Late payment is one of the leading causes of business failure. When the cash stops flowing, many firms – even successful ones – could be forced out of business. Keeping on top of your cash flow should be a priority for all business owners.
Despite a number of Government-backed initiatives in recent years, such as the much-criticised Prompt Payment Code, late payment remains a persistent menace for small businesses. According to BACS, the UK’s SMEs were collectively owed £39.4bn at the end of 2014.
According to a recent YouGov poll, 85% of the 1100 business owners who took part said they’d experienced late payment problems at some stage over the past two years. 11% reported that late payment issues had almost caused their businesses to fail.
Here are some ideas from the Company Bug team to help protect your cash-flow, and tackle potential late payment issues before they become a real problem.
Make your payment terms clear from the start
When you establish a new relationship with a customer or client, your payment terms should be stated explicitly, and included on any contracts and invoices. If you don’t do so, then you won’t have a basis to complain when payment is not forthcoming, although current late payment legislation (see below) sets a default payment period of 30 days before a payment becomes ‘late’, unless otherwise stated.
Have an accounts contact
When you ask a client for their address for invoicing purposes, and a PO number (if applicable), always ask for a specific person to email or post any invoices to. This will make it easier to follow up any overdue invoices.
Have a payment tracking system
You must keep on top of your invoices. You should know at a glance the status of all invoices issued by your company – which ones are about to become due, and which ones are overdue. Many of the current online accounting products such as FreeAgent do this automatically, making it far easier to know who to chase.
Charge interest on late payments
Although many small companies are reluctant to charge interest on overdue payments due to the imbalance of power between small and larger businesses, you have every right to do so.
Under the terms of the the Late Payment of Commercial Debts (Interest) Act 1998, and Late Payment of Commercial Debts Regulations 2002, small firms have the statutory right to charge interest on late payments, and reclaim ‘reasonable’ debt recovery costs.
Under the terms of the legislation, you can charge interest at a rate of the current Bank of England base/bank rate + 8%, so currently a total of 8.5% (January 2014).
To calculate the interest you can charge a late paying client, multiply the owed amount by the interest rate (8.5% in this example), and divide this sum by 365 days. This is the daily rate you can charge until payment is received.
You can find out more at the excellent late payment resource, PayOnTime.
Consider invoice financing
Some companies employ an invoice financing (factoring) company to take care of their cash flow management issues. Factoring companies will free up the value of your invoices, and chase payment on your behalf, in return for a fixed percentage of the invoice value.
Provide incentives for prompt payment
You could consider providing a discount for prompt or early payment. For example, if you charge £1000 for payment within 30 days, you could provide a 5% discount for payment within 14 days.
Electronic invoicing and payment
Aside from the massive time saving benefits you can achieve by firstly issuing all invoices via email, and secondly insisting that customers pay either via BACS of Faster Payments, it is far more efficient to run your whole cash flow management systems electronically. After all, cheques and invoices cannot be ‘lost in the post’ in the digital age.
Most small businesses will use every other method to try to extract payment from a stubborn client before approaching a debt management company, however every business has its limits. In many cases, all it takes is a single phone call from a professional debt recovery firm for payment to be made. Further steps can be taken, of course, including issuing taking the case to the County Courts.
In the majority of cases, things never progress this far, as few firms can afford to have a County Court Judgement issued against them.