Every successful business needs to be financial stable. Cash flow is essential to a business, so it can pay its bills and plan the future strategy. All too often, disorganised businesspeople will claim to be ‘late payers’ rather than nonpayers
However, late payment is one of the most difficult problems faced by SMEs. Bad debtors will have an effect on the ability a business has in paying its suppliers and employees, and could eventually lead to business failure if cashflow is managed unsuccessfully. Even if a business has a full order book, if it has too many late payers, the business is stifled.
Thankfully, there are steps you can take to help you address the problem of late payment:
Set out payment terms
Make your payment terms absolutely clear, right from the first order. This way, the client knows exactly what to expect if they make a late payment. There are various ways to encourage prompt or even early payment, and these options should also be outlined to the client.
According to legislation, a payment isn’t technically deemed to be ‘late’ until it has been outstanding for 30 days. This time is counted from the date the invoice is received or the date the goods were delivered, whichever is sooner.
A point of contact
Rather than issuing an invoice to the company in general, request a point of contact with the client so that you can specifically address one person. If a payment is late, you can contact that person and discuss the issue, rather than sending a general reminder for payment.
Keep track of payments
Create a system so that you can keep track of all due invoices, payments made and those that are outstanding. A complete accounting service will address the issue of late payments and a reputable company will suggest ways to avoid late payment issues. Don’t allow invoices to run past their due date without taking action of some kind. After initial action, make sure you have an in-house approved procedure for managing late payments, until they are resolved.
Interest charges
Nothing encourages prompt payment more than the addition of late payment penalties and interest. If another business is late paying their invoice, you can charge interest. You are permitted to charge statutory interest, which is the Bank of England base rate plus 8%. Multiply the amount outstanding by the total interest rate and divide by 365 to obtain the daily rate of interest that you are permitted to charge.
Payment methods
Provide as many ways to pay as possible, so that you are making it easy for the client to make a transaction.
Incentives
There are various things that can be created, which you may want to offer, such as an incentive for prompt payment that will reduce late payments. Include details of any incentives with your payment terms and ensure your sales team uses these as negotiation tactics. Any incentives agreed should be documented and again note them with the invoice. If a client has financial concerns, a 5% discount may tempt them to pay earlier.
There are many ways to solve the problem of late payment and systems are available to enable your business to manage and monitor late payments. Managing debtors will have a positive effect on your business cash-flow, profits and resources.
If you would like to improve your cashflow and gain more profits then, just give us a call and we will work with you to improve your business financial stability.