A vital feature in any enterprise is Cash Flow. Some accountants will put a lot of emphasis on profit. This is really a secondary aspect of the way in which an enterprise should be governed. You can make a lot of profit but without the cash available to pay the bills you will be quickly out of business. Profit is a measure of the difference between what an enterprise charges its Customers and the costs that the operation incurs to supply that end product or service but this does not take account of the cash involved in any of the transactions. If you make 50% profit on a sale (ignore at this point any of the accounting gobbledygook about gross and nett profit) and allow your Customer credit then, unless you collect the money from the sale in good time, that profit margin is meaningless. You can be sure that your costs will not be allowed to wait beyond the terms that you have agreed upon with your suppliers and eventually you will either have to dig into your cash reserves to meet those costs or, more likely, to have to borrow money for that purpose. Either way that ‘new’ cash in the system will cost you money either through loss of the reserve or by interest on a loan

It is known that for small enterprises something like 40% of their assets can be tied up in unpaid sales invoices !!

As an example, if your gross profit margin is 50% of your sales and you have to write off £1,000 you will need to sell a further £2,000 to make up that loss !!

So how should you handle cash flow ?

Firstly avoid giving credit to your Customers if at all possible and get as much credit from your suppliers as you can - but make sure that you do always pay on time since your credit arrangement will very quickly be terminated should you default and you will either have to pay cash with future orders or go find another supplier willing to give you credit. But be aware that these days credit checks can be made very quickly and suppliers will talk to each other

With some Customers it will be impossible to avoid giving credit. This is because their own cash handling system is too unwieldy to allow them to pay quickly. If you want their business then you need to make arrangements with them to ensure that your bills will be paid on time. 'On time' means that you should aegree with the Customer that your credit terms are acceptable tio them. You will probably have to extend the period beyond that normally accepted, though most often not met, of 30 days after their receipt of goods. It is not unreasonable to allow a good Customer 45 days credit but you may have to let that go out to 60 days in some cases. Whatever you agree, make sure that your invoices to that Customer contain the date on which you expect to receive payment. Add something like 'Please make Payment on or before 19th August 2008'. Don't use the usual system of simply repeating your terms with 'Credit 30 days nett' whatever that might mean !!

Also try to avoid providing monthly statements. It is easy to make an invoice a statement as well and if you can get prior agreement with your Customer, head the document 'Invoice and Statement'. Some Customers will tell you that they only pay on Statements - well here it is !!

None of this will work for you unless you get a firm agreement with your Customer. You may feel too small to wield a big stick, but you must if you want a successful business. Always remember there are good Customers that you will want to do a lot of business with and there are bad Customers that you should avoid. Don't be mesmerised by the promise of big orders from those people who will not pay you on time. Remember to do that business you will incur additional costs and these will support that Customer's business until they pay you. You are not a bank and such financial support to Customers is without any interest although you might have to pay interest yourself to a proper bank to support your own extra costs and that will affect both your profit and cash flow

If you cannot get an agreement at the accounts payable level, talk to the person who will place the order and make sure that they get the agreement for you. Don't be put off by promises until you know that you can trust that promise through all levels of the Customer's organisation. If that fails try the Financial Director. They are not ogres and have the ability to make things happen but again don’t be put off by empty promises

You might be able to agree to a pro-forma (that is, cash to be paid when the goods or service is ready to be delivered) arrangement for a period in order that you can get some confidence in your relationship but don't let the subsequent orders be much greater than you have been used to during this try out period. If they are, then acknowledge the order with a partial delivery plan that will break the value of the goods or services down to manageable size for you to handle the credit. That way you can stop further delivery if the Customer defaults on the agreement

It is very hard to turn down potentially large business but remember the risks are all yours and nobody is likely to come to your aid when things go wrong, least of all the Customer

Build your business carefully with each new Customer and be sure that you are able to keep that cash flowing in the right direction - into your bank account

There has been talk many times by organisations representing SMEs about the law regarding 'late payment' wherein it is proposed that penalties in the form of a percentage of the bill be added when the payer defaults. Such a legal stick would never work since the bad payers will always find an excuse for the delay and collection of the penalty additions would be impossible to collect. In any case it all adds up to bad Customer relations. There is a ‘Late Payment of Commercial Debts Act’ which provides for interest to be paid on overdue invoices but it has not yet been invoked

Government Departments are said to be subject to a ‘Prompt Payment Code’. We have no experience of the results of that scheme

The carrot method used by some in the UK but widely used elsewhere in Europe is to offer discounts for early payment inside the normal 30 days. One stick that is known to be used in other parts of Europe is to have a legal provision for a supplier to have a Customer's bank account frozen when they are able to show that a bill is unpaid - this would literally put the Customer out of business !!

A reasonably safe but costly way to get early payment is to factor your sales invoices. This is a process whereby you effectively sell your invoices at a discount to a financial institution and leave them to collect the full amount. But like banks these organisations are not risk takers and will generally only buy invoices from you that are placed on credit worthy Customers. So the only advantage to you is that you don't have to do a credit check or wait for your money. If this is a way you want to go adjust your price to take account of the discount that you have to pay and shop around for the best factoring deal

When making your payments to suppliers be sure that you know that the cash is available. Aim to pay on time but as soon as you know that you will be late in making a payment tell the supplier immediately and agree on a date that you are able to keep

What it all boils down to is Good Credit Management that involves credit checking of a Customer, having a firm agreement for payment terms before any order is taken and making sure sales invoices are sent with least delay after the supply is made

Try hard to meet your commitments to your both your Customers and Suppliers. It will take you some time to build relationships but they can be destroyed quickly if you fail to deliver to a Customer or to pay a Supplier