Knowledge Centre

1.1 For every supplier, work out what your purchasing objectives are.

• The priority is usually reliability, followed by quality, price and then their credit terms.
• Shop around. If you have a choice of good suppliers for a particular product, your supplier may be prepared to extend the credit period to keep your business.
• Agree these objectives with your accounts department, and train them in how to treat your creditors.

1.2 Set out a general policy on payment and make sure your suppliers understand your payment terms and you understand theirs. For example, you might pay within 30 days of receipt of invoice.

• If you generate cash, like most retailers tend to, you can afford to pay quickly in return for price or settlement discounts.
• Write down your terms of trade and ask any new supplier to agree them by signing and returning them. If the supplier's terms of trade conflict with yours, come to a (written) agreement before you order.

If you manage your cashflow well, you should be able to pay your suppliers on time.

1.3 Allow for some flexibility.

• Be prepared to trade off credit in return for other concessions (or vice versa) from your suppliers.
• Some suppliers operate on a cash-up-front basis, or require a deposit.

1.4 Communicate the benefits to your suppliers, so they support you in the future.

• If you pay promptly, your suppliers should expect to do you a favour in return when you need one.
• If you negotiate extra credit, show the suppliers what they get in return.

1.5 Review your terms regularly.

• Check whether other suppliers would offer better terms. If they would, ask your existing suppliers to improve theirs.

2.1 Your financial backers are usually top of the list.

• Treat your bank as an investor, by providing regular management accounts in a format which the bank has agreed is useful.
• Make sure you are aware of what would happen if you were unable to make a payment on time. For example, at what point would your hire purchase company repossess the equipment?

2.2 Decide which suppliers are mission critical, on the basis that there is no alternative supplier immediately available.

• IT suppliers (who regularly maintain your IT system) are often high up the list, as trying out a new supplier can be a risk in itself.
• Your landlord may have the right to evict you for non-payment. But your landlord would also have the right to seize goods within your premises, without going to court.
• Suppliers of commodity items, which you can buy elsewhere, are bottom of the list.

2.3 Identify which creditors are likely to be inflexible, and could seriously damage your business as a result.

• Statutory bodies such as HMRC can automatically surcharge you for late payment (see 5 and 6). Your local authority can sue you for non-payment of business rates.
• Utilities suppliers can cut off your telephones, electricity, water or gas.

One problem is that these organisations are large and impersonal, so it is hard to build a supplier relationship (see 3). If you hold back payment because of a dispute, you may be penalised immediately. You may have to pay up first and argue your case afterwards.

3.1 Negotiate clear, written agreements at the outset. Then stick to them.

• Be aware of your supplier's right to interest on late payments.

3.2 Involve your suppliers in your business, so that they understand your needs.

• Suppliers are often good at coming up with ideas for how to improve your product or your whole business, as they supply other companies like your own.

3.3 Keep them informed, to build up their trust in you. Otherwise small problems can escalate into large ones.

• A common example is the situation where you withhold payment because you received damaged goods. It is not enough to telephone the operational manager at the supplier to explain the situation.

  You should also confirm it in writing and copy the letter to the managing director or finance director there - otherwise when they review the aged debtors list, they may assume that you are simply refusing or are unable to pay on time.

Also keep informed about developments at your suppliers. For example, a change of ownership can mean a drastic reduction in the credit a supplier extends to you.

3.4 Ask for benefits in return for giving suppliers what they want.

• For example, you might negotiate to receive an enhanced service in return for committing to place regular orders or pay on shorter terms.

4.1 Talk to a bank manager who's empowered to make lending decisions.

4.2 Build up a track record, so the bank trusts you and the information that you provide.

• Supply the bank with regular management accounts, including cashflow forecasts and a brief commentary explaining variances. Be proactive, rather than waiting to be asked for the information.

4.3 Give advance warning to the bank of any cash shortages. The earlier your warning, the more support you may receive in return.

• Provide evidence to show that the cash shortage is only temporary. Third party evidence, such as a confirmed order, can be particularly effective.

4.4 Organise the right finance, so you have options ready when you need them.

• In principle, the bank can demand repayment of an overdraft at any time. Consider the benefits of alternatives such as bank loans, leasing, hire purchase and factoring. In smaller businesses, personal finance is increasingly a major source of funding as well.

5.1 If you need time to pay, approach the VAT office with a clear payment plan.

• Unless you have clear evidence that the plan is reasonable and viable, it is unlikely to be accepted.
• The first answer you receive is almost invariably 'no'. But continued, reasoned correspondence may lead to a solution.
• You are far more likely to be granted a temporary 'arrangement to pay', such as paying off the debt monthly over three months, than a longer term arrangement.
• If you fail to stick to the agreement you can be surcharged, and are less likely to be granted other arrangements thereafter.

5.2 If you repeatedly fail to pay VAT on time the penalties escalate rapidly.

• Once you have been warned, the next step is a fixed surcharge of 2 per cent of the tax outstanding. This increases to 5 per cent, 10 per cent, and 15 per cent for each subsequent default.
• Once a surcharge liability has been incurred, you need to pay your VAT on time for a full year to come out of the surcharge system (and revert to a pre-warning status).

6.1 Individual Collectors of Taxes (or tax inspectors) have the authority to agree an arrangement to pay with you.

6.2 Interest is payable on late payments.

7.1 If you are in financial difficulties, or expect to be, get professional advice quickly.

• Consult a reputable firm of insolvency practitioners. Contact the Association of Business Recovery Professionals (020 7566 4200) or the Insolvency Practitioners Association (020 7623 5108).
• Directors who allow their limited company to continue trading with no reasonable prospect of avoiding insolvent liquidation may be personally liable for 'wrongful trading'.

  They also run the risk of 'creating preferences'. For example, if you pay back a director's loan in preference to paying a trade creditor, this would probably be a preference - in which case the money would have to be repaid.

Assuming that you are not advised to cease trading, take steps to improve your cashflow (see 7.2 and 7.3).

7.2 Agree extended credit with your suppliers.

• The further ahead you can plan this, the better. Reassure your suppliers that the problem is only temporary.

  For example, you might explain that you are taking on a large order which will cause a hole in your cashflow in four months' time. Or you might be recruiting and training a new salesman, which will reduce sales in the short-term but boost sales thereafter.

• Agree a plan, then stick to it. Don't be too optimistic.
• You will probably be advised to part-pay several creditors, rather than paying one and ignoring the rest. Aim to achieve some visible progress in the eyes of all the creditors. This will help buy you time to trade your way out of the difficulty.

7.3 Keep your bankers informed, to avoid any panic at their end.

• If you have not done so already, investigate the scope for extending your borrowings. (See 4.4.)

7.4 If you receive any writs or claim forms, immediately ask your solicitor or accountant how to proceed.