Only half of all businesses offer their customers the chance to settle their invoices by Direct Debit, despite the cash flow benefits according to new research.
In a survey of more the 1400 businesses, 53.8 per cent said that they did not offer other businesses a direct debit payment option.

Organisations benefit considerably in taking payments from Direct Debit, according to ICM (Institute of Credit Management) www.icm.org.uk Chief Executive Philip King “Direct Debits are cheaper to process than cheques or other payment methods, and reduce the workload on usually already over-stretched credit teams. But the 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”

Other Direct Debit benefits that Philip highlights include the ability to collect variable amounts on regular or irregular dates, reduced instances of errors resulting in less rejects or refused payments, and detailed reporting that keeps businesses fully informed on the status of all payments.
But the advantages of Direct Debits are not all one sided, the payer also benefits as Philip explains: “Paying by Direct Debit allows the payer to spread the cost of their purchases by paying monthly, quarterly, half-yearly 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 error and will receive a full and immediate refund from the payer’s bank”

One of First Capital’s customer’s credit controllers stated more than 75 per cent of all their new customers use DDs “From our perspective it has enabled credit control to become more efficient and reduce costs, which ultimately benefits the customer,” he says. “It also allows more resource to be placed on higher value and higher risk accounts therefore improving cash collection and risk exposure”

“I expected more companies to be using Direct Debits to improve cash collections and streamline efficiencies,” he says. His view is supported by Philip King: “it is not as though direct debit is a modern service that is yet to be proven”, he says. “Perhaps with the future of cheques now in doubt, Direct Debits will take centre stage”

Why don’t you find out how easy it would for your business to set up its own direct debit system through First Capital Cashflow’s Direct Debit Facilities Management or Direct Debit Bureau Service.

It’s a sign of the times. Yes there may be some green shoots popping up here and there – and very welcome they are too – but there is still a long hard road ahead for most businesses. I suppose it’s occupational hazard that we’ll hear more about it than most. One of the prime reasons for using the direct debit services we provide is the recognition that cash flow is of primary importance and the understanding of how direct debits play an important part in cash management and credit control.

As you trawl the SME blog sites, cash flow remains a hot topic. Cash Flow is King is an excellent site and just one of the sites recommending the use of direct debits as a means to manage cash. Interestingly they point out that mainstream banks won’t help you set up Direct Debit arrangements until you are exceeding £2m - £5m turnover. No such issues with First Capital Cashflow, where businesses with much lower annual sales can use our Facilities Management Services.

For those who do enjoy business blogging, the Chartered Management Institute runs the splendid http://blog.managers.org.uk which is a mine of information and opinion on the widest range of business topics. I’m recommending everyone here studies this closely - this blog post - well there’s got to be some perks for being in charge!!

The lighter side of business is important – never more so than when we have seen so many businesses struggling and, as we said, cash flow has taken on an importance and relevance not seen before. We know what our clients think of our popular and comprehensive services – both direct debit collection and sales ledger management. And we know that these services have been important in helping our clients through difficult times.

The harsh reality of economic life is that it’s becoming harder to be paid on time. With UK businesses taking an average of 51 days to pay invoices (that’s an average figure, some take a great deal longer) companies need a clear debt management strategy in order to secure payments owed to them.

According to recent research conducted by BACS Payment Schemes, UK SME’s are owed £25.9bn. This represents close to a 40% increase on the figures published 12 months ago!

The speed and depth of the credit crunch has caught out a lot of businesses and they are ill-prepared to cope with the issue of late payments with the majority of banks being reluctant to increase, albeit temporarily overdraft limits.

With credit lines being more costly and harder to obtain, automating the collection process through the use of Direct Debit collections backed up by professional credit control can be one of the most cost-effective ways of improving cashflow and reducing outstanding payments.

Feedback from our own customer base indicates that where they collect outstanding payments via the FCC “Direct Debit Service” they remain in control of the cashflow situation with no deterioration in DSO (days sales outstanding) For those clients that also utilise our “Collect” credit control service, prompt action can be taken to manage the whole sales ledger process including following up and reinstating Direct Debit instructions if appropriate.

