You’ve probably heard that the majority of businesses fail because they run out of cash. A company could be making a handsome profit, but if their debtors are taking months to pay then there may not be enough cash to remunerate employees or meet utility bills.
In fact this has been a topical news item with the Guardian reporting that SMEs across the country are now owed a total of £40bn in unpaid invoices. This equates to an average of £38,186 for each company and may explain why 1,682 firms have also put their names to the Prompt Payment Code, a government backed voluntary initiative managed by the Institute of Credit Management that commits companies to pay "within clearly defined terms". Unfortunately the terms aren’t binding and many of the companies that have signed up are small businesses. So, it has never been more important to be on top of your debtors (organisations that owe you money).
Thankfully many online accounting software providers contain features that not only help you collect money owed but also improve the performance of your organisation’s credit control function.
Money owed to your company for products or services provided on credit is referred to as accounts receivable. Generally a sale is treated as an account receivable once an invoice has been issued to a customer for the goods/services provided. While it is crucial to understand your accounts receivable, it is equally important that you recognise the time commitment necessary to properly manage them on your own. The Quarterly Survey of Small Businesses in Britain by the Open University Business School found in its 2013 Q2 report that ‘cash flow, payments or debtors’ was cited as the second most commonly reported problem to small businesses for the sixth financial quarter in a row.
Entrepreneurs in many cases are spending several hours every week managing their assets – that is understanding and then chasing up unpaid bills. With some understanding of accounting principles and the accounts receivable section of your online accounting software, you could spend just one hour managing your debtors and dedicate the rest of the time to the more effective task of building your business. We explain how you can use invoicing to your advantage through your online accounting software so you won’t have to worry about potential cash flow issues.
When your business extends credit to another company for services or products, you are in effect offering the equivalent of a bank loan with no interest charged. Therefore the sooner you can settle the payment of invoices (see next section); the sooner you will receive money to potentially re-invest in your business. In fact late payment is seen among SMEs as one of their most challenging current issues and the recent Small Business, Enterprise and Employment Bill was criticised for barely addressing this matter.
While the bill states that large companies will have to provide details in their annual report on how long they take to pay suppliers, the problem is this will take time to be implemented. Many SMEs can be very keen to work with corporates due to the kudos and additional revenue it can potentially bring. This also means that they can overstretch themselves trying to achieve this which forces them to make use of overdraft facilities or other options such as invoice financing to tide them over.
This then eats into profitability as it costs your company money in the form of bank fees or service charges and is a scenario you should look to avoid where possible. Some businesses also fail to realise that where they have set a precedent in accepting late payments from certain customers, they are then exposed to the customer now applying that payment pattern as their credit agreement and not being bound by the standard payment terms and conditions.
The legal document that connects you to your debtors is called an invoice. A standard invoice should contain:
It is imperative that you analyse each component of your invoice to maximise collecting your debts. Accounting software giant Xero has concluded that debtors pay two weeks late. They recommend establishing a 13 day pay period in order to ensure funds are received within a month.
Software company FreshBooks compiled their customer invoices, and established that invoices that were specific, requested payment in 21 days, included their company logo and were polite, maximised payment. Additionally, they found that invoices that added interest to late payments were paid later but more often, and companies that spent time on an attractive design to their invoice pages were more appreciated by customers.
When managing your accounts receivable, your accounting software helps you first and foremost by keeping tabs on your assets. As QuickBooks explains, its software can track and report on your payments. QuickBooks, and other accounting software, determine which of your debtors are still yet to pay and which ones are repeatedly unreliable. Furthermore, your custom invoices can be programmed to be sent automatically after your products are purchased. This way, any customers late on their payments can be sent reminders or have phone calls scheduled to ensure prompt funds.
We no longer operate in a cash and cheque world. Accepting credit and debit cards may be more convenient for your customers and therefore help you get paid more quickly. One of the many services PayPal offers is invoice management. Your debtors may well be sending and paying their invoices through PayPal, so including a PayPal transaction option could help you collect funds.
Understanding your bookkeeping is the final step. If you're sending several invoices a week, some online accounting providers can automate this so that every time an invoice is sent the software then adds an asset to your accounts receivable. When your invoice is paid, you only need to enter your invoice number, company name and amount paid to wipe any outstanding debt off your financial statements. Then, through sending monthly statements to your customers and by reviewing your software’s payment tracking, you can uncover which customers are your most reliable, which need reminding, and overall, if your invoices are doing their job.
As your business grows, the number of assets you have to manage will only increase. At some stage you will need help in doing this. Incorporating online accounting software into your business will therefore be a logical and inevitable move. Its functionality in managing your accounts receivable will help ensure your cash flow doesn’t dry up while cutting the time and improving the efficiency in the process of chasing up your debtors.
The content of this post is up to date and relevant as at 13/08/2014.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.