At the broadest level, the concept of running and growing a business is simple: Make sure you have more money coming in than going out, and reinvest it. In the real world, however, things are a little more complex than that. While a business’s accounts might look great on paper, with a strong list of debtors, its cash flow often tells a very different story, as company’s large and small struggle to keep the cash flowing by getting those invoices paid on time.

Throughout the UK hundreds of thousands of small businesses struggle when it comes to getting the money owed to them in a timely manner. We recently conducted a survey of small and medium-sized enterprises (SMEs) across the UK to better understand the impact of late payment on their businesses. The findings were quite shocking:

  • 84% of UK SMEs have experienced late payment
  • Despite economic improvements, almost a fifth (19%) have reported a rise in incidence of late payment, while 46% have reported no change.
  • 42% of respondents say late payment has slowed their growth. While 39% have had to delay payment to their suppliers as a result of late payment.
  • 40% of businesses are owed more than £10,000 in late payments, with the average amount owed to businesses standing at £20,138.
The research also revealed that the most common reasons given for late payment were ‘excessively bureaucratic systems’ and ‘clients changing payment terms’. Regardless of the excuses, there are measures every business owner can take to minimise the risk of late payment.
  1. Background checks
Winning a new client is very exciting for any business, especially if it’s a big chunk of business. However, before the celebrations begin, it is essential to conduct appropriate due diligence on your new customer to ensure they have the financial ability to pay your invoices, and perhaps more importantly that they pay on time. Due diligence doesn’t take much time and can save you a lot of headaches – and money - down the road. This may involve speaking to past and present suppliers, purchasing credit reports that indicate the company’s financial health, and face-to-face meetings with the buyer.
  1. Master your receivables
It is essential that receivables are managed efficiently to ensure the health of the company. Business owners who constantly ignore the ageing of their receivables are creating a problem for themselves that could have dire consequences down the road. Be sure to issue your invoices when you should, and to remind clients when they are due. Overdue accounts lead to bad debts.
  1. Hire a credit manager
While on the surface hiring a dedicated credit manager may seem like another cost, the value they bring can quickly make up for it. As they are the ones chasing payment, credit managers provide a buffer between you, the business owner, and your customer, ensuring relationships are kept intact.

Where an invoice is overdue, a good credit manager can actually help strengthen your client relationships by working with them to find creative solutions to resolve their payment issues. By working with them rather than hounding for payment, they pave the way for smoother future payment processes, and hopefully more orders.

If budgets are restricted, consider hiring a freelance credit manager.

  1. Have a ‘Plan B’
From time to time, even the most diligent business owners may find themselves caught in the middle of a slowdown in payments, or a rapid escalation in accounts receivable due to exponential growth. Either way when the extraordinary happens, it’s important that you have a financial back-up or ‘plan B’ that will allow you to keep the business going, especially if you work with a small number of high value clients.

Most business owners have an agreed overdraft facility in place with their bank for such circumstances. However, with the banks cutting over £5 million worth of business overdrafts a day, having a back-up for your back-up is now a must.

Today, businesses have a host of alternative financing options to help keep the cash flowing. Some of the most popular options include spot factoring - where you sell your invoices, not necessarily all of them, at a marginal discount before they’ve matured; asset based finance - where company assets are leveraged to secure a funding rather than relying on an equity approach that most banks employ, and of course many others. Each option has strengths and weaknesses, so be sure that the option you choose is most suitable to the needs of your business.

By David Banfield, President of The Interface Financial Group