Almost a fifth of all companies now employ someone specifically to chase overdue invoices and with the recession biting harder, all businesses will need to examine and place greater focus on improving cashflow from their existing client base.

It’s fair to say that some poorly managed businesses would have failed in any event and the current economic situation has purely accelerated their demise but the survival and growth of well managed professional businesses will no doubt have a robust and solid Credit Management system in place.

In summary, if you want to have an even chance of not only surviving but thriving, make sure you are one of the latter and not the former.

The chief executive of Visa Europe has predicted that by 2012, paying for goods with notes and coins could be consigned to history, once and for all. And let’s face it, it can’t come too soon!

Already we have seen subtle movements towards a cashless society as first pound notes were replaced with one pound and two pound coins, increasing the flexibility of using this level of currency in more automated environments. Then we saw the demise of the pointless half pence coin and I’m sure before long there will be agreement on retail pricing levels at, for example, £14.95 instead of £14.99, to remove the need for anything smaller than the already irritating 5 pence coin.

So how do Direct Debits fit into this scenario? Well already the standing order is becoming a vehicle of the past as the efficiency and flexibility of direct debits becomes recognised by the widest possible business and consumer audience. The fact that almost all businesses can now collect payments using direct debits, either under a Direct Debit Facilities Management Scheme or by using a Direct Debit Bureau Service means that the exclusivity of adding this process to your Sales Ledger Management arsenal has all but disappeared.

And who remembers cheques? Well there is another instrument about to bite the dust. It’s 350 years since someone first ‘promised to pay’ Messrs Morris and Clayton 400 pounds only, on the first ever cheque issued, but this financial dodo is also heading for extinction as we use direct debits to cover our household and business regular payments and a variety of cards to make both business and retail payments, on and offline.

For some of us who grew up working in clearing banks, where cash and the cheque were kings, 2012 may be a sad day. The prediction for cheques is that only 3% of all transactions will involve a cheque at the same time as the man from Visa predicts the disappearance of cash. Is this fantasy – well already the Netherlands is a cheque free society and the value of transactions conducted by cheque in the UK is less than 3% of the value of transactions involving a debit or credit card, or cash.

Whether it happens in day to day private life, we all know that business payments have changed for ever and for the better. Yes we have a vested interest in saying it, but there is no doubt that the burgeoning popularity of direct debits as principal form of business payment is here to stay because of convenience, flexibility, cashflow advantage and security.

Well, we were talking in the office earlier this week and someone said “so how did all this start then – direct debits?” So nobody knew, and to be honest you try Google-ing anything about the history of direct debits and all you get is stuff about payment histories, which is important for the user but didn’t get us any nearer to our answer.

Then some one found this obscure US Treasury and Finance website that had the whole history on it. So now we know that it was just under 40 years ago – 1970, only two years after the establishment of Bacs, that the first direct debits came into use in the UK banking system.

I think I can say we all felt much better for knowing that!! Oh and we’re saving up for the big party at Bacs in 2010!

We don’t know who the first payment was from and to but what we do know is that nowadays, nearly six billion direct debit payments are made every year, which is about 90 per person for every man woman and child in the UK.

They don’t all pass through our direct debit processing bureau at First Capital Cashflow, but with all the sophisticated platforms, systems and controls we have in place capacity will never be one of our issues – or our customers! It’s a market we lead the world in and talking to providers across Europe you soon get a feel for just how advanced the technology is that we use.

To be honest, we are starting to see many of the traditional providers of direct debit bureau services in the UK lag back as specialists like our company make continuing investments in our systems and the security that surrounds them. But this has always been the case where the big banks have had a virtual monopoly in a particular service until strong smaller niche players come along and take the concept to levels that the banks just don’t aspire to – particularly while they’ve got other things on their minds!

For more information on how First Capital Cashflow can help your business, please contact us.

The First Capital Cashflow blog is our new service aimed at helping small and growing businesses manage their cashflow, and introduce aspects of how direct debit processing can be a cost effective way of helping your business survive and grow in difficult times.

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