How to secure a steady cash flow in hard times

Jan 9 2009 By Greig Cameron

Legal methods will help improve payment terms

Managing cash flow is vital to businesses even in the good times but in the current climate it has become even more important.

Making sure customers pay on time is a common difficulty for those running enterprises of all sizes.

The Federation of Small Businesses has regularly campaigned for larger companies to improve payment terms and conditions for suppliers.

However, smaller firms are often reluctant to pursue larger firms for payments as it could lead to a lack of goodwill and a breakdown in crucial relationships.

Now legal experts are advising on ways to make attempts to secure cash easier.

Ensuring all contracts and documentation are clear on terms of payment should help to make the process less stressful.

Michael Royden, a corporate partner at law firm Thorntons, believes all companies need to make sure agreements are up-to-date to make things clear in 2009.

He said: "Although there is legislation which allows interest on late payment of commercial debts the relevant provisions are not always applicable.

"It is safer to have contractual terms to cover interest on late payment.

"Businesses should also consider appropriately-worded retention of title clauses when providing goods to a customer so that ownership of the goods does not pass on until full payment has been received.

"It is equally important to proactively manage outstanding debtors so that the organisation's credit control processes achieve prompt payment wherever possible.

Businesses should explore the most flexible forms of payment for their customers so as to ease the process for them.

"If all else fails, there is always the option of court proceedings - often the threat of court action is enough to persuade a customer to pay."

Businesses feeling the impact of the downturn must make themselves fully aware of payment terms put forward by individual creditors as non-payment could result in costly court proceedings.

Royden said: "If payment can't be met within the required timescale in any individual case it often pays dividends to be open with the creditor - a longer payment term may be re-negotiated if the approach is proactive. In the case of most businesses the biggest creditor is often the bank.

"If you are experiencing difficult financial circumstances, be open with them.

"Keeping them up-to-date with your progress and your financial needs will often give them comfort that you recognise the importance of your relationship."

For more information on how long companies can take to pay bills go to www.paymentscorer.com.

'It is safer to have contractual terms to cover interest on late payment'