The Life Cycle Of Debt

7th November 2018
Paul Brooks

With the uncertain future we are facing it has never been more important to carry out a health check on your business. The life blood of any business is cash flow and should the cash flow reduce or fail completely then your business cannot continue to trade regardless of the sales achieved. There is little point in trading unless you are being paid for the work undertaken.

Obtaining payment and cash flow in to your business starts from the moment a sale is agreed.

Do you or your sales people appreciate the importance of understanding the legal identity of your customer and confirming who the person signing an agreement is and whether they have authority?

Do your sales team seek a personal guarantee from a director?

Without this type of basic information, obtaining payment for services properly undertaken is made that much harder.

Once an invoice has been raised it is imperative that you hold and implement an effective credit control procedure. There is no right or wrong when it comes to a procedure and the basic rule of thumb is whatever works for your business. However even if you did hold a procedure that worked effectively for you, this may now need to be reviewed in light of the Pre-Action Protocol for Debt Claims which came in to force a year ago on 1 October 2017. This Protocol applies where your customer is an individual and imposes various requirements needed in the letter of demand. One of the biggest changes is that the debtor now has at least 30 days to respond to the letter (this can be extended to 74 days). This new time limit must be built in to your procedures to avoid your cash flow being potentially damaged.

Of course if all else fails then legal proceedings should be commenced. By this time you should be aware of the likelihood of your customer being able to pay (i.e. information obtained at the point of sale or subsequently). Issuing legal proceedings is not cheap and therefore the investment should only be made in the right cases where there is a good chance of payment being received. If a claim is ignored then judgment can be obtained and enforcement action undertaken to attempt to recover the outstanding sums, such as instructing bailiffs to attend the customer’s property.

Without cash flow you won’t have a business so getting the basics right is vitally important.

This is only a brief commentary on cash flow and the above points, and more, will be addressed in greater detail through our upcoming webinar series ‘Cash is king’ where we’ll be discussing pre-action protocol and legal proceedings & enforcement.

Paul Abdey, Associate, Brachers, Commercial Litigation.

If you’d like to speak to Paul directly about a specific cash flow challenge in your business please contact him on 01622 767470.

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