So you have just won a new client. You aced the bidding process, the initial project meetings went well and the money is good. You can’t wait to get started, when out of the blue you get the following note from their finance people:
“Please be advised that our payment terms are 60 days from date of invoice. This will override any payment terms stated on your invoice. Payments will be processed accordingly on the final Friday of each month.”
What do you do?
Having to chase late payments is sadly an experience most people in business have to go through at one time or another. But knowing when irritating delays have crossed the line into a breakdown in the business relationship can be difficult to fathom.
Cash flow is important, but long-term survival depends on holding on to the clients that you invested in.
British businesses are facing a unique set of circumstances right now - the global economy is emerging from the deepest recession in living memory, domestic trade is uncertain with the EU Referendum looming, and there are issues of legislation from the National Living Wage to auto-enrolment pensions that are affecting company finances on a national scale too.
With all of this in mind, what are the implications for businesses of all sizes when it comes to getting paid for the work they do?
We recently wrote about a large fraud case involving at least six connected companies. Each of these companies used false accounts, identity theft and fake documents to achieve large amounts of credit. When the goods arrived, they immediately vanished, but they were never paid for. The suppliers were left out of pocket, and the fraudsters disappeared with the proceeds.
Clearly, this was a very large and highly organised fraud, and 6 companies known to be involved have been liquidated. This kind of operation is unusual, but increasing in prevalence and we suspect it will only get worse as more criminals start to hear about it.
The Insolvency Service has just completed an investigation into a network of fraudulent companies in the UK. The implications of this investigation should act as a cautionary tale for anyone that offers credit to their customers.
In this case, scammers used fake financial accounts to acquire goods on credit with suppliers, using fake details and false documents to elevate credit limits artificially. As the scam progressed, these companies acquired goods they had no intention of paying for and unwary suppliers continued to offer credit, because all of the companies looked profitable on paper.
We recently blogged about Crowdmix, the London-based start-up that went into administration. It’s a sad fact that many businesses fail within their first year. This can’t always be prevented: starting a business is tough. But there are certainly things you can do to avoid disaster.
Profit is important to all businesses, but don’t underestimate the importance of cash flow either.
London based start-up Crowdmix Ltd was in the process of developing a social media music platform. But before it could even launch its product fully, it ran out of money despite having previously raised £14 million in funding.
As of Monday 11 July, 2016, it has left its creditors, many of them freelance contractors, tens if not hundreds of thousands of pounds out of pocket. If you’re owed money by Crowdmix the prognosis for recovery is not good, so let’s look at what happens next.
When Tesco was exposed for its long payment delays, it exposed an ugly trend among large businesses: delay, delay and delay some more, until your supplier is on its knees. And while the supermarket provided an extreme example of this unethical practice, a shockingly large percentage of global businesses see late payment to suppliers as a “fact of life”.
When you sign up a new customer or client, it’s tempting to skip the formalities. New customers are always keen and it seems like nothing can go wrong. The last thing you want to do is sour the relationship, or risk losing a client to a competitor. If you ask for a deposit, are you at risk of scaring them away?
In truth, most businesses are used to paying deposits especially if they are dealing with freelancers or micro businesses, and there are plenty of good reasons that you should ask for one.
Small businesses are extremely vulnerable to cash flow problems, and even the slightest slip in payment dates can leave the business unable to pay its suppliers and even staff salaries. In many cases, big suppliers don’t pay their smaller suppliers quickly enough to keep the small businesses running, and as a result the small business finds it simply can’t make ends meet.