Cash & Liquidity ManagementCash ManagementCash Management RegionalDirect Debit as an Effective Cash Management Tool

Direct Debit as an Effective Cash Management Tool

Any suggestion that many companies are poor in maintaining
their cash flow risks receiving a fierce rebuttal, but the figures don’t lie. In
the UK and elsewhere the late payment of invoices has experienced an upward
trend, transforming what used to be something of a nuisance into a
company-crippling epidemic. Research conducted by Bytestart suggests that 25% of
small to medium enterprise (SME) failures in the UK occur as a consequence of
late payments.

Other research giving cause for concern includes the survey carried out by Equifax last year,
which consisted of qualitative data taken from members of the Institute of
Credit Management (ICM). The results indicated that two in three UK businesses
were being directly affected by late payments, and also revealed that 50% of
them had experienced a rise in late payments during 2012.

the pressure is obviously felt most keenly by those businesses directly
affected, companies in the black should know that they are not necessarily safe.
Figures from R3, the UK insolvency practitioners’ trade body, showed that 27% of
corporate insolvencies were actually triggered by another company’s collapse.

The Importance of Cash Flow

Clive Lewis is an authority
on the issue of cash flow, as head of enterprise at the Institute of Chartered
Accountants in England and Wales (ICAEW). He comments: “For smaller businesses –
particularly start-up and early stage businesses – cash flow is absolutely the
number one priority. They lack a track record, have few assets and are in the
process of building a business, which requires working capital. Cash flow is

The ICM’s chief executive (CEO), Philip King, adds:
“Simply put, cash flow keeps businesses in business. Businesses fail when they
can’t pay wages, rent, or the key supplier.”

Cash flow is integral to
a business’ sustainability, which many businesses recognise, but few actually
act upon efficiently. It is vital to treat credit control seriously, using the
available tools and collection methods to keep on top of it, keeping the cash
coming in consistently and making life that little bit easier.

Frederick, a spokesperson for R3, warns: “It is important that businesses
maintain strict credit control and debt collection procedures to ensure that
they receive all monies owed to them.” Yet this is easier said than done. Credit
chasing requires a time commitment that, frankly, could be better spent on other
strategic activity to encourage growth and sustainability. So what is the

The Role of Direct Debit

Among the available
tools and collection methods mentioned above is a payments tool that over 70% of
UK adults regularly use; direct debit. It’s a transfer solution that has spread
its wings across both personal and business banking and can help a business
improve its cash flow.

A far cry from the paper-based systems of
old, paperless and web-based direct debit offers an automated, secure payment
method, leaving little room for error on the part of both the payer and the

According to the ICM’s Philip King: “Direct debits are
cheaper to process than cheques or other payment methods, reducing the workload
on what are usually already overstretched credit teams.

principal benefit is that it puts you in control. You control the payment dates,
amounts, and frequency of payments. Any changes are controlled by you, so you
won’t be held up waiting for your payer to contact their bank.”

Hutchinson, head of marketing at Bacs Payment Schemes, adds: “We urge SMEs to
look at where they can assert some control, automating payments wherever
possible to save valuable time and administration costs, and remove some of the
stress on the business and its owner.”

As a business owner, it is
also imperative to make sure that every aspect of the way your company works is
in some way beneficial to your clients. Luckily, direct debit offers a number of
advantages to those making payments. Payment by direct debit allows the payer to
spread the costs of their purchases by paying monthly, quarterly, biannually or
annually. It also provides a high degree of protection for, under the terms of
the Direct Debit Guarantee, the payer is protected in the event of a collection

Peace of Mind

The knowledge that payments will be
regularly made and received on agreed dates provides corporate treasurers and
their colleagues with peace of mind and boosts confidence in the company’s
business strategy, helping them focus other revenue generating activity rather
than cumbersome credit control.

According to recent statistics, 91%
of the UK’s direct debit users agree that it is a convenient way to pay the
bills, and 87% think that using direct debits ensure that payers are less likely
to incur unwelcome financial penalties, thanks to automated bill payment.

In terms of using direct debit to facilitate time-saving plans, four in
five current direct debit users agreed that it saves time compared with other
payment methods.  Moreover, according to Bacs, business to business (B2B) direct
debit collections are rapidly growing in popularity and are set to become the
standard payment method business transactions in future.


One common misconception is that the application of
direct debit is only relevant to larger businesses, although it is available to
any business as an effective cash-management tool.

However, setting
up a direct debit facility for a business may not always be straightforward, so
it’s worth going to a professional advisor, rather than just scanning whatever
Google can scrape from the far reaches of the web, or indeed relying on your
bank to point you in the right direction.

A Bacs-approved bureau is
a good place for UK businesses to start, as they usually offer a full
front-to-back management solution for an entity of any size. They also do not
require the sponsorship of a bank or financial institution (FI) to process and
manage collection runs.

It should be noted that, in general,
fledgling companies and those with annual turnover of less than £3m are unlikely
to obtain the required sponsorship; thus a bureau solution via the facilities
management scheme is the only feasible option available to such entities.  

For those that opt to try and manage such a solution via their bank with
their own sponsorship, this can often prove a cumbersome process with lack of
support and knowledge to get things up and running smoothly. There is also
likely to be large capital expenditure for approved processing software
in-house. This approach is one that many organisations underestimate and indeed
many corporate and public sector entities are looking to outsource the
management of direct debit processing and finding it more cost effective and
administratively efficient. 

When considering which solution to use
for processing their direct debit collections, businesses should consider the

  • Are funds managed securely by fully trained staff?
  • Are the means of setting up new customers, historical data, and tracking
    cancelled and unpaid direct debits all easily accessible?
  • Are there any
    limitations attached to the service, such as transactional limits?
  • Are
    fee structures transparent?
  • For how long has a provider been offering
    their services?
  • The adequacy of continuity and security measures. 


It’s clear that the way businesses are
dealing with money is changing. Dealing with cash flow issues is imperative to
ensuring your business continues to grow and stays afloat in a volatile economic
environment. Being active in doing so requires vigilance and a readiness to
investigate new means of guaranteeing that the company’s money is coming in
exactly when it should.

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