Top tips to manage bad debts and increase cash flow

Small companies, who are more vulnerable than their larger rivals to the banking credit squeeze, can take some simple measures to reduce cash flow problems and to cut out the risk of bad debts, according to a national accountancy group.

UHY Hacker Young recommends that SMEs consider adopting some of the following measures, including tips on how to manage their customer relationships and ensure they are being paid in time for their services, as well as tips on how to ease cash flow by slowing down their tax payments.

Top 10 tips to manage bad debts

1. Set a credit limit with customers. You can use a credit reference agency for an overall report on your customer’s credit, but be aware that your customers’ ability to pay bills can change from one week to the next.

2. Set out payment terms clearly to your customers. Although you do not have to charge it, you could refer commercial customers to your statutory right to late payment interest from them (currently up to 13%). See www.payontime.co.uk for more details.

3. Organise your billing schedule and invoice at the earliest opportunity. Consider asking for a percentage payment in advance. If your goods are easily identifiable include a retention of title clause in the contract so that ownership only passes when payment is received in full.

4. Review your debtors regularly. If customers cannot pay the full amount at once, consider an initial part-payment, and try to agree a payment plan. Getting some money in soon is better than nothing at all and may be less of a hurdle to the customer.

5. You could consider factoring or invoice discounting, i.e. assigning your invoices to a third party. This can improve the reliability of your cash flow. However, this does involve a fee.

6. If your PAYE/NIC comes to less than £1,500 a month then you can arrange to pay quarterly rather than monthly.

7. Start paying PAYE/NIC electronically through BACS. This allows you until the 22nd of the month or quarter to pay it, rather than the 19th. More details can be found at the HMRC site here. Payment of bills generally by BACS gives you more control of when transactions go through your bank account compared to cheques.

8. If you are VAT registered, consider moving to completing your VAT returns online. This gives between 7-10 extra days to pay, and it speeds up refunds. More details at the HMRC site here.

9. Avoid being charged interest or penalties on tax payments for your business by setting up a free reminder service using the Business Link website – look under “key filing dates” here.

10. If the worst comes to worse and your customer goes into administration, make sure that you contact the administrator to ensure they are aware of amounts owed to you.