By Max Firth, Managing Director for Experian Business Information Services
How quickly companies are paying their bills is a bellwether for how well the British economy is performing. Debt repayments should be swift if cash flow is good. Last tax year, 2014/15, businesses in the UK settled their bills a day quicker than in the previous tax year, indicating growth in both the economy and confidence of businesses.
Nationally, businesses went an average of 24 days beyond their agreed payment terms on invoices in the last tax year. Small businesses led the way in settling their debts, as companies with one or two employees took an average of 20.58 days beyond terms to settle overdue invoices. Businesses with three to five employees showed the greatest improvement, settling 21.34 days beyond terms – an improvement of 1.3 days.
But when you’re a small company, you don’t necessarily have the monetary reserves in place to protect your business from late payers. It’s especially challenging if you’re dealing with specific industries where the standard time beyond terms to pay an invoice can be an average of 44, some 20 days later than the UK average.
The speed at which companies pay their invoices can also be dependent on where they are in the country. For example, companies in Northern Ireland settle their bills, on average, 15.93 days beyond terms, while those in the North West take an additional 30.44 days.
So what can small businesses do to better protect their cash flow, and how can they reduce the risk of late payments?
Eliminate the risk of no payment before you do business by running a status check on the perspective customer: Do you know if the business you are dealing with is for real? Four out of ten companies which start up never actually go on to trade. Telephone and email correspondence with a new customer should be backed up by checking its address is real, in person or on Google Street View.
Set credit and payment terms based on thorough research and findings: Running a credit check on a potential customer or supplier will reveal their credit status, trading history and help you make an informed decision about the appropriate line of credit to extend to them and the payment terms you should set.
Remain watchful throughout the lifecycle of the customer relationship: Conditions can change rapidly, so a business which was a prompt payer yesterday may run into financial difficulties tomorrow and affect your cash flow. Monitor customers on an ongoing basis and take a proactive approach to dealing with potential problems with payment. Don’t be afraid to adjust payment and credit terms if there is a risk your customer won’t pay you.
Home or away, be consistent in the trading, credit, and payment rules you set: Take similar precautions when exporting as you would do when doing business within the UK.
By knowing the payment history of your customer from the point of acquisition and through the lifecycle of the relationship, you should be able to put in place credit and payment terms which reflect the company’s ability to pay without hindering your cash flow.