By David Costley-Wood, KPMG’s head of Enterprise Consulting

It’s a sobering thought that 1m small and medium-sized enterprises (SMEs), along with 5.7m jobs have been lost since 2008 — only now is activity recovered to previous levels. What is even more worrying is that according to insolvency trade body R3, late payment has been a major factor in 20% of these failures.

According to Brothers barometer, 20% of SMEs claim the situation has worsened in the past 12 months, and of those affected by late payments, over half say they have to write off up to 10%.

For entrepreneurs working all hours to grow their business and innovate, it’s an ongoing Catch 22. They need their customers to give them more orders and don’t want to harass them — but they need their cash as well, to survive.

So what’s the answer?

Firstly, prevention is better than cure, so;

• Make sure your customer is credit worthy, no matter how delighted you are for their first order;
• If necessary insure. This can be expensive, but getting a quote from a credit insurer will often reveal which customers are at risk;
• Make sure your ‘all monies’ retention of title claim is on your orders, so if the worst happens, you can retrieve your product quickly;
• Agree terms up front and get the first invoice paid on time — slack credit control on your first invoice sends the wrong signs to the customer;
• Make it clear you will apply the European Directive on late payment which allows you to claim interest.

Also, do the simple stuff;

• Month end reconciliations to the debtors profit and loss balance for high value debtors. This will identify queries before the payment date and not cause unexpected cash-flow issues;
• Set up an e-mail system so that invoices are also e-mailed on a daily basis to the debtor for all sales, therefore eliminating excuse of missing invoices;
• Chase in advance of payment dates and request e-mail confirmation of the payment date and the value/remittance. This will help identify any unexpected offsets;
• Include in standard terms and conditions of sale a clause for charging for copy Proofs of Delivery, which can help eliminate this issue and reason for non-payment;
• Talk to your customer to determine why they are paying late. Good communication with your customer is key for avoiding late payments.

OK, so you’ve done all the above, but you’ve still got a late payer. Next steps:

• Ask the customer immediately why. Sometimes there’s a dissatisfaction issue that has not been communicated or resolved. If so, deal with it immediately then chase;
• Get a promise of a date for payment- so if they miss it you can increase the pressure justifiably;
• If this fails, often in the SME markets CEOs know or simply respond to CEOs. Go over finance team’s head and as CEO ring the customer’s CEO. You’d be surprised how often this works.

It’s difficult to recommend a court route because (a) that’s probably the last time you’ll get an order from the customer and (b) the Ministry of Justice plans to impose a 5% court fee on such claims, which effectively means chasing any debt less than £10k through the courts is not worthwhile.

An SME client facing insolvency recently took the unusual step of immediately threatening to issue a winding-up petition against a debtor for an undisputed debt. This aggressive action produced payment and saved the business, but at the expense of losing the customer.

An alternative approach is using online funders to ‘factor’ individual invoices which typically allows non-payment for up to 90 days. This carries less stigma than it used to and can be done confidentially so the customer doesn’t find out. It can be expensive though and once the invoice trips 90 days, the cash impact is immediate.

So, overall, focus on ensuring you have systems that help you to manage this risk, communicate regularly with your customers and don’t let them get used to paying late.