Managing working capital

Cue 1 The cash conversion cycle as a loop with days marked at each stage.

AMARA 00:00 A business needs cash inside a month. Where does it look first?

NADIA 00:04 At what it is already owed. Not the bank, not the supplier terms, not pricing. Most businesses that feel short are owed more than they need and have never made collecting it anybody's named job.

Cue 2 Stock days plus debtor days minus creditor days worked through with figures.

AMARA 00:18 Most of them would say they do chase.

NADIA 00:22 Intermittently. Late payment is rarely refusal, it is the absence of a request. Invoices nobody asks about are paid after the ones somebody telephones about, consistently, in every sector.

Cue 3 Invoice timing comparison: on delivery versus at month end.

AMARA 00:33 What is the second place to look?

NADIA 00:36 The invoicing date. A business delivers on the second of the month, invoices at month end, then waits thirty days from there. That is four weeks of cash given away for nothing, permanently, every month.

Cue 4 Volume discount trap: cash on the shelf against the discount earned.

AMARA 00:50 And stock.

NADIA 00:51 Look for what has not moved in twelve months, and treat volume discounts with suspicion. Five per cent off for eight months of a product that sells in two is not a saving. It is six months of cash on a shelf, and a shelf pays no interest.

Cue 5 Growth doubling stock and debtors while cash falls.

AMARA 01:10 On the payables side, is the answer simply to pay as late as possible?

NADIA 01:15 Use the agreed terms fully and do not exceed them. Beyond terms you lose priority when stock is scarce, you lose settlement discounts, and a small supplier may not survive carrying you. That is not a relationship you rebuild cheaply.

AMARA 01:31 You said working capital scales with growth.

NADIA 01:34 Roughly proportionally. Double the sales and you double the stock and the unpaid invoices, both funded before any new customer pays. The large contract everybody celebrates is frequently what breaks the business, and the profit on it is irrelevant until the money lands.

Cue 1 Credit control timeline with the pre due date contact marked as the highest impact point.

AMARA 01:51 Our credit control is one person chasing when they remember. What is the single change with most effect?

NADIA 01:59 Contact before the due date instead of after it. Most businesses never do it and it changes more than everything else combined.

AMARA 02:07 Why? Nothing is late yet.

NADIA 02:10 That is exactly why it works. You are not chasing, so it is a comfortable call, and it surfaces the things that actually cause late payment. The invoice went to the wrong person. There is no purchase order number on it. It is sitting unapproved on a desk.

Cue 2 Escalation ladder on a written timetable, applied identically to all customers.

AMARA 02:29 None of which would have surfaced until day thirty five.

NADIA 02:33 By which point you are annoyed, they are defensive, and the fix still takes the same two minutes it would have taken on day ten.

AMARA 02:43 Terms. Ours are printed on the invoice.

NADIA 02:46 Then they are announced rather than agreed. Terms belong in writing before the work starts. On the invoice they carry very little weight in a dispute and none at all in a negotiation.

Cue 3 Terms agreed before work versus printed on the invoice.

AMARA 02:59 We have a large first order from a customer we do not know.

NADIA 03:04 Then check them before you deliver it. The exciting large order from an unknown customer is the classic route into a bad debt that removes a year of profit.

AMARA 03:16 That feels like distrust.

NADIA 03:17 It is ordinary commercial practice and every competent finance function does it. Filed accounts, a credit reference, a trade reference. And consider a deposit. A customer who will not pay a deposit has told you something extremely useful for free.

Cue 4 Large first order from an unknown customer as the classic bad debt route.

AMARA 03:33 Late payment. Do we have any actual rights?

NADIA 03:36 Statutory ones, under the Late Payment of Commercial Debts Act. Interest at eight per cent above base rate, a fixed sum of compensation depending on the debt size, and reasonable recovery costs.

AMARA 03:49 Nobody I know has ever charged it.

NADIA 03:52 Almost nobody does, for fear of the relationship. But the right exists whether you exercise it or not, and simply stating that your terms carry the statutory entitlement changes behaviour without you ever raising an interest invoice.

Cue 5 Statutory late payment entitlement: interest, fixed compensation, recovery costs.

AMARA 04:07 Last one, and it is the hard one. When do we stop supplying?

NADIA 04:12 Earlier than feels comfortable. Continuing to supply somebody who is not paying converts a debt you might have collected into a bigger one you will not.

AMARA 04:22 But we lose the customer.

NADIA 04:24 You lost them already. A customer who does not pay is not a customer, they are an unsecured loan you did not agree to make, funded by your wages bill.