Aberdeen-based firm Red Spider Technology designs, manufactures and supplies tools to the oil and gas industry around the world. Set up in 2003, the company employs 43 staff and has offices in the UK, Norway and the Middle East. Co-founder Chris Oliver explains how setting the right payment terms has helped boost the firm's cashflow.
What I did
"When we first set up the business, one of our fundamental aims was to deal mainly with solid blue-chip customers who we knew would pay us. Cash management is something we've always been highly aware of. We took advantage of invoice discounting to start with, which helped regulate our cashflow, and while it was more expensive than a traditional overdraft - because we paid a small percentage fee to the bank, based on the sales value of each invoice issued - it meant we were paid in five days, rather than 30.
"Now the business has grown, we arrange our own credit control. Our standard payment terms are 30 days, which is the industry standard, although occasionally we have to accept customers' standard terms which can be up to 42 days. While we don't do formal credit checking, we'll often ask new customers to submit a credit application form, so we can at least capture bank details and client contact information. If the level of credit we offer ever became an issue, we'd agree set limits and ensure that no deliveries were made that would take a customer above this limit.
"Equally, if we're running big development projects, we will usually ask for staged payments as this helps preserve our cashflow, particularly if we have to buy materials up front."
Avoiding late payment
"Being meticulous with contracts and purchase orders is probably one of the most important ways to avoid late payment. If any of the details are wrong, most clients will just send it back and obviously the clock's ticking on you getting paid.
"For that reason, we run a strict checking system when we issue invoices, ensuring that the purchase order number is right, that we're charging VAT when we should be, that we've got the right cost code, and that we're following all procedures correctly.
"Following up invoices by phone or getting one of our sales guys to visit can also help sort out any problems. It may sound obvious, but getting paid on time is really a question of good communication and staying on top of paperwork."
"I think it's also important to understand how clients' businesses work. Some of our customers hold awareness days for their suppliers and we always make sure we attend these. If the client is putting new systems in place or is facing certain trading issues, it helps if we are aware of these.
"Being friendly and communicative with their accounts departments doesn't hurt either. We have been known to send a new client's accounts team a box of doughnuts or some small token so they remember us."
What I'd do differently
Increase our initial cash reserves
"As our initial funding was quite tight, I would have liked to have had more liquid cash in the business which would have bought us more time to get going. Generally, it takes twice as long to do half the sales you think you will when you first set up."