A guide to third sector trading - WCVA

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).
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