3 Golden rules to avoid bad debts and massively improve your cash flow

3 Golden rules to avoid bad debts and massively improve your cash flow

3 Golden rules to avoid bad debts and massively improve your cash flow

In an earlier Money Tips episode, we talked about how to recover debts without using a lawyer. I want to give you 3 golden rules on how to avoid the problem in the problem in the first place. If you follow these three golden rules you will avoid 90% of problems with bad debt and poor cash flow. Prevention, as they say, is better than cure.

This is partly in mindset problem, as many small business people are afraid to ask for payment in advance I do not sufficiently value their service to expect it.

Let me take you back to my business story

In 1999, a partner and I started a business recruiting overseas nurses to work in the UK and America. We supplied nurses to the NHS and private care homes and hospitals. We would do all the work recruiting and vetting candidates, arranging work permits and visas, making travel arrangements, meet and greet at the airport (usually at 6am) and drive the staff to the place of work. After all this, we would invoice the client and wait to get paid after the nurse had started work. In some cases, we waited and waited and waited.

One of the very first contracts was with a leading specialist NHS hospital in London. They wanted 40 nurses spread over a 12-month period and we were charging something like £1500 per nurse.

I remember the day we won the contract and coming out of the hospital almost jumping for joy, high fiving, hugging and punching the air! We had arrived!

The problem was that we had to do all the work and bear all the expenses (which included our flights and accommodation for an overseas recruitment trip) before we got paid. We were taking all the risks.


We supplied the staff and they were all very happy, accept one guy who complained about everything. We worked extremely hard on this contract, but the NHS government hospital did not pay us paid for over a year and only did so after a considerable amount of chasing and cajoling form yours truly. I went around the houses calling this department, the payments team, the invoice people, then another and another. By the time we had delivered on the contract and received all monies owed to us it was over 18 months from the day we got the order.

We knew we couldn’t survive supplying to the NHS or the government. In other words, we would have to run our office, pay rent, overheads and staff, invest in photocopying machines, phone systems, computers and equipment, do all the work and after all that NHS government hospitals expected us to wait for a year before they paid us. Fortunately, I had another business in financial services which funded the recruitment business and my partner had a full-time job for the first couple of years. Otherwise, there was no way we could’ve survived.


Moving forward, I had to quickly obtain smaller contracts within the private sector where decisions were made on the spot and most clients paid our invoice within a month or so, in some cases when it suited them.


The private sector was not as bad, but we still have to chase them for months and take a few clients through the county court system, which is where I learned to become a debt collector. In any small business, the managing director has to fulfil several roles and were many different hats.


When large companies or government bodies hold back on paying you on time, they are making use of the money they owe you as their leverage. You become their leverage. Yet when businesses are one day late with a tax or VAT bill, HMRC immediate hit them with a penalty or interest charge.


This practice sucks cash out of your business and means you cannot pay suppliers on time. In addition, I wasted a lot of non-productive time chasing invoices, juggling with bills and delaying payments because we were owed so much money.


Our biggest client, who owned 50 nursing homes and took hundreds of care staff from us, was run by a hands-on Managing Director, “Mr A” as we nicknamed him, who was a very sharp businessman and notoriously slow in paying. Every month, I would have to drive to their head office (a converted garage next to one of their nursing homes) to collect a cheque. If I didn’t it, it would take another week to be paid and we had to make the payroll or VAT, both of which you cannot delay.


I would grab a chair and sit down with Mr A, who didn’t even have his own desk, let alone an office, and he’d go through every single invoice and credit note. He was one of the smartest men I’ve ever met. Despite running a large business employing over 500 hundred staff, he remembered every detail of every invoice and would be able to recall a credit note or swop for someone who had left the job early, meaning he was entitled to a refund or replacement.


Only after he was fully satisfied would he get the accountant to issue a cheque, usually for £5-10,000. I would then drive 50 miles around the M25 back to the office before the bank closed.


He once asked me not to bank a cheque for a few days, so he too had cash flow issues. I saw that he had a member of staff who just dealt with invoicing and chasing social services for payment.

During this early period, we learnt how to keep the lifeblood of the business flowing through its veins, in other words – cash flow. Your business will soon die without cash the matter how many sales you are making.


1 Credit Control


The first tip to avoid bad debts and massively improve cash flow is credit control.


If you do not have strong credit control and good systems in place to manage your money your business will soon run into trouble. When you only have a few customers, you may be able to rely on your memory or manual systems, but as your business grows and you get more and more busy fulfilling orders you must have systems in place to avoid getting into a mess.


There are many software packages on the market which will help you create invoices, track outstanding debts and produce monthly reports. You should speak to your accountant or bookkeeper to check which package suits their system, which will save you time and money when it comes to producing your accounts.

Credit Control and staying on top of the situation. Use a software package to keep a track of all payments coming in, going out and due. We had an accountant and bookkeeper and relied on them to do this for us, but unfortunately, they were frequently incompetent and almost ruin our business had I not taken back control of the finances.

