Late payments lead to cash flow issues which can cripple or even kill a small business — so how can you ensure that you successfully chase payments?
The issue is so acute that the Federation of Small Businesses (FSB) is urging the Government to introduce fundamental changes to tackle overdue payments. FSB research has found that 62% of small businesses have experienced an increase in late or frozen payments as a result of the Covid-19 crisis.
The knock-on effects of outstanding payments can ripple through the whole supply chain, with each link taking turns to suffer.
“Sole traders or small business owners often do not have the time or the tools to effectively chase customers, which leads to the problem snowballing. Growing gaps in cash flow can drag down a business, leading to cost cutting, rising overheads and eventually solvency issues.”
Emma advises all business owners to implement some simple steps to keep on top of their cash flow…
You’ve probably heard of credit control systems, well the first step is to get a credit report on every potential new customer. This means you can determine the financial position of each client, so you can make informed decisions on payment terms and extending credit lines.
Good businesses should not be afraid to turn away clients if a credit report highlights issues. You could be saving yourself a lot of time and energy in the long run.
Set payment terms
Every customer should be 100% clear on what is expected regarding your payment terms, and these should be enforced from day one. Spelling things out early in a business relationship can prevent problems developing later.
Many businesses enforce standard payment terms for their clients, but have you set credit limits? These should be specific for each customer, based on their credit report and payment history. Another option could be to offer discounts for early payments.
When a customer reaches their credit limit, ensure that any further work ceases until the account has been settled. For bad debt, add debt recovery costs and interest (usually 8% interest over base rate) to the amount owed.
Don’t leave it until the end of the month to issue your invoices, move to a system where invoices are sent out when work is completed.
Efficient credit control systems identify when invoices have been raised and then flag those which need chasing. Make it someone’s job to contact late payers on the day the invoice becomes overdue, don’t sit and wait.
Issuing a friendly reminder can help to educate the customer into speeding up their payments., and don’t be afraid to politely bring up any late payments during your normal dialogue with clients.
Online payments can improve your cash flow, while making life easier for your clients. Whether you use a direct debit system such as GoCardless or monthly standing orders, you will get your money quicker.
You can use digital tools to handle the entire billing and invoice chasing process, saving you time and worry. There are plenty of online accounting software tools now available, do your research and speak to fellow business owners to work out which one suits your needs.
“Robust credit control procedures must form part of every business owner’s financial strategy,” adds Emma. “
When dealing with late payments, your customer may have valid reasons for why they can’t pay, such as family issues or financial difficulty. But that doesn’t mean that you should bend the rules for them, or offer extended credit lines. Be sympathetic and find mutual solutions, such as payment instalments. If they go to the wall, there is a good chance you may not receive the outstanding money.
If you would like some help with your financial strategy, contact Emma Roberts at firstname.lastname@example.org