CASHFLOW: the jobbing contractor’s curse...
Victoria Delafaille, a Director of Exchequer Accountancy which specialises in SME accounts, offers a few words of advice about preventing poor payers from ruining your day...or worse.
We owe one of the most telling descriptions of running a business to the advertising guru, Charles Saatchi.
“Running any business,” he argued, “is like holding a colander under a running tap.”
“The water pouring into the colander is like the income stream from sales. The water running out through the numerous holes is your expenditure. The value in your business is merely the constantly changing pool of water that’s temporarily accumulating in the bottom of the colander.”
“If too much liquid comes in, and spills over the rim, you’re overtrading and in big trouble because you haven’t the resources to process the work fast enough. You need a bigger colander. If too little water comes in, or comes in too slowly, your pool of funds quickly shrinks – and you’re in even bigger trouble, with insufficient money to pay suppliers and overheads. You’re technically ‘trading while insolvent’.”
In short, Charles is right. Proper management of your income and expenditure is critical to your survival as a business. In the UK construction industry, where some £30billion of unpaid invoices are sitting on file at any one time, this is doubly important. It’s in the nature of the industry that main contractors delegate work to sub- contractors and they, in turn, often delegate work to independent small trading firms or sole traders. This puts SMEs at the back of the long queue for payment.
And nobody’s in a hurry to pay.
Your terms of business may state clearly that you need to be paid within 14/28 days but there are endless excuses and reasons for delaying payment; not least the precise date of completion of satisfactory work (niggles put back time) and the exact date you got around to invoicing for it.
The truth is that the waiting-time of 30 days for the payment can easily stretch to, 60, 90 or even more. The big players know it pays to sit on cash balances – and aren’t afraid to do so.
In the interim, you have to pay your suppliers, perhaps the HMRC and the usual catalogue of everyday outgoings. Wages, supplies, premises.....
In effect this means you are subsidising your customers’ borrowings and getting no interest for your trouble. You can get help to smooth out cashflow bumps from various sources, of course, at a price. Invoice factoring can work for some, but it adds an unwelcome extra cost. Bank borrowings will require you to provide both interest and collateral; putting your home on-the-line is never ideal.
See exchequeraccountancy.co.uk for more advice.