The business changed when we changed the way we charged and started asking for payment upfront when we started work.

My partner was brilliant that this and would simply present our written (not verbal) term of business to the client with the fees stated at the bottom of the letter. She then asked them how they would like to pay by cash, credit card or cheque.

I knew many of our colleagues in the industry who would claim that you “can’t charge clients upfront” because “they don’t have any money”. To which I would reply, if they didn’t have the money, then why the F*** are you doing work for them?

In our experience of dealing with thousands of clients, people who ask for credit or beg you to start the work with a promise of paying you later, are always the ones give you problems with payments later down the line. I can say that whenever we gave somebody the benefit of the doubt and said, “okay will start the work as your visa expires next week”, they always renege on their promise.

One small firm I knew well were constantly chasing people for work that they had carried out on their behalf, sometimes years later. The funny thing is, they still to this day take on work without upfront payment, insistent that people couldn’t afford it. They have since started requesting a 50% upfront payment, but often accept lower deposits and end up collecting dribs and drabs, which is time consuming. The problem is not the client, it’s the mindset.

We had people who swore blind that they had “no money” and were “broke”, but my partner always stood firm. She would say, “no problem come back when you have the money, and I will start the work on your visa which expires next week”. The “broke” client would then go out and come back 15 minutes later with the cash.


I used to say to clients, we are not licensed as a bank or credit card company, so we leave the money lending to them. Don’t become a bank unless you want to go into moneylending. If you do give credit, you should be checking out the customer just like a bank do when they lend money.

Now you might say “you can’t do that in my industry”, and there are some exceptions, but I guarantee that there are people in your industry that charge on a different basis to you, especially if they are a small-to-medium sized service-based business.

I’ll give you an example. I use a local one-man-band plumber and heating engineer for my properties. He is reliable and trustworthy. After he does the job, he makes a note in his book and posts me an invoice a few weeks later, by which time I have usually forgotten about the job. I then have to write out a cheque, because that’s how he wants to be paid, and post or drop it round to his home. He then has to manually deal with that cheque and paid invoice. He also has to spend his evenings preparing invoices and chasing up people that have not yet paid him.

Now compare this to a locksmith I use. He turns up in his van with everything he needs to do the job. When he’s done, he asks for payment and has a mobile credit card machine in his van. I pay the bill, prints a receipt or writes an invoice and that’s the end of it. He doesn’t have to spend his evening on his computer preparing invoices or chasing payments.  It’s also easier for me as the customer, so it’s a win-win all round.

Our regulator at the time, the OISC, said we could not charge clients in advance and insisted that “clients” money be held in a client account until the work was completed.


The OISC, like most government organisations and QUANGOS (quasi-autonomous non-governmental organisation) always charge their fees in advance with no refund if they refuse your application.

There are obviously some situations and some business relationships where you cannot charge upfront. A few years ago, I did some marketing for a nursing agency in London. They supplied nurses to the NHS for temporary placements, usually last-minute placements when the hospital were short of staff.


The agency would have to pay their nurse weekly, but they would not get paid for at least 30 days and sometimes months later.


They used a factoring company or a bank to smooth out the peaks and troughs so they could maintain cash flow. The factoring company pay their invoices and then chase the company which owns the money.


The problem with factoring is that it is expensive and eventually if bills are not paid, they can pull the plug.


On one particular contract they were dealing with an NHS umbrella supplier, which was a larger agency which then subcontracted to smaller or medium size agencies. At one point, this company owed my clients £600,000 for contracts were filled up to 12 months previous. This meant that they had paid the nurses and the back-office staff, but had not been paid themselves. This was a huge burden on the company and almost broken down.


What’s this was going on, they were still doing business with the company and supply nurses every week. This company was a major customer and provided much of the work coming into the agency, so they could not afford to simply take them to court as this would be the end of the relationship.


The company were not actually refusing to pay any of the invoices, they would just query them or return them. There are hundreds of individual invoices and transactions going back as far as 12 months and the company could not cope with all of the queries.


How did they solve the problem?


The answer is, they brought in a credit controller. He was an experienced credit controller and his job was to make sure that outstanding invoices were paid and ensure that future invoices did not remain unpaid for too long.


He tightened up the whole system and did a good job, but it took months of painstaking work, going back and forth dealing with queries to get the outstanding balance paid. In the end he got all of the outstanding invoices paid apart from a few thousand pounds which they eventually had to write off.


He also made sure that invoices did not remain outstanding after the due date. Reminders were sent out automatically and he would politely call debtors to request payment.


In my business, I was always the credit controller, debt collector and money chaser! You must have systems in place and stay on top of your invoices at all times. That way, you can pay your suppliers on time and not become one of their debtors.


  1. Request payment in advance – don’t give credit, you’re not a bank!


Remember are used to see a sign in small shops which said:


“Please don’t ask for credit, as a smack in the mouth of the offends”!


