By Greg Ford, Managing Director of Advanced Exchequer (Exchequer)
With the amount owed to businesses in late payments standing at £46.1 billion the issue of managing a healthy cash flow and enforcing credit control is a significant one. The situation is also worsening – in 2008 the amount owed in late payments was £18.6 billion, less than half what is owed today, so there is a real need to take action.
Small businesses are highly dependent on healthy cash flow and the consequences of late payment can have a huge impact, and in extreme cases lead to insolvency. Even in less severe cases the effect can be costly. A government paper revealed that small businesses spend on average 130 hours a week chasing late payments, which equates to an average cost of £1,500 per business. It also reported that 34% of companies have used external finance to cover gaps in cash flow caused by late payment, leading to £180 million in debt interest charges.
Here are some top tips on how to save time and money by avoiding payment delays.
1. Create a clear credit control strategy – Implementing a simple credit control process does not need to be complicated and can ensure payment is on time, every time. A structured approach that sets out a day-by-day strategy can help reduce the threat of late payment.
2. Know the customers – It is becoming increasingly important to run credit checks on all new customers before offering credit terms. A simple credit check can be run online in a matter of minutes but could save much more valuable time, and money, in the future. This should be an ongoing process as even the most reliable payers can have a change in circumstances.
3. Agree clear payment terms – Make sure the payment terms are clear and consistent, and be upfront with customers about any late payment charges to save disputes further down the line. Think about including payment terms on statements, invoices and in the terms and conditions of business.
4. Invoice quickly and accurately – Make sure invoices are sent on time. This is a simple step that many businesses fail to take. E-invoicing can speed up the invoice issuing process as well as provide a record that it has been sent. Equally as important is making sure that the invoice information is 100% accurate as any mistakes can delay payment.
5. Make it easy for people to pay – Everyone prefers a simple and straightforward process, so ensure that customer payments can be made easily, and preferably online or by direct debit. Where possible avoid the use of cheques which can delay processing.
6. Build positive relationships – Consider making a courtesy call or sending an email a few days before payment is due to ensure the invoice has been received and there is no query. This is good customer service and will remind the customer of their outstanding invoice without actually chasing the debt. Also consider thanking customers that pay on time. This shows appreciation of their punctuality which is good for customer relations and can lead to repeat business.
7. Start chasing payment immediately – Don’t delay in chasing late payment immediately after the due date. Consider having set dates when debtors are chased by telephone, email and in writing.
8. Be flexible – Businesses can ensure good cash flow by offering flexible payment packages or terms to regular customers. On large, outstanding amounts this could mean regular instalments or simply splitting the bill into two manageable amounts and in some circumstances this may be the best way of getting payment. This will allow businesses and customers to plan ahead, with the ability to confidently predict cash flow.
9. Use technology to help – Automating manual processes enables a pre-emptive approach to payment delays, which protects cash flow and saves time. Quality credit control software can support businesses to manage all aged debtor information within a single system.
10. Don’t let the problem escalate – If payment has not been received, stop supplying the customer immediately and inform them that they will no longer be supplied until all outstanding invoices have been settled. If the customer is reliant on the product or service in order to run their own business this should provide enough leverage to ensure prompt payment.
Late payment is an all too common occurrence in business, and is one that needs to be tackled. SMEs are particularly vulnerable to the damage that can be caused by late payment and its impact can reach far beyond denting the company’s bottom line.
Without strong cash flow SMEs can be reluctant to invest in growing the business which has a wider effect on job creation and the broader economic situation.