Don’t let late payers disrupt that all-important cashflow

STRONG and sustainable cashflow is essential for any successful business, especially for small business owners in those first few “make or break” years.

Business-owners who set clear payment terms with their customers, invoice quickly and follow up on late payments can avoid the dreaded cashflow crunch that can effectively put them out of business.

Nonetheless – and irrespective of a business’ productivity – problems with cashflow are one of the biggest reasons why many of them fail.

According to research conducted by the Institute of Directors (IoD) last year, almost half of SMEs surveyed had faced issues with late payment, with nearly a third of respondents suggesting the blame lies with an “excessively bureaucratic payments system” in the company being invoiced.

Others noted disparity between the practices of smaller and larger businesses, with almost a quarter claiming that larger firms they dealt with operated “grossly unfair” terms or practices.

The research suggested that, overall, as many as one in three payments to small businesses are late, with the average value of each payment standing at more than £6,000.

Given the findings of the research, understanding, recognising and responding to the specific threats which impact on your firm’s cashflow is paramount in protecting the bottom line.

Implementing an efficient and robust billing system is a simple but effective starting point.

For example, billing clients promptly – or agreeing to an interim bill if the matter at hand is ongoing – is a standard safeguard to ensuring healthy cashflow.

An inconsistent billing system will give the impression that there is no rush for payment and leaves money in your clients’ pockets which could be in your bank account.

Bills should highlight the payment due dates and clients should be sent regular statements which clearly state which bills are overdue.

Where fixed fees have been agreed, it may be possible to break the total fee into smaller monthly payments, aiding transparency of the billing process and helping to prevent unnecessary queries of the bill on completion.

Equally, issues billed on a “timeserved” basis, such as consultancy or legal fees, can be processed more frequently – perhaps monthly instead of quarterly.

Businesses can also save time and money invoicing clients by email – e-billing – thereby increasing the possibility of quicker payment, while some SMEs may want to consider negotiating payments on account, prior to commencing any work.

Incentivising early payment can also reap rewards.

Some small business owners offer an early payment discount, typically at a rate of 1.5%-2% for NET30 invoices (bills that require payment within 30 days).

Many customers will appreciate the opportunity to save money and most business-owners don’t miss the small amount taken off the bill.

Customers who routinely pay late, however, may be motivated by a late payment penalty – also in the 1%-2% range of payment – but be willing to negotiate with them, as late payment is better than no payment at all.

Managing your clients’ access to credit facilities with you is an important part of the cashflow process. Clients who have a history of slow payment should be flagged up when payments become overdue.

Chasing clients for outstanding bills costs your business time and money and can be highly unprofitable. Therefore, it may be prudent to credit-check new clients before you start any work to highlight the risk of non-payment.

Many businesses also find that the “art” of accounting, invoicing and collecting payments can be made easier by using cloud-based software such as Xero or Quickbooks Online, which offer the ability to access and generate invoices quickly and on the move, as well as giving business-owners good visibility of outstanding payments in real time.

Ultimately, successful SMEs will give a lot of thought to client care but it’s important that an effective billing policy forms part of each and every agreement.

When clear payment terms are agreed with clients at the outset, taking into account what works best for you and your customers and being clear about expectations, not only is it more likely that your invoices will be paid on time, but it generally makes for a better and more fruitful working relationship for both parties.