You’re not a bank or a credit card company, so why are you giving credit to people? If they cannot get credit themselves there is a reason for it. Perhaps they are a bad risk, or maybe they’re up to their eyeballs in debt already, in which case you should not be giving them any more credit.


A customer’s propensity to pay a bill diminishes in proportion to the time that has elapsed after the service has been delivered.

Once you have supplied a service or goods to someone, they have already started to forget about you. They are moving on with other things in the life and are not thinking about your invoice or your problems. They have enough problems of their own.

The time they are most emotionally engaged to pay you is at the start of the transaction when they need you most.

Like when your boiler has broken down in the middle of winter during the Christmas holidays.


You would agree to pay anything to get the boiler fixed. Once the boiler is fixed and the house is warm again, you’re probably forgotten about the heating engineer who came out during their Christmas holiday and now think the bill looks very high for a simple repair.


Imagine if you needed a lifesaving operation which can only be done by private specialist hospital. Your operation is going to cost £10,000 upfront but it could save your life. At that moment, you are going to get the money.

If you have not paid in advance and woke up after the operation you would feel immense gratitude to the surgeon. A few weeks later your feelings towards the hospital may have changed. You might start thinking, “they charged a lot of money for a one-hour operation” or you’re worried about other bills coming in because you’re not working.

This is why private hospitals have a credit card machine on the front desk.


I realise that there are situations where you cannot request payment in advance in which case you need to go back to tip number one, credit control and systems.

If you do have to supply goods or services without upfront payment then the very least you should do is check out your potential customer. Obtain a credit report, ask around, google them, do a Companies House search or request references. You wouldn’t just handover thousands of pounds in cash to someone who walked in off the street with you? So why are you supplying thousands of pounds of goods or services with no background checks or references? A building contractor I know was owed over £100,000 by a wealthy customer who owned a large company. He thought he could trust them. He used to do refurbishment work for me without charging anything upfront, not even for materials. One day, I asked him why he was not getting any advance payment from me. He replied that I had a trusting face!


  1. Make it easy for customers to pay


You need to make it as easy and as simple as possible for customers to pay and buy from you.


Think about the above comparison between my plumber and my locksmith. The plumber wants a check posted to him, where is the locksmith pulls out a credit card machine which makes the whole transaction easier for both parties.


I would rather pay my plumber on the spot so I can forget about it, but he always insists on sending me an invoice in the post. I told him on many occasions that he should get a credit card machine, and he would reply that they were expensive and that the banks would be taking a percentage of his turnover. What he failed to realise is that the banks are taking a percentage of his turnover anyway in bank charges and that his time would be better spent earning money instead of preparing invoices and banking cheques. Not taking credit cards is a false economy.


There are still a couple of Chinese restaurants in my area which refused to take cards. I’ve often seen him in the bank with a bag full of cash and coins. The bank will charge him to process this cash. Yes, a credit card company will take a percentage of your turnover, but it saves you time and money. More importantly, more people will want to do business with you as increasingly people are not carrying around as much cash as they used to in the past. I can’t think of how many times I’ve avoided going into establishments because they don’t take credit or debit cards. Some even tried to add on a fee for using a debit card!


The cost of setting up a credit card facility is a fraction of what it used to be. When we started taking cards in the early 90s, HSBC charged us a fortune to set it up and it took ages. Nowadays, there are many other card payment systems through challenger banks, such as Sumup which are cheap and easy to use. My massage therapist – a recent start-up business run from a cabin in her garden – uses a neat little Sumup card machine linked to her smartphone.


If you collect recurring payments or annual fees do not send them a form in the post and ask them to fill in all the details every year and then send you a cheque in the post. A lot of charities and non-profit organisations still work in this way, mostly because they refuse to change with the times.


You can collect recurring payments in a number of ways, by standing order paid into your bank from the client’s bank, by direct debit where are you debit your customers bank or by credit card facility.


Over the years, I’ve noticed that the Americans are particularly good at making it easy for you to spend money. They collect payments fast and efficiently.


I remember eating in American restaurants 15 years ago waiters would carry a machine attached to their belt. When you asked for the bill, they would immediately produce it on the spot and could collect payments from you there and then.


There was none of this waiting for the waiter, saying can I have the bill please and then watching them walking away for 10 minutes before dropping the bill on the table on a silver plate and then disappearing for another 10 minutes. Then they come back and you say I want to pay by credit card. Then they go back to collect the card machine from the counter. All of this takes about 15 minutes. Being impatient, I often order the bill halfway through the meal to save time!


Make it easy and quick for your customers to pay for your service and do business with you. This includes the whole transaction and not just the payment. Make it easy for them to order, contact you and finally pay you. I see so many small businesses to make life difficult for themselves and their customers. No wonder companies like Amazon are growing so fast. They are convenient to use and never argue when you need to return an item.


Just to recap. My three tips for avoiding bad debts and improving cash flow are:


  1. Credit control and systems
  2. Take payment in advance
  3. Make it easy for people to do business with you and pay you.

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