Among the many things that keep business owners awake at night, two of the biggest offenders are late payment of outstanding invoices and bad debt.
There’s a good reason for this. Both can lead to cash flow difficulties, which could have a severe impact on any business, regardless of size. The issue has become so prevalent that the UK Government appointed a Small Business Commissioner in a bid to drive cultural change in payment practises to ensure small businesses are treated fairly. But it’s a big job - recent research by FreeAgent found that almost half (47%) of all invoices sent by UK freelancers & micro-businesses last year were paid late.
So how can businesses get paid promptly and keep their cash flow healthy, whilst maintaining customer relationships? We’ve come up with some practical tips to effectively reduce your debtor days and get your cash flow under control. Given that our CEO, Glen Morgan, wrote the Chartered institute of Credit Management’s Debt Collection syllabus, which all students are currently studying, we’d like to think this is something we know a thing or two about.
Step 1- Only give credit terms to credit worthy customers
In the current climate, the temptation to snap up any order or piece of business has never been greater. But no business is good business if you’re not going to get paid.
Always make sure that you’ve thoroughly checked a customer’s credit worthiness before offering them terms. This might seem familiar if you’ve already read our tips on credit control, but it’s so important that it bears repeating.
If a new customer doesn’t meet your predetermined criteria (more on that here), insist on prepayment. And don’t lift a finger until the money is in your account. Once you’ve established a relationship and feel more comfortable that they’ll be able to meet the ongoing payments you could offer to switch to a credit account.
Step 2 - Implement a strong set of payment terms and stick to them
As soon as any agreement is made and before any order is processed, make sure you’ve made your payment terms clear. You then need formal WRITTEN acceptance from the client. When someone says “my word is my bond” it’s always safer not to believe them!
We understand that discussing payment terms and making it explicitly clear as to how and when you need to be paid can be awkward. But just think of the potential damage to your business, not to mention the customer relationship, if you’re spending valuable time and resource chasing payment time and time again.
Step 3 - Keep on top of overdue invoices
As with any problem, the sooner you address it the sooner it will be resolved. This is especially apt when faced with overdue invoices. Deal with late paying clients quickly, apply gentle pressure in a manner that is unthreatening and you’ll soon see the pay-off in terms of quicker payments. Think of it as tearing a sticking plaster off your business - short term pain is much more preferable than dragging it out.
Step 4 - Set a process for chasing overdue invoices
Most late payments are the result of customers simply forgetting or being too wrapped up in the day-to-day business. A soft nudge may be all that is needed.
As soon as a debt becomes overdue, send a well crafted letter to gently remind the customer that their invoice payment date has passed. If, after a number of attempts, you still haven’t received payment, you can then begin with a more direct approach.
Don’t be heavy handed and be considerate to the customer’s potential situation. Your customers are more likely to respond and appreciate this course of action than receiving a strongly worded letter demanding payment in the first communication.
Step 5 - Keep accurate records and documents
Always put your communications in writing, either by letter or email. And ensure everything is filed in such a way that you can find it if needed. If you are faced with the problem of having to resort to legal action, this will prove invaluable and could be the difference between recouping the debt and walking away with nothing.
Step 6 - Offer early payment discounts or rewards
Everyone loves a chance to save money. And everyone loves a reward. So why not combine the two and give your clients an incentive to pay quickly or, even better, offer a discount for prepayment of invoices? Some clients would welcome the chance to prepay so give them the option. Not only will this have an immediate impact on your cash flow but some clients may find that it helps with their budgeting.
If you don’t get a handle on the issues of late payment of outstanding invoices and bad debt it won’t just be a bad night’s sleep you need to worry about. Research from Xero & PayPal last year revealed that over 1/3 (37%) of small business owners have considered closing their businesses in the last year alone due to problems with late payments. You can bet that figure has risen even higher since March.
For more insight on how much extra you could add to your cash flow and to see if your credit control is as effective as it should be, use our handy days sales outstanding (DSO) calculator.