Debbie Austin explains the items you must implement to both prevent and deal with late payment.
Late payment is the curse not just of SMEs but the economy as a whole. What might seem an innocuous oversight by a corporate business can actually turn into a vicious cycle of delayed and even non payment among several organisations as each one suffers from the actions of the other. The problem has become so acute that the government have set up the post of Small Business Commissioner to tackle this very matter.
This highlights what a huge issue this has become. Overdue debts force SMEs to delay settling their own bills because they don't have the cash on deposit to pay up. It can lead to a drying up of the cash flow which means entrepreneurs don't obtain the cash they need, when they need it, to fund vital investment to 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 and on time.
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 as it equates 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 with 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.
It's not surprising that successive administrations and even the EU have tried to get involved using legislation. For example, in 2015 the government introduced the prompt payment code, a voluntary scheme for large corporates to sign up to and commit to paying their suppliers on time. Around 2,000 did this but even that hasn't delivered a solution to the problem.
The EU introduced legislation through a directive which gave SMEs the right of compensation when invoices were settled after the payment date. Unfortunately achieving repeat custom is so vital to the growth and success of many early stage businesses that many don't want to challenge their customers. After all their turnover may be built on a small number of customers whereby losing one them through legal action could be financially harmful.
18 Things to implement as part of your credit control system
Managing cash flow and your cash position is an absolutely vital area that you as the business owner should focus on as part of your business growth strategy. Be sure to implement the following as part of your credit control system to prevent the risk of ending up with a number of bad debts:
Pre-checks and new customers
Obtain credit reports on potential new customers to gauge their ability to pay before you sign them up and extend them 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
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
For 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
If a customer is in financial difficulty and struggling to make payment
Be empathetic to their position and consider offering them regular payment installments for outstanding bills to help with their own cash position
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
The content of this post is up to date and relevant as at 24/04/2017.
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