It sounds like a paradox, but we prefer to think of it as more of a delusion. Hardly challengeable either, since it has long been accepted within UK accounting traditions that income can either be recognised at the point at which an order is placed or when the actual cash is received in payment of the order which was received. Furthermore, there are some rules in place which prevent a business from using the cash-basis accounting system.
However, we at JSP Credit Management have no business telling people what accounting method they should be using to file their self-assessments, or company accounts to Her Majesty’s Revenues and Customs. We are not qualified too! We will leave that up to you but if it is a genuine curiosity of yours then more information about that can be found here: https://www.gov.uk/simpler-income-tax-cash-basis . What we instead want to do is focus on a mentality within a business that we think gives rise to the sort of problems we often come across with our clients.
Oddly enough if everybody we worked with really embraced the alternative psychology which we intend to offer in this blog then it would likely result in a significant drop in our income. However, it would also result in a much more financially stable economy because as is widely acknowledged, businesses require cash to survive. Staff do not get paid with “IOU’s”, supplier’s patience will only last so long beyond the payment terms of their invoices before they up the ante for payment and ultimately. Read our other blog https://www.jspcreditmanagement.co.uk/post/the-perils-of-a-weak-credit-management-function for more about that.
So, we vision an economy that is more finely tuned to business survival because it understands that whilst it feels fantastic when a big order comes through the door, this is actually when the works start, not where it ends because as the title of this piece suggests, a sale is not always a sale. It is through this mentality that businesses can ensure that complacency does not set in and result in missed opportunities throughout the sales cycle to ensure that payment of their services is forthcoming in as prompt a manner as possible.
We feel that some businesses appear to be more vulnerable to this issue than others, whilst acknowledging that nobody is immune from missing out on payment for their goods and services. For small businesses where the person provides the services for the company also holds many other responsibilities within their business, it can be easy to overlook the good practices involved in protecting their cash flow or become distracted by other priorities. Still, the structure of some larger companies is such that some people are targeted to simply bring in orders (sales professionals) and will often get paid a bonus based on that mechanism alone, which can also contribute to the issue.
So now we have illustrated the problem. What about the solution though? Well, there is some psychology behind our explanation for that. Prospect theory (Kahneman & Tversky, 1979) cited in (behaviouraleconomics.com, 2021) states that people generally have a stronger bias towards avoiding losses than they do for taking risks of making gains. This correlates precisely to our experience of working in the credit management world for the last 15 years, in which we have seen companies only act on their responsibilities to ensure payment of their services once payment has already become overdue.
JSP Credit Management and many other credit management companies around the world offer a range of services that are designed to protect businesses against the risks of them being paid late or not at all because they know that this should start right at the point of enquiry from a potential customer but businesses are understandably reluctant to do that because as per prospect theory, why would they want to invest (i.e lose) money in a service designed to help them achieve timely payment of their invoices when their customer might make payment on time anyway?
In our minds, it makes complete sense why businesses are reluctant to invest more into their credit management function to ensure that a sale is actually a sale. However, the statistics tell another story. There were 29,000 company liquidations in the UK in the final quarter of 2020. It would be right to highlight that not all of those are related to cash-flow problems, and we also appreciate that being paid late is not the only issue that can contribute to cash-flow problems. Issues such as low-profit margins, low-level sales, poor management all play their part, but we would argue with anyone that a large proportion of them will have been affected by the issue at hand.
Further still, we are yet to fully feel the impact of the prolonged restrictions imposed on the economy throughout the COVID-19 pandemic. This is a point that should not be underestimated. As a recent government report puts it “Historically, changes in company liquidation rates have been related to economic conditions: in periods of economic growth, liquidation rates typically tend to decrease. In recent history, the liquidation rate peaked in the 12 months ending March 1993, over a year after the end of the 1990s recession.” (Government Report)
Based on the above then, we wholly advocate ensuring that all businesses be as mindful as possible about the steps that they can take to safeguard themselves against those risks, starting from now. We appreciate the difficulty involved in conflicting priorities for businesses or lack of experience and expertise in that area. We at JSP Credit Management are not immune to those challenges either (hence the reason this blog has been published three days later than usual) but there is a wealth of support available for business but it has to start with a change of mentality in you. The cycle of change begins with an awareness. From that position, you can act in the best interests of your company.
We are here to do a bit to help with that if required, so if you have been struggling to get an invoice paid and would appreciate the support of a team who pride themselves on operating in a way that is mindful of the factors discussed above then visit our website at www.jspcreditmanagement.co.uk and contact us to discuss your needs. We operate on a no-win-no-fee basis for bad debt recovery and our credit control and credit risk services can be ordered via our website with the littlest of hassle.