Good Terms = Good Cash flow
When you are running a business there is a never-ending list of tasks to complete. Sorting out the terms and conditions (T&Cs) of trade is not always at the top of the list. However, very often cash generation takes priority and yet many fail to recognise the value that well drafted terms and conditions can have upon a businesses cash balance. If you can combine that with well trained staff and slick business processes around the use of those T&Cs then you will be giving yourself a much better prospect of success in business.
Below I cover how to reduce risk by including essential and bespoke information which will offer protection and increase cash flow for your business.
The basis upon which you contract with sellers and buyers is a fundamental aspect of doing business. Yet a focus on this important fundamental seems impossible when other tasks like product development and sales and marketing seem to take priority. Neglecting this less sexy part of your business, however, could have a terminal effect on your business alternatively it can seriously impact your cash flow through delayed payments, having to pay for materials before taking payments or crippling spend and time wasting on debt collections.
Late payment is a fact of life for small businesses, as customers often give lower priority to bills from small firms. Many of our clients are SME/ OMBs and will have faced the prospect of dealing with much larger businesses. With the right terms in place, however, you can ensure that you get paid first. Get your terms right and there’s no excuse for slow payments outside of any contractually agreed time to pay.
Protect your business
Failure to specify YOUR T&Cs puts you at risk of contractual uncertainty and misunderstandings – it’s vital to establish the actual arrangement between the two parties involved in any deal. You need to cover yourself, so sellers or buyers have no opportunity to go back on their word. Buyers and sellers expect professionalism from you and in some instances they demand it … so do not let them down in the context of you engaging with them.
What to include in T&Cs
Well-drafted terms should act like a manual or recipe book for doing business and having absolute clarity on what should happen in a given situation. They should set out what the agreed terms are between parties and more importantly what happens if things go wrong or one party wants to leave or is unable to continue.
The exact elements to include depend on the individual business but you should consider including:
- A clear definition of what products or services will be provided.
- Setting out the payment terms – when is payment due.
- Any guarantees or warranties offered.
- Specifying what happens if either party doesn’t deliver or pay, or wants to end the relationship.
- The term of the agreement and what notice is required to get out of it.
- Which law shall govern the contract – particularly for international contracts.
There is no legal requirement to include T&Cs on invoices though many people put their terms on the back of them. This raises certain issues on the point of incorporation which is dealt with below.
One size doesn’t fit all
It is important to make sure your terms are specifically written for your business – you can’t assume another business will have the same needs as yours. Yet we regularly encounter clients who have been adopted T&Cs used by another business in their sector using terms word-for-word from an offline template. Whilst this ingenuity is to be applauded it is false to assume that such an approach will provide the requisite protection. There is nothing more comprehensive than obtaining bespoke T&Cs for your own business. Use a lawyer and use the process to inform you of the particularly important commercial and legal considerations. Look upon any initial cost as an investment in your business as bespoke terms will reduce the risk to your business.
Train your staff
There is nothing more devaluing than for a client to request new T&Cs and subsequently fail to weave them into the fabric of their business. I would therefore always advise that when T&Cs are being drafted / amended that this then precipitates internal training. Ensure that the necessary staff members are kept up to date which will generate understanding of the important T&Cs, or any changes. This understanding will ensure that when T&Cs are called into question that any amendment to is sanctioned by authority.
Automate / business process
Critically much can be done to ensure the incorporation of T&Cs into commercial arrangements to ensure that you win the ‘Battle of the Forms’. Understanding the processes within any business of both buying and selling are crucial to identifying possibilities to create greater efficiency and control over contractual arrangements. These processes if understood sufficiently should give way to automation where possible. The more consistent the approach to both buying and selling the better prospect there will be of generating commercial and legal certainty.
Top tips for setting out your T&Cs
- Draw up a list of the key commercial terms that you are offering your customers.
- Think of all the scenarios of what could possibly go wrong and then set out what you would do in each case.
- Imagine the most awkward customer possible when doing this exercise.
- Put yourself in the shoes of the seller / buyer.
- Train your staff as and when things change.
- Automate where possible.
Finally when in doubt, seek help from a professional who is experienced in providing commercial business advice.
Further reading in this series