5 Must-Have Legal Documents for Cash Flow Optimisation
By Alex, Last updated: 2023-01-18 (originally published on 2016-09-20)
Cash flow management is the cornerstone of every healthy business. In addition to giving you the confidence and room to grow your business, cash reserves provide the cushion for unexpected events.
Businesses face many challenges – some companies fail to plan their finances properly, some don’t keep track of costs, and some fail to chase payment or to collect debt. Some don’t use standard documents before they enter into a business relationship, which makes it hard to create the right expectations and chase payments as there are no written agreements.
Start taking the first step towards a healthy cash flow right now with these 5 essential steps.
1. Start commercial relationships with watertight contracts
Start off your business dealing on the right foot with watertight contracts detailing the scope of products and services you are providing. When selling goods or services, make sure you use a Sale of Goods Agreement or a Supply of Services Agreement. A Sale of Goods Agreement typically covers a description of what is to be bought, the price, payment terms, delivery or collection conditions, returns, and how the agreement comes to an end.
Use a Supply of Services Agreement when one business provides services to another. This agreement will describe the scope of services provided as well as the service levels, timescales, the fees to be paid, when payments will be made and how to change or terminate the agreement.
By taking ownership of the contract drafting process, you can create payment terms that will help to improve your cash flow.
Learn more: Download free eBook on Managing Cash Flow
2. Confirm each sales order with a purchase order
A Purchase Order is a document between a supplier and a buyer that confirms a purchase. It details the items the buyer agrees to purchase at a certain price. It also outlines the delivery date and terms of payment for the buyer. A Purchase Order makes the purchasing process more efficient and allows for better inventory and payment tracking.
3. Issue invoices on time
Invoices allow you to set out clearly the type of goods or services you are providing, the price for such goods or services, and your payment terms. It is a document you typically send to a customer requiring payment for goods or services that you have provided or will provide. It also serves as a bill and a proof of a transaction. Invoices also allow you to get the money you are owed by your customers or clients.
4. Chase payments
Dealing with late payments and collecting money owed to you is a crucial part of cash flow management. Late payments and bad debts are faced by many businesses.
If you do have to chase up invoices, Late Payment Letters are a useful to chase overdue invoices. Late Payment Letters can be split into three parts; the first, the second, and the third:
- First Payment Reminder Letter – sent once the payment becomes overdue,
- Second Payment Reminder Letter – sent after a reasonable amount of time given to the client to repay the debt, and
- Final Payment Reminder Letter or Letter before Action – sent to communicate your intention to commence legal action to enforce the debt collection.
5. Recover debt
Occasionally, accepting payments in instalments can be an alternative solution to legal action for bad debt collection. If your customer does not dispute that money is owed and is willing to make arrangements for the debt to be repaid, you can consider a Letter Accepting Payments in Instalments. Such a letter allows the debtor to pay off the debt through regular fixed instalments.
More than 33% of business owners are uncomfortable with the levels of their company debt. With as many as 29% of businesses failing as a result of poor cash flow, it is easy to see where poor cash management will lead you! Mitigate your business losses with the right legal documents that are customised for your specific business situation. Let us help you prevent that.
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