THE LATEST STATISTICS from BACS on late payments make harrowing reading for UK SMEs. The figures, which were released in May, show that altogether around £24bn is owed to SMEs, with large corporates being amongst the worst offenders.
The survey goes on to say that payments in the north of England are delayed by an average 52 days and that 158 million working hours are lost to chasing overdue bills with the average debt amounting to £27,000. These are substantial numbers, so how can SMEs protect themselves from the worst excesses of late payment?
Good cash flow is essential to the success of any business and at the moment it’s even more critical. While it’s tempting not to upset good customers by chasing bills, late payers can, and have, forced profitable SMEs to the wall. Overdue payments, therefore, can no longer be ignored.
The process of ensuring accounts are settled on time starts a long while before the first invoice is raised and like most things it operates better if there’s a solid, workable system in place.
New customer strategy
All new customers, no matter how substantial they appear, should be subjected to a thorough credit check. If whole countries can be in danger of defaulting on their loans, there’s no reason why some of the biggest companies couldn’t share the same fate. Before you start supplying anything make sure you get an up-to-date status report, which outlines recent business performance.
It’s also perfectly acceptable not to give a new client any credit until they have proved themselves to be good payers. As soon as an order comes through, confirm it in writing. Make sure the order has a number, that the value of the order is agreed and that it’s given an invoice number.
Let the client know what that is and make sure that the payment terms are clearly stated and don’t allow any room for manoeuvre. Offering a prompt payment discount as an incentive could also be worth considering. All the above will help reduce the risk of queries, genuine or otherwise, further down the line.
Keep up contact
Once the order has been completed, it is obviously good business practice to get the invoice in promptly, but don’t then forget about it until the money is due. Make contact a week later to confirm that the invoice has been received, that the figures are correct and that it has been logged onto the system. All this helps to avoid the well-known excuse that the client “never received the invoice”.
Printing the invoice on coloured paper also helps to make it stand out. Another worthwhile exercise is sending out a statement about halfway between the invoice date and the due date. This further reinforces the point that the invoice is due and that the accounts department is on top of things.
Try and keep it personal at all times. Make a friend in the accounts department so that the company has a human touch rather than simply being a number. Equally, if the accounts department isn’t being terribly forthcoming, consider speaking to some of the other contacts in the client’s offices instead.
Theoretically, all the above should ensure that payments are made on time but sometimes, despite the accounts department’s best efforts, payments won’t be forthcoming. There are, however, a number of processes to handle that too.
Take more serious action
Firstly, begin the chasing process immediately the payment is overdue. At this stage, it’s a gentle phone call to confirm that payment is on the way. Send out a reminder the next day which is a polite request for payment.
If necessary, send out a second, slightly stronger letter seven days later and seven days after that post a letter threatening legal action if payment isn’t received in the next week. And at this point, if monies still haven’t been received, the account should be on stop so. From the second letter onwards, it’s perfectly reasonable to request interest on the outstanding monies, too.
As mentioned before, this can be a tricky process to follow if the relationship is strong and the orders are regular. As a result, before getting too aggressive, it’s always worth trying to negotiate first. An amicable arrangement, whereby perhaps the outstanding balance is paid back over a period of months and the client remains a client, is potentially a much better ending than County Court Judgements and a lost client.
That said, you need to know when to stop trying to resolve the issue and instead resort to legal proceedings. No matter how good the relationship, there comes a point where being sociable won’t pay the bills and tough action may be required.
One of the very best ways to avoid late payment is to insist on all invoices being paid by Direct Debit. This not only makes cash flow much more reliable, but if a payment is missed, the problem is flagged up immediately and action can be taken straight away.
Direct Debit also saves time and money. Less time is spent handling cash and cheques and staff that were focused on chasing payments can now spend more of their time doing things to help the company grow.
Late payments can be a particular problem during the holiday season. ‘The person who writes the cheques is away’ is a classic excuse. There are other ways to avoid the holiday non-payment blues.
Make sure that staff know who else they can talk to if their usual contact is away. It’s also important that they have access to all the information they need to chase bills effectively. Your accounts department shouldn’t grind to a halt because one person is away, so ensure that key files are still accessible and all post is opened.
And one final thought … late payment goes both ways. Ensuring your own invoices are paid on time will help maintain a good reputation.
Luisa Grey is a director of Eazipay
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