is your business safe?

January 29, 2018

Luisa Grey, Director at Eazipay Ltd

The tragic collapse of Carillion, the UKs second largest construction company, raises profound questions for every SME owner, and principal among these is: “Is my business safe?”

If a major British company can fail while still holding £billions in government contracts, how can SMEs protect themselves from financial over-exposure which could drag their business into a downward spiral into bankruptcy?

A staggering 30,000 smaller companies could be negatively impacted by the demise of Carillion. The impact on peoples’ lives must be devastating.

It isn’t just new customers that pose a financial risk to your own business; your existing customers do too. Unless you’re extremely good friends, you won’t possibly know if your best customer is heading towards financial ruin. How could you?

One partial solution would be to perform regular credit checks on your customers, but that is time consuming, comes at a cost, and at best, can only give you a snapshot of your customer’s financial health. Credit checks are retrospective; they can only give you a broad indication of how viable the company was. They will not help you predict a customer’s future financial stability.

So how can SMEs keep financial tabs on their customers, so that if trouble starts brewing, they are warned at the earliest opportunity?

The answer lies in the humble, but brilliant Direct Debit.

Most of us – from a business perspective - see Direct Debits as an efficient way of collecting money that is owed to us on time and in full, every time. And that is true. But for the savvy business owner, using Direct Debit can also give them a real-time indicator of a customer’s state of financial health.

Let’s take a typical example. Company ‘A’ supplies goods and services to company ‘B’. At the end of the month, company ‘A’ submits and invoice for the work done, with payment expected 30 days later.

Company ‘A’ then starts work on next month’s activity with the intention of raising a second invoice at the end of the next month. So, by the time the first invoice falls due, company ‘A’ is already two invoices into the contract and is about to start on month three – and still no money has changed hands.

So what do you do? You need the work, but you sure need to be paid for the work already done. So do you wait a couple of days before chasing the outstanding amount from month one? Remember you are now in month three! When you do chase up the invoice you are told that the cheque is in the post, that the person who does the cheque-run is on holiday, that the no-payment is an oversight and will be corrected immediately. So you wait another few days. And then…

You can see where this is going. The increasing debt is rapidly ensnaring company ‘A’ and by the time the grim realisation sinks in that there is no money coming to company ‘A’, it’s way too late to pull out.

So let’s run that example again, only this time Company ‘A’ insists that all its customers pay by Direct Debit. The beauty of making Direct Debit an essential component of its payment terms is that if company ‘B’ has enough funds in the bank, then company ‘A’s invoice will be paid in full and on time. No excuses. Direct Debits don’t get lost in the post.

There are essentially two main reasons why a Direct Debit might fail: one, because there isn’t enough money in company ‘B’s account or, two, the Direct Debit has been cancelled. The point is that you will be alerted to either of these situations long before they become financially fatal.

By insisting that your invoices are paid by Direct Debit, company ‘A’ is not only giving itself the best opportunity to be paid but it is also running a financial health-check on its customers every month. If payments are made on time for the full amount then all is good and you move into the next month’s phase of work. If the payment is missed you will know in plenty of time and be able to prevent the situation becoming critical.

If a customer refuses to pay you by Direct Debit you may well take that as an indicator that they don’t have confidence in their cash flow predictions to meet your invoices as they fall due.

Direct Debits will give you a real time indicator of your customer’s ability to pay you, this month, next month and every month thereafter, and in real time. There are no magic bullets when it comes to being paid, but given the volatility surrounding all of us at the moment, being forewarned is definitely being forearmed.

Luisa Grey is a director of Eazipay Ltd, one of th UK’s largest and fastest growing Direct Debit processing companies. Eazipay provides regular Direct Debit collection and processing services to thousands of SMEs and corporate organisations in a wide range of market sectors throughout the UK, Europe and beyond. For more information visit www.eazipay.co.uk