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Business success – the importance of cash management

08 September 2021 | Paul Hardman

Paul Hardman discusses the importance of cash management in a business, the perils of letting processes break down, and how you can best protect your interests post-pandemic.

A recent conversation with a cashflow management consultant brought home to me the importance of cash.  Many of the dynamics of business are replicated in the board games I love to play (and occasionally win) and these sorts of games involve balancing between income producing units and victory units.  To win the game you need to have the most victory units but you cannot get there unless you have managed your income producing units properly and used your income to grow your overall wealth (in victory unit terms). 

Customer confidence & cash management

In business, income is dependent ultimately on your customers’ ability and willingness to pay.  In some ways, experience is counter intuitive.  You might think that a customer would be more willing to pay if you are more generous with payment terms, whereas experience tells us that customers will pay a premium for pricing certainty and prefer to know where they stand on bills.

This was apparent in a recent case I handled where tempers had gotten frayed between an IT service supplier and its client.  The relationship, which was by now 20 years old, was coming to an end and in a fit of pique mixed with some genuine concern about payment sent in 3 statutory demands (one for each company in the customer group).  Some of the amounts claimed went back 4 years and includes items which the supplier had paid out to third party suppliers but never billed on to the customer.  We were able to settle but the point was that the customer wanted a different sort of service:  the technical expertise was not the issue, it was how the back office was run that caused the customer to think again about its IT provision for the future.

Business cash management post-pandemic

As we come out of lockdown, the furlough schemed has ended, the VAT deferral will come to an end and CBILS loans will start to become payable, cash management will be all the more important to manage.  The indicators are that the rate of insolvency will rise as we go into the new year so make sure your credit control policies are in place and effective and your terms and conditions are up to speed.

Legal aspects of cash management

Under the Corporate Insolvency and Governance Act 2020 (CIGA 2020) which came into force on 26 June 2020, suppliers are restricted from relying on provisions which enable them to terminate supply, demand repayment of existing debt as a condition of continued supply or “do any other thing” in relation to a contract for the supply of goods or services, as a result of the customer’s insolvency.  The exemption for small suppliers came to an end on 30 June this year.

Statutory demands cannot be used as a basis for petitioning the winding up a company before 30 September 2021 and nor can you petition to wind up a company based on an unpaid invoice unless you have reasonable grounds for believing COVID-19 has not had a financial effect on the company or the debt issues would have arisen anyway (in practice this is difficult to show).

Advice for businesses

GL Director Paul Hardman is Head of the Corporate and Commercial teams, providing a wide range of advice and support to business owners and managers. If you would like to discuss your situation with Paul, please contact him by calling 0117 906 9400 or email p.hardman@gl.law

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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