“Cash is king” is an adage often used to underline and explain the failure of both businesses and consumer households, and the importance of solid cash flow management. Without proper “arrears management” and the right amount of cash on hand, both of these entities can inadvertently run into major distress, and even be forced into bankruptcy.

In uncertain economic times, companies are experiencing tremendous financial pressure and “dealing with arrears and bad debt” has become more relevant than ever before. Businesses must have sufficient cash for various reasons, such as investing in new infrastructure and dealing with unexpected expenses. Moreover, a business’s cash flow is often cited as a key factor in its potential for long-term success. A company may have all the revenue in the world, but without the ability to generate cash, it can easily fail.

So why is Cash so important for the survival of a business? 

1. For any company to survive, cash flow is the single most important financial factor. Therefore whilst revenue is key, it is important to have an efficient financial operation to ensure a positive cash flow is created. Without this, any company, no matter how promising the business model, will go bankrupt, as it will not even be able to accomplish the simplest of tasks like paying its monthly expenses.
2. For growth, as a business will not be able to undertake capital expenditure like investing in latest technology etc. or expand via acquiring other companies either within their niche or as a way to branch out into new areas, to achieve desired company growth. Whilst loans can be taken out, these attract interest rates that can further decrease the company’s financial status. 
3. To enable a company to reward its shareholders through dividends and share repurchases and also survive during global recession and down economies.
4. Have an emergency fund to meet business emergencies that requires expenses paid straight away such as legal fees and unexpected costs associated with natural disasters. 
5. And importantly pay bills faster, by tightening the company’s credit control strategy ensuring bad debts and credits are dealt with within the period of payment agreed with their customers/ suppliers. 

“A company can manage its arrears and bad debt” by streamlining its debt and asset recovery process. By streamlining the process, a customer (whether a fellow business or an individual) is placed under pressure as he/she knows of the strict approach that the company will apply should he/she default and not pay when the balance is due. A company can tailor it’s collection process by issuing for e.g. a final request to remedy letter followed by a 7 day demand letter, followed by a solicitor’s letter before action for a response within 14 days. By outlining such a strict deadline approach in a process map, which leads to the instruction of solicitors to advise you of the most commercially viable solution to recover any balances and payments that remain outstanding to you forthwith, will ensure that arrears are better managed and bad debts are significantly reduced.

Practical tips to avoid getting into a situation where significant payments or arrears are owed to your company:

• Know your customer, i.e. being certain of the correct legal entity with whom you are doing business and ensuring your Terms and Conditions are effectively communicated to the other contracting party.
• Be very critical of your estimates of both the size of receipts and when they will come in. Check typical payment times by carrying out some background research such as talking to colleagues, other business owners or even checking the payment times disclosed in annual reports where relevant – these can vary from industry to industry, and from country to country, and whether your customers are in the public or private sectors.
• Have you done any checks to help make sure your customer will be able to pay you on time for the products and services you provide? You can get some basic information using the Companies House Web Check service, investing in credit reference information or obtaining references by talking to other suppliers of the business.
• Do you know who signs off payments at your customers? Do you know how frequently they make payment runs? Do they operate a purchase order system? If so do you know what the limits are on amounts authorised? If not – ask them.
• Try to build up the same close understanding with your bank manager. Don’t delay in bringing bad news to him or her as they have more ways to help you before you dip into the red without authorisation.
• If you are going to be paid in a foreign currency, check how easy it is to convert to Pounds Sterling, and what the charges are likely to be. You might want to price this into your quote / invoice.
• Make sure you document things properly. This sounds very obvious however it is surprising to see the lack of evidence there to pursue matters through the court. 
• Keep your invoices simple and clearly laid out. If you are to be paid a fee plus incidental expenses keep the two components on separate invoices. This ensures you do not leave yourself open to those who quibble over relatively small expenses to avoid paying the much larger fee.
• On your invoices ensure your terms of payment are clearly shown, for example "payable on demand" and what rate of interest applicable on late payment. 
• Don't sit back and wait, actively chase your cash in and if you find you are in difficulty making payments to suppliers, let them know promptly, and when you will be able to settle up.

Furthermore, things you should regularly consider when “controlling this non-payment/ arrears risk” are:

• Credit checking your customers to verify whether they are genuine businesses
• Knowing your customer and the correct legal entity with whom you are doing business with
• Ensuring your Terms and Conditions are effectively communicated to the other contracting party
• Ascertaining their insolvency status i.e. how likely are they to go out of business
• See how quickly they pay other suppliers
• Extend more credit to your most financially stable customers

Therefore, whether you are a large corporate entity or a SME business or even an individual, it is vital to implement an effective recovery strategy, deal with arrears as they build up and prioritize the importance of cash. It is important to remember the old business saying; turnover is vanity, profit is sanity, but cash is reality.