“Cash is king” – we’ve all heard the expression – but when it comes to your business, “cash flow is king” and the contract you have with your clients is the best way to protect it.
Poor cash flow happens when a business is not collecting enough payments to pay for all of its outgoings. There are two main causes of poor cash flow – not selling enough products and services, and clients not paying their invoices on time.
It is no exaggeration to say that poor cash flow kills businesses every day. Businesses that go on to survive and thrive have a number of strategies in place to ensure that they are increasing sales and collecting payments on time. One of the best strategies is having a great standard contract in place that makes it easier to collect payments on time and imposes consequences on bad debtors. Here are just a few contract terms that smart businesses use to protect their cash flow:
1. Payment terms
These are terms which explain how fees are calculated and when they are due and payable. A common reason for poor cash flow is disputes about what the client owes – clear and comprehensive payment terms prevent those misunderstandings from happening and give the client the buying confidence they need to purchase more products or services from your business. Both lead to better cash flow!
It is also important to have clear payment terms to support any future debt recovery claims. If your business does not provide clear payment terms to a client before they place an order, what the client was obliged to pay and when they were obliged to pay it is less clear and this can make it more difficult and complicated to prove what your business was owed.
2. Restraint of Trade
A restraint or trade clause can protect your business cash flow or decimate your business cash flow, depending on how it is drafted. If the clause operates in favour of the other party, it can prevent your business from taking on certain clients. If the clause favours your business, it can prevent other people from poaching your business’ clients, employees, key suppliers and contractors.
Restraint clauses can also be difficult to enforce. They need to be clearly drafted and the restraints need to be reasonable in all the circumstances. Otherwise, a court may make an order preventing your business from relying on the protections in that clause. For this reason, it is best to get an experienced commercial contracts lawyer to draft this type of clause for your business.
3. Late Payment Terms
Late payment terms incentivise clients to pay on time and make sure that – if the client cannot or does not pay on time – your business is protected and adequately compensated for the late payment. Examples of late payment terms include terms which allow your business to charge interest on late payments, recover debt recovery costs, suspend work until debts are paid, and get out of the contract (eg in the case of a chronic bad debtor).
The bottom line is, you need to protect your bottom line!
It is important to remember that cash flow is the lifeblood of a business – it is what keeps your business running and without it, your business cannot grow. Often businesses that struggle with bad debtors do not have a well-drafted standard contract in place with their clients.
Deciding whether to invest money in your business can be an agonising decision. Lawyers fees can seem expensive, especially when dealing with poor cash flow. But it is worth keeping in mind that the cost of getting a great contract in place that fixes your cash flow issues forever is often much cheaper than chasing a single bad debt from a client! And if your business is suffering from chronic cash flow issues, investing now may be the difference between your business dying and your business thriving.
We prepare these types of contracts at competitive fixed fees. To find out more, call us on 02 9199 4563 or click here to book in a free initial consultation.
This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.