Debbie Austin FCCA explains the items you need to implement to help prevent and deal with late payment.
Late payment is the curse not just of SMEs but the whole economy!
An innocuous oversight by a corporate business can actually turn into a vicious cycle. The result is delayed or non-payment among several organisations, each one suffering from the actions of the other.
The problem has become so acute that the government has a post of Small Business Commissioner to tackle this very matter. Overdue debts force SMEs to delay settling their own bills because they don't have the cash on deposit to pay up. It leads to a drying up of cash flow meaning owner managers can't access the funds they need to invest and expand their business.
If your organisation is growing, you're taking on more customers, and overheads are increasing then this post will detail the credit control items needed to ensure you're more likely to get paid on time.
What is credit control?
Credit control is a business practice of extending credit only to customers who can pay for the goods or services being sold. Systems and procedures are then implemented to ensure customers are more likely to pay on time while also pursuing instances of late payment.
How to prevent late payments?
1. Use credit reports to understand if potential new customers can pay
2. Set up payment terms specific to each customer
3. Encourage payment using direct debit or standing order
4. Issue invoices promptly stating price and work delivered
5. Identify invoices raised and those that are soon to be overdue
The problem of late payments
According to research conducted by Bacs Payment Schemes Limited, 47% of SMEs surveyed are paid late by their customers on a regular basis. Worryingly the average small business is owed £32,185 in late payments! That's bad for the economy equating to £26.3bn across the UK.
The research also revealed that this resulted in a third of SMEs struggling to pay business bills including energy, rents and rates. Around 12% battling to pay their workforce on time. Consequently 29% end up using their overdraft facilities and 19% salary sacrifice at director level to make up for any cash flow shortages.
Unfortunately achieving repeat custom is so vital to the success of many early stage businesses, they're reticent to challenge their customers. After all their turnover may be built on a small number of customers, losing one through legal action could be perceived as financially harmful.
Credit control help
Managing cash flow and your cash position is absolutely vital. As a business owner you need to focus on this as part of your growth strategy. Be sure to read the following credit control procedures guide. Implementing theses measures in your business will help ensure you don't end up with a number of bad debts.
Obtain credit reports to gauge the credit score of potential new customers, you will then have a clear picture of their ability to pay before you sign them up and extend any credit
Explain very clearly what you're payment terms are, better still given their credit record create payment terms specific to their circumstances
Be sure to talk through the terms with each customer when signing them up for the purpose of clarity
To assist your cash flow position, encourage customers to settle invoices electronically either via direct debit or through a monthly standing order with any balance settled at set intervals throughout the year
2. Actions once the product or service is delivered
Issue invoices promptly, communicating clearly what work or item has been delivered and the price
Put in place a system to identify both invoices that have been raised and those that need chasing because they haven't been paid on time
Consider employing staff for the above task as well as following up with late payers
3. Dealing with late payers and bad debts
Be sure to follow up on late payment the day an invoice falls as overdue, don't risk waiting to see what happens
Send friendly reminders to nudge customers that the account is now overdue
If you have regular communications or meetings with the customer, be sure to bring up the matter of payment politely as an agenda item
When communicating with customers try to understand if there is a reason why the invoice is overdue, are they experiencing financial difficulties?
For particularly late payers, don't offer them any further lines of credit
Look at implementing a stopping point so that no further work is done on long overdue accounts, also known as bad debtors
In particularly bad cases, consider adding expenses for debt recovery costs and interest to the amount due, it's your statutory right to charge 8% interest over base rate
If the debt is long overdue and your follow up attempts have failed to secure payment then an option is to outsource it to a debt recovery agency to act on your behalf
4. If a customer is in financial difficulty and struggling to make payment
Be empathetic to their position and consider offering them regular payment instalments for outstanding bills to help with their own cash position
5. For each customer, review their payment track record
Set varying credit limits depending on each customers historical track record on payments
Look at the option of offering discounts for early payments
This post was creaed on 24/04/2017 and updated on 02/11/2020.
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