There is nothing more important than improving cashflow. Paul Jackson gives some tips
The observation by Lord Denning that to the building trade, “cashflow is the very lifeblood of the enterprise”, is as true today as it was when he uttered it in 1970. Given today’s recession, perhaps more so.
As delays in the payment cycle become increasingly prevalent, what action can the average contractor take to improve things?
In payment terms, the important thing to note is, one size most certainly does not fit all. Your agreed payment terms should be set to ensure there is a constant stream of cash, however small, flowing into the business. The relationships you build with the people who actually sanction your payments are vital. Do not neglect them.
However unpalatable they may be, a contract’s provisions in respect to delays and time are there for a purpose; it will harm your cashflow if they are ignored.
Companies that persistently pay late should be given the opportunity to pay interest and compensation on the overdue account or reminded, with a suitably worded notice, that continuing to flout the payment rules will result in an absence of workers on the site. In this context, committing your entire workforce to one customer is a high-risk strategy.
Suppliers and subcontractors
Information has a value. Subcontractors and suppliers value the early warnings that instructions, delay notices, production schedules and programmes can provide.
Passing this information to them in an appropriate fashion will help them to manage themselves more profitably. Improvements to your cashflow will be evidenced by having first call on any scarce resources or receiving better discounts.
Finally, when placing a sub-subcontract order, remember the Construction Act’s requirements on providing payment and withholding notices also apply to you.
A successful debt recovery service once summarised reasons why businesses failed to get paid on time. The reasons were:
- There was either no customer application form or it was not used.
- Applications or invoices failed to be raised, either on a timely basis or at all.
- A credit control strategy was either lacking, unclear or not implemented.
- Clients were excused poor payment practices.
- Credit control was by repetition rather than escalation.
- Communications tended to be unclear, imprecise or not carried through.
- Lessons were not learned.
It is a simple matter to estimate the value of your income, then identify when the income is to be received. Any deviation from these two criteria must be acted on.
Contracts and disputes
To survive in business it is essential that companies foster good relationships with all their stakeholders. When two businesses trade, their relationship should be formalised into an agreement. These agreements are called ‘contracts’ and, although they can be made orally, it is far better that they be ‘evidenced in writing’.
Consumers must be given a cooling-off period under the Cancellation of Contracts Regulations, and this too must be evidenced in writing. Without this, enforcing your payment terms will be virtually impossible.
Of course contractors impose conditions of their own. When an order is received, acknowledge it by saying you will confirm acceptance soon, then check the contract sum, discount, retention provision, payment terms, withholding and set-off provisions. If these are inequitable, decline the order. A significant number of contractors will renegotiate if your trading history is good.
Retention of title
When goods are delivered, title (ownership) may transfer to the customer. This will almost certainly be the case, once they are installed. It is possible to protect yourself by including retention of title clauses in your terms and conditions. Clauses of this nature are not difficult to draft but need to be constructed to reflect the nature of the service provided.
Electrical and Mechanical Contractor
Paul Jackson is commercial adviser at the ECA