A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support 6.3 Cash flow and credit control If you run a shop or a café, customers are expected to part with their money as soon as you serve them. But in many types of business it will not be possible to charge your customers till later. Even when you ask them for payment by issuing an invoice it is common practice for the customer to delay payment. You need to be prepared for the complications and difficulties created by this unavoidable aspect of business life. The importance of credit control: Whether you are providing contract services for public and private bodies, selling goods to retailers, or renting a room for a meeting you probably won’t get paid on the spot. So you need a credit control system to keep track of the money you are owed. This has important implications that some people overlook: • Since you pay to deliver the service some time before you receive payment, it may seriously affect your cash flow, ie you have to pay wages and production and service costs up front. • Once they have got what they wanted from you, even your most honest and supportive customers may have little incentive to make quick payments, especially if their own cash flow is causing difficulties. • Large organisations including some public bodies automatically expect lengthy periods of credit. So it is not exceptional to have to wait two months for payment. • Offering credit to customers immediately adds a new element to your book keeping system – the need to record and keep track of the people who owe you money. • You are very likely to need systems or at least routines for reminding people to pay their bills, chase late payers and deal with those who won’t pay. Is this the sort of business you want? The burdens of credit control may make the difference between a viable business and one that quickly becomes too difficult or complex to manage cost effectively. Here are some of the factors you need to plan for: 150
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support • Cash flow forecasting: Delays in payment should be reflected in a cash flow forecast in your business plan – this is the same as a budget for your project, but it is costed month by month to include the actual times when you need to pay for staff, stock and materials, and the actual times when payments will be received. • Bank credit: Delays in payments could mean that you need to have credit from your bank; this will have to be arranged in advance, and is not necessarily guaranteed for new businesses. Borrowing is not free. Bank interest will add to your operating costs. • Working capital: Even if your organisation is lucky enough to have reserves or grant funding to use as ‘working capital’, the money that is tied up in customers’ unpaid bills will not be available for investing in the business, for instance to buy new equipment. • The dangers of business growth: It can be a shock to realise that a business which offers customers credit faces special problems if it grows very quickly. The more work you do the more money you have to pay out immediately, and more you may need to borrow to fund this in the short-term. It is not at all uncommon for conventional businesses to grow too fast and cripple themselves with debt because they cannot resist the opportunity to expand. Then it only needs one large customer to default on payment to send your enterprise into insolvency. • Payment incentives: You may need to offer incentives to customers to pay more promptly. − The most attractive approach may seem to be to add a penalty of a few per cent for late payment. But this can alienate customers, and in a competitive environment anything which raises their costs unexpectedly could drive them away. − Alternatively you could offer a discount for early payment, though this means adjusting your pricing arrangements or accepting that you will earn less than you had hoped. A credit control system: Even a basic credit control system can be quite complex. It is likely to include: • Arrangements for issuing invoices to customers at the point (or soon after) they receive the service or goods. • A record of invoices issued (in a manual system this is the unpaid invoices file). • A system for identifying paid invoices (paid invoices file). 151
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