The outs and ins of finance

It's often easier to collect money from local clients

Lynn Willrich has a great time installing audio visual equipment for exhibitions and many other hi-tech activities.

It's an exciting business to be in.

The exhibitions are full of creative ideas and there are many famous-name clients such as the FA Premier League Hall of Fame.

Have a look at the company's website,
www.djwillrich.co.uk, to find out exactly what they do.

Cash flow

There is just one cloud on the horizon - cash flow.

Installations like this are expensive and Lynn has to pay for all the equipment they use and the people to do the work before the company is paid by the client.

If people don't pay their bills on time, DJ Willrich Ltd, as the company is called, can be in trouble.

Just think...

What will happen to DJ Willrich Ltd if too much cash flows out before money starts flowing in?

What do you think Lynn must do to keep control over the situation?

Please pay up

As 80% of the cost of a project is equipment which has to be bought from suppliers, Lynne asks for:

30% of the full cost when a project is agreed as the company has to order the equipment immediately so the bills start coming in.

50% once the installation begins to cover the rest of the equipment costs

20% when the work is completed.

Even when this works - problems can still crop up.

DJ Willrich usually starts to set up its installations last - when all the building work is done - so the slightest delay upsets the cash flow.

The business that has provided the equipment is waiting to be paid but Lynne is still waiting for the 50% payment as their work hasn't begun.

Just think...

What can happen to a business that can't pay its bills?

How does Lynne avoid these difficulties?

A small business problem?

Cash flow is a problem for small businesses but not a small problem!

There are all sorts of costs involved in managing cash flow and avoiding insolvency.

Borrowing from the bank to bridge a cash flow gap costs money as the company has to pay interest on the loan.

It takes time as Lynn has to manage the bank account on a daily basis. She could be using her time to add value instead of worrying about keeping the books balanced.

Late payments to suppliers may make them unwilling to accept orders in future. One small company's late payment can be another's cash flow problem.

Large companies can be big enough to spread the problem. If one project is paying late, another may be on time so the bank can be kept happy.

Relationships

Lynne's lucky because she has good relationships with both the bank and suppliers.

Fortunately they understand the difficulties that face a small business - but it always makes her feel vulnerable because you can't predict when things will go wrong.

Although she does her cashflow forecast for the months ahead, there are too many things that might go wrong.

Just think...

Why is it hard for Lynne to predict when cash flow problems will happen?

Explain why cash flow can be more of a problem for a small business than a large business.

Does the law help?

In 1998 the Late Payment of Commercial Debts Act was brought in.

It aimed to help small businesses by allowing them to charge interest on overdue payments.

The aim was to encourage businesses to pay up on time to avoid having to pay the interest - but has it worked?

Lynne is not convinced.

She needs to keep good relations with clients in order to maintain a good reputation.

If she charges interest, they won't come back and may tell others that they are not a great business to work with.

The other solution is to take people to court to get the interest.

This will damage their reputation even more.

Anyway - most small businesses have neither the time nor money to pursue poor payers.

Just think...

Making a profit is critical to the success of all businesses but sometimes it can be at the expenses of others.

Should an 'ethical' business always pay its bills on time even if it damages its own position?