Reducing the impact of late payments - What is late payment?
Dealing with the day-to-day running of your business, whether you are self-employed, a company or contractor, can be difficult enough without having to deal with the financial side of things. Being owed money due to missed payments can cause detrimental funding gaps for SMEs in particular, affecting cashflow, hampering growth and impacting the ability to pay staff or suppliers on time.
In an effort to tackle a culture of paying invoices late, regulations are in place that require large companies and limited liability partnerships (LLPs) to report twice a year on their payment practices and performance. In an environment where cashflow is key to small business survival, our guide will help you to adopt better invoicing practices and ease some of the pressures to reduce the time and money spent on recovering late payments.
Forecasting bad debts
A regular, reliable cashflow is vital to the financial health of any business. There are some clear steps that companies can take to encourage their clients to pay promptly, and to limit the impact of late payment when it does happen.
Know your customers
Run credit checks on all new customers before offering credit terms and set appropriate credit limits. A simple credit check online could save valuable time, and money. This should be an ongoing process as even the most reliable payers can have a change in circumstances.
Explicit payment terms
Make your payment terms clear and consistent from the start and advise customers about any late payment charges to save disputes. The standard term of 30 days gives a basis on which to chase payment and take further action if necessary. Consider including payment terms on statements, invoices and in the Terms and Conditions of business.
Part payment terms
This is best suited for larger projects, but an agreement to pay half the bill at the onset of the project and the other half after completion is a sign of good faith and an indication that you’ll likely get paid at the end of a job.
The first step towards keeping on top of overdue payments is to maintain up-to-date records to identify any potential issues at an early stage, and where necessary take steps to resolve them. Track invoices and accounts receivable weekly to determine which clients have and have not paid.
Send invoices soon after the job has been completed and stick to a regular payment schedule. The invoice should clearly state the nature of the work, the due date for payment and payment terms. A straightforward process can ensure that customer payments are made easily, and preferably online or by direct debit.
Effective credit control
Tighten any existing credit control procedures and look at using technology, such as quality credit control software to automate manual processes to enable a pre-emptive approach to payment delays. Sending friendly reminders up until the due date will also help clients remember that the deadline is drawing near or has arrived.
Flexible payment options
While some clients want to pay by credit card or online payment system, others prefer to pay directly to a bank account. A straightforward process and giving various payment options, gives clients more reasons to pay you easily and on time.
Early payment discounts
Offering incentives to encourage clients to pay early, even a small discount of 2% if paid within ten days, may motivate clients to pay you on time. Not only is it a great way to encourage speedy payment and maintain your cashflow, but it could also lead to a more long-term relationship.