It is estimated that right now around £255 billion is owed to small businesses by customers who have yet to pay them. According to SME Insider, the small business news service, one in five is owed more than £25k, one in 10 more than £100k and a staggering 43,000 SMEs are owed in excess of £1 million.
Not only does this sad state of affairs damage the national economy but it presents huge problems and challenges for the small businesses that are owed so much. Late payments cause cash flow problems and drain business resources too, in the form of working hours spent chasing them, having to negotiate late payments with their own suppliers, potentially incurring costs through, say, overdraft facilities or credit cards, and having to go, cap in hand, to the bank.
Although you may never combat the issue of late payment entirely, there are measures you can take to minimise it and the effects it can have.
How to overcome the problem of late payments
Consider the following steps to improve your invoicing and debt collection processes to mitigate the problems caused by late payments:
- Check who’s to blame: Before you remonstrate with your client, check that you haven’t inadvertently caused the hold-up in the payment process yourself. Have you included all the required information and references on the invoice? Some suppliers won’t pay unless you include their purchase order number or a specific reference number. And they are unlikely to let you know in a hurry if you haven’t complied with their requirements.
- Make it easy for them to pay you: Take a loose look at your invoicing policy. Do your invoices contain all the details customers will need to make the payment – your references, your bank details etc? Could you entice them to pay promptly with a discount or look at implementing Direct Debit or Standing Order so that your bill is paid automatically each time?
- Invest in online accounting services: Online accounting services solve many issues concerning billing schedules. By integrating with your bank account, records will always be up-to-date and will quickly flag a payment issue, allowing you to act swiftly on overdue accounts. Online accounting helps you feel in control of your accounts and finances.
- Become an invoicing wizard: Invoice promptly on the delivery of your service or product and then make contact with your customer before the payment due date to check there is not going to be a hold-up.
- Turn debt collector: Chase up unpaid invoices as soon as they become overdue. Make a phone call first to check if there’s a problem with the invoice (see point 1). If there’s no issue, and payment remains outstanding, first write a gentle reminder letter, followed by another call, then send a final reminder. With online accounting systems, such as Xero, you have the facility to send regular reminders. Xero also has many add-on partners offering software services to aid cash flow management, such as winner of the Add-on Partner of the Year Award at this year’s Xerocon conference, Chaser, with its automatic invoice-chasing. Your last resort will be legal action to recover the debt.
Ensuring strong cash flow
Online accounting and invoicing can help get you paid faster and reduce debtor days, which in turn ensure a strong cash flow in your business. By working closely with your accountant, you will also benefit from having potential problems flagged up and dealt with before they become cash flow bottlenecks.
If you need our expert accountants’ advice on overcoming the problem of late payment email Jon now.