How to encourage late payers cough up

Late payment of invoices is the scourge of the SME sector and one of the main things that threatens their viability or hampers the growth of many such businesses.

By Pierce.

Of course if you own a retail business you can be smug in the knowledge that you don't have to provide credit to your customers and needn't read on...

So how can you convert those invoices to cash without letting credit control take over your life?

Understand your cash flow

In these post recession years many business people know the old mantra of "Cash is King" still remains true. No matter how much you sell, if you don't get paid then your business won't last long. However, many businesses and their owners still focus on sales and bottom line rather than cash flow.

With good cash flow comes freedom. Freedom from covenants and personal guarantees, freedom from unexpected surprises, freedom to invest wisely and acquire competitors and the freedom to enjoy the lifestyle you envisaged you'd have when you set up your business.

You should know what your cash flow requirements are for at least the next 3 months if not the full year and beyond. More importantly you should revisit this forecast regularly to see where things have gone well and not so well. Then you can adjust your expectations going forward.

Not sure how to go about forecasting your cash flow? Well there are a myriad of solutions - one of my favourites is Spotlight.

One often overlooked solution to improving cash flow is to improve your credit control process...

12 great tips to improve your credit control process

1. Credit check all new customers and only offer credit terms to those with a good history and rating. There are a number of credit checking agencies out there including DueDil, Experian and Dun & Bradstreet to name a few. Failing this many accountants and Chambers of Commerce provide a credit checking service and a number of cloud accounting systems and their add-on providers are moving into the sector.

2. Don’t offer over the top credit terms i.e. 90 days when your competitors offer 60 or 30. Hopefully it's your product or service that sets you apart from your competitors not your credit terms.

3. Establish payment arrangements that minimises your credit risk. If possible negotiate stage payments, deposits up front or for work to be completed on retainer if providing project type services.

4. Invoice quickly. It may seem obvious but if you raise invoices as soon as the work is done then you won't inadvertently extend your credit terms. Consider sending invoices out by email rather than post - then you know the clocks ticking as soon as you click the send button.

5. Agree clear payment terms. If you and your customers don't know your terms how will they know when to pay your invoice and, more importantly, how do you know when to chase them? Make sure you clearly state your payment terms (print them on your invoices) and state that you will charge interest and statutory costs for late payment and collection charges.

6. Clearly state the due date you expect your invoice to be paid. Another seemingly simple solution, but how often do you find 30 days credit terms is interpreted by some as 30 days from the invoice date, 30 days from delivery or even 30 days after the month the invoice was received... Most mainstream accounting packages allow you to do this.

7. Investigate and resolve invoice disputes as soon as possible. Nobody likes bad news or to be told they haven't lived up to a customer's expectations but disputes are often used as an excuse to delay or avoid paying outstanding invoices. Better to solve the problem promptly, even if it costs you a bottle of wine or bunch of flowers. That's a much better trade off than costing you the current sale and the possibility of repeat business in the future.

8. Give your customers a friendly reminder that they owe you money. Rather than chase invoices when they are late why not remind customers a week in advance that payment is due.

9. Encourage customers to pay early by offering a settlement discount. Just as you are concerned about cash flow, so are your customers, and some will take advantage of say a 5% discount to pay you earlier.

10. Make it easy for customers to pay you. Offer your customers as many alternatives to pay you as possible, particularly by bank transfer, Direct Debit, or credit/debt card rather than by cheque which delays payment further due to postage and bank clearing timings. If you already offer alternatives why not put payment links on your invoices so there's no excuse for not being able to pay. Find out more about payment solutions here.

11. Don't compound the problem. If a customer is late in paying don’t do any more work for them and put into action your credit control process. Of all the business owners I've dealt with who have suffered bad debts they're most bitter about the customer who owed them money, ordered and received extra goods and services, despite misgivings, and then went bump owing even more.

12. Do the dirty work. Not many people enjoy credit control and quite often it's the job usually put off to: this afternoon; tomorrow; next week; or next month. Chase the amount due, raise an invoice for interest and costs on the debt, put the customer on stop. You can find out more about the best way to ask for payment in this guide from Sage.

Know you rights

The government has tried to help tackle the problem of late payment through legislation. This legislation was first introduced in 1998, updated in 2002, and was most recently updated and amended on 16 March 2013 – the Late Payment of Commercial Debts Regulations.

This legislation says that you are able to charge statutory interest and compensation to your business customer when they pay an invoice late, even if you had not agreed terms and conditions before working for them or supplying goods.

The calculation is as follows:

- interest on the outstanding debt at 8% above base rate (currently 0.5%) accrued on a daily basis (i.e. (8.5%/365)*£ debt per day); - plus compensation based on the size of the invoice:

£40 for an debt less than £1,000; £70 for a debt between £1,000 and £10,000; and £100 for a debt of £10,000 or more.

The most recent changes allow you to also claim reasonable costs for recovering the debt if these are more than the above compensation, which can increase considerably if you start pursuing debts through the courts system.

The new amendments also enforce 30 days payment terms for public bodies and 60 days for businesses. Also, if you don’t actually agree payment terms, then under the law 30 days is the assumed default.

Of course the problem with this legislation is that you may not want to charge your customers late fees, for fear of antagonising them. And some may feel that this is akin to using a sledgehammer to crack the proverbial nut. However my thoughts are that it's always nice to have something extra in your armoury just in case.

After all which is worse? Charging a late paying customer interest and compensation with the associated risk of upsetting them or letting them take your product or service without paying for it and leaving you with a bad debt problem to sort out.

Use technology to take away the pain

If you don't have the man power or the time to dedicate to credit control then why not let technology be the answer? The team at Satago have a desktop and cloud based solution to automate your credit control process that integrates with all the major accounting and bookkeeping software on the market. What's more they have the seal of approval from the Institute of Certified Bookkeepers.

Of course there's much to be said about the human touch, but there's no reason to not let technology take some of the burden.

Finance your debt

One sure fire way of rapidly improving your cash flow is to borrow against your invoices. This isn't without a certain element of risk or financial cost but invoice discounting or factoring services can be extremely beneficial and cut down the working capital cycle i.e. how quickly you pay your suppliers compared to how long your customers pay you.

The additional benefits of using these kind of services are that some will help collect your debts for you, taking away the pain of credit control, plus you may well be able to have credit insurance included as part of the service or bolted on for an additional fee.

There are many invoice finance providers in the market from both the high street banks and the rapidly growing peer to peer lending sector - more of which can be found here. Let me know your thoughts on the above and share the tactics or solutions you use as part of your credit control and cash flow management process in your business.