Encouraging prompt payment

Alex BellQ: I have too many overdue invoices and am spending too much time chasing them. I know that cash flow is king, but how do I get people to pay promptly?

A: I find that businesses are experiencing the late payment of their sales invoices more and more regularly. Customers always seem to blame the credit crunch and the economic slowdown.

There are numerous ways in which you can speed up the receipt of cash coming into your business from those who are late or slow at paying you. I do find that different business sectors will have differing experiences, in general the following should speed the process up:

Early settlement discount
More and more companies are starting to offer a discount of between five and 10%, as long as payment is received within say 14 days, the discount will apply. This mechanism should not affect your turnover value as you should increase you original selling price to compensate.

Statutory late payment interest and/or surcharge
The use of the statutory late payment interest can be applied to any late invoices, that have been outstanding past the due date of payment. This is calculated at 8% above the Bank of England base rate and is prorated.

Outsource your credit control
There are numerous credit control businesses sprouting up, these work on your behalf and chase those invoices that are late, allowing you to concentrate on your day to day work.

These credit control businesses either work on an hourly rate or per invoice chased.

Ask for payment up front or on delivery
Dependent upon your industry, you may already employ this idea. For example, supermarkets, shops, insurance and the motor industry already use this system and very rarely experience any late settlements.

The standard business however may be reluctant to change their current method of invoicing, to adopt this.

Standing order / Direct Debit originator
It may be possible to work out a fixed fee for the year and apply a standing order system, this would ease the cash flow for both parties.

If your business is large enough it may be an idea to become a Direct Debit originator. Subject to the rules of Direct Debit you are able to control the amounts of money that are deducted from your customers’ bank account. The set up cost of this is in the region of £4,000.

Legal action
As a last resort it is possible to take your worst customers to court. It is best to take advice from your accountant or solicitor, in these circumstances.

Stop working for late paying customers until they pay
If a customer is unable to pay on time, they may be unable to pay at all, thus it makes sense to STOP work on any further work relating to the particular customer.

Once the debt has been settled or an agreement has been reached, work should be commenced if you are happy to do so.

Keep in touch with your customers
By keeping in touch with your customers through the use of monthly statements. It is a constant reminder of the amount of money that they owe to you and should always be top of their list of payments to make.

Alex Bell, Studholme Bell Chartered Accountants.