other payments that were late. He said that he was a big fan of the NHS, but not of how some trusts carry out their work. “A big debtors’ list forces us to keep more cash in reserve than we would like. It would be so much better if we could use some of it to expand our business and employ two or three more people but, with the NHS being so tardy over payments, we just don’t feel confident enough to do so.”
But this is not to say that public sector bodies are the worst at laying late. Private sector firms are just as bad. One of the problems with dealing with a very large firm is the lack of a personal touch. People within the large firmsforget they are dealing with people who may struggle to keep their business afloat if they aren’t paid on time. When I took on a new client I used to talk openly about payment terms and also call their finance department to introduce myself, give them my details, then made sure I followed up my invoices until they were paid, especially once the 30 days were up. With very small firms, it was even possible to get some payment up front as a way of establishing trust. This became particularly important when a firm deliberately wound themselves up and starting up again the next day under a different name to avoid paying me and some others. It was OK for me though, I didn’t have employees to pay, or many immediate expansion plans, so I could afford to be patient sometimes. But if I was patient, I was still assertive. I found that finance departments did like to wait to find out who was on top of chasing payments and who weren’t. It wa s a sort of game which you had to be good at. Because in the end. If revenue earned isn’t in your bank account, it is useless.