Cash flow management - chasing the late payers

AS and A2 students are likely to come across a scenario or two where the case study business is suffering from slow payment of invoices by customers who bought on credit (so called “trade debtors”). An interesting survey out today suggests that small businesses in particular are being more aggressive in chasing up long-standing debts - as the need to maximise cash flow becomes the number one business priority…

According to analysis by debt-recovery law firm Lovetts, businesses issued Letters Before Action (LBAs) 39 days earlier in February 2009 than they did in February 2008.

An LBA is a formal letter warning of intended court proceedings, often written by a solicitor. LBAs are used to encourage payment, or to obtain a response from a customer before issuing a lawsuit.

I came across these for the first time a few days ago. We’re just about to start taking legal action against school customers who have left our invoices outstanding for 2,3 and sometimes 4 years (well - thats a long time and we have asked for payment many times!). I wonder whether using an LBA might just do the trick - and it looks like many other small businesses are turning to them during the credit crunch.

According to Lovetts chairman, Charles Wilson.

“Often businesses just need a firm reminder to pay up, and in most cases, LBAs do the job.”

For students, the key learning point is that managing and improving cash flow from trade debtors is all about being pro-active and persistent.

The standard business studies textbook approach to this is to argue that firms should be careful taking an aggressive approach to credit management - with the risk that the firm might lose custom by being too aggressive. Thats a good point - there is no need damaging a relationship by simply threatening legal action (not right at the start). There may be good reasons why invoices haven’t, or can’t be paid.

A good counter argument for students to use in a longer answer is to point out the importance of a mutual trading relationship between the firm and its credit customers. Taken an eternity to pay a bill is unethical and it is no basis for a long-term relationship.