A study carried out by a leading accountancy software firm found that the average business is owed over £11,000. Given that running out of cash is the leading reason why firms go under, what measures can you take to keep your cash flow running?
According to Sage Pay, the average business is owed £11,358, and one in five is owed £30,000 or more. Although there may be little small business owners can do to force some clients to pay on time, there are practical steps you can take to reduce the chances of invoices becoming late.
The survey found that while medium-sized firms were more likely to have embraced e-invoicing (85%), an astonishing two-thirds of ‘small’ firms still use paper invoices. These small businesses also spend a lot of time (two weeks per year on average) chasing overdue invoices, suggesting that the majority of SMBs don’t have efficient cashflow management measures in place.
How to reduce the chances of invoices becoming late
- If you issue invoices to be paid in the future, rather than at the time of payment, make sure you have the correct email address of the person who will be processing your payment (e.g. someone in the accounts department).
- Consider using an electronic invoicing system, rather than the traditional paper-based method. If you send invoices via email, you’ll not only save postage costs, but you’ll also save time.
- There are many cost-effective invoicing systems available to small firms, including FreeAgent, QuickBooks, Blinksale, and FreshBooks. Most provide a free introductory period so that you can try before you buy. You can also access various payment solutions provided by SagePay (who conducted the survey) here.
- Most online invoicing software comes as part of a complete accounting package, so your invoices are automatically added to your company accounts. Unsurprisingly, there are huge benefits to be had by investing in a complete online accounting system, but you can simply use invoicing software if your immediate concern is to keep tabs on the status of your invoices.
- Agree payment terms before you conduct any type of business transaction. In the absence of formal terms, a 30-day payment terms will be considered ‘standard’, according to late payment legislation.
- Whether you use software or otherwise, keep a record of all outstanding invoices. Online software will let you know at a glance which invoices are overdue, or soon to be late.
- If you encounter a late paying client, follow up your initial invoice with a polite, but firm reminder. Although there may be some standard ‘delaying tactics’ practiced by larger firms, if you have any other small businesses as clients, they may simply have forgotten, or even not received the initial invoice. Don’t always assume the worst.
- If all else fails, and invoices become substantially late, you do have the right to claim interest under the Late Payment of Commercial Debts (Interest) Act. Many small business owners are reluctant to use threats against clients, for fear of losing future business. However if the actions of others could put your own business in jeopardy, you need to carefully consider whether or not to take further action against certain late payers.
- In our experience, using a professional debt recovery service can be extremely effective. We’ve used this type of service several times at Company Bug, and have received payment within 48 hours in each case. Try Safe Collections as a starting point.
- As a last resort, you may consider taking legal action against late paying customers (the threat of having a County Court Judgement against their firm’s name is quite persuasive).