When your company is facing yet another cash flow crisis caused by late paying customers, it can be hard to believe there might be a solution.
But there are steps you can take to overcome the problems delinquent payments cause and to avoid them happening again.
Late payments are something that hundreds of thousands of SMEs experience. Of the 1.7 million SMEs in the UK for example, 640,000 say they have to wait beyond the agreed terms for payments, according to Bacs Payment Schemes.
Nearly 40% of them spend up to four hours a week chasing late payers and 12% employ someone specifically to pursue outstanding invoices.
Late payments can threaten SME’s ability to trade, and stifle appetite for growth and recruitment, says Ian Cole, Head of Invoice Finance at Siemens Financial Services. In worst cases, it can lead to insolvency. Mike Cherry, National Chairman at the Federation of Small Businesses, said if payments were made promptly, 50,000 business deaths could be avoided every year.
So too could the problems that late payments cause. Of those SMEs facing late payments, 16% struggle to pay their staff on time, while 28% of company directors reduce their own salaries to keep essential working capital inside their businesses. A quarter (25%) rely on bank overdrafts to make essential payments, and 15% find it difficult to pay business bills like energy, rates, and rent when they’re due.
Late payments take an emotional toll on business owners and CEOs too.
Over a quarter (29%) of UK SME owners struggle with depression, anxiety, increased stress, and other serious mental health related issues caused by the worry of late payments, according to research commissioned by The Prompt Payment Directory (PPD).
The survey polled 1,000 UK small to mid-sized company owners who all suffer from poor cashflow due to late or outstanding invoice payments.
More than a third (34%) regularly lose sleep over poor cash flow caused by clients paying late and 7% even claim to have lost their hair because of the anxiety, the PPD revealed.
Nearly a quarter (21%) struggle to pay their mortgage or rent or have been forced to sell the family home. The consequence of these late payment pressures is also destroying people’s marriage, family, and social lives.
The amount of time SMEs are kept waiting beyond their previously agreed payment terms is a big issue. Almost a third of companies face delays of at least a month beyond their terms and nearly 20% are having to wait more than 60 days before being paid.
UK businesses with turnovers of under £1million wait an average of 72 days for payment of invoices, according to the Asset Based Finance Association, the body representing the asset based finance industry in the UK and the Republic of Ireland. By comparison, businesses with an annual turnover of between £1 million and £10 million wait about 53 days and businesses with £500 million-plus turnovers wait about 47 days.
Fortunately, there are measures you can take to protect your company from the worst effects of late payments and to ensure you are paid promptly in future.
Research prospective clients
Before accepting a new client, carry out a credit check and find out if the company has a reputation for paying on time.
Agree prompt payment terms
Get clients to sign a contract or agree to terms and conditions that specify when they must pay your invoice and late or overdue fees. Include your payment terms on every invoice.
Send invoices promptly
Don’t delay in sending out invoices. Check that the details are correct to avoid delays.
Offer a range of payment options
Make it easy for customers to pay you by offering them a variety of payment options such as Direct Debit, PayPal, and credit card. If your clients are based in a different country, accept payment in their currency.
Use invoice finance
Invoice finance will give you essential working capital (90% of the approved total invoice) while you wait for the outstanding invoice to be paid. You’ll receive the remaining 10% when your client pays your invoice.
Use an invoice tracker system
You’ll receive an alert when invoices are overdue.
Keep to a schedule
Invoice on the same date every month so that your clients known when to expect your invoices.
Set up internal invoice reviews
Hold regular weekly or monthly internal finance meetings to review your invoices.
Don’t back down
If you have late fees for overdue invoices then make sure you follow through and charge them. By law, you can claim interest and debt recovery costs if another business is late paying for goods or a service.
If you haven’t already agreed when the money will be paid, the law says the payment is late after 30 days for public authorities and business transactions after either:
- the customer gets the invoice
- you deliver the goods or provide the service (if this is later)
You can agree a longer period for payments from one business to another—but if it’s longer than 60 days it must be fair to both businesses.
Hire a part-time CFO
For a fraction of the cost of a full-time CFO, the CFO Centre will provide you with a highly experienced senior CFO. Your part-time CFO will assess your company’s cash flow position and take the following steps:
- Identify and address all the immediate threats to your business. It might involve chasing late paying customers, using invoice financing to give the business an immediate cash injection, or arranging short-term loans or overdraft facilities with your bank.
- Determine where improvements and savings can be made.
- Instigate the use of regular cash flow forecasts. This way you’ll know in advance if your company is going to face a cash shortfall and can make arrangements for extra borrowing, or take other action.
End your late payment and cash flow problems now by calling the CFO Centre today. To book your free one-to-one call with one of our part-time CFOs, call +852 3059 2506 or just click here.