Staying on Top of Late Payments
This week's guest contributor is Sage. Sage is the market leader for integrated accounting, payroll and payment systems.
Late payments can be a real blow to cash flow, especially for startups or small businesses. In the UK around 17% of all payments to SMEs are late and on average businesses spend approximately 15 days each year chasing payments, according to recent research by Sage
While difficult to completely eliminate, there are steps you can take to encourage customers to pay your invoices on time. In order to help businesses who are burdened by late payments, here are the top five causes of late payments and handy pointers for getting paid:
Top reasons for late payments
Payments may be delayed for many reasons. Often, it's as a result of disagreements between suppliers and customers. Potential disputes can include:
- Suppliers changing terms and conditions
- Suppliers withdrawing credit without notice
- Customers withholding funds to check quality of work
- Customers demanding payment discounts not agreed at the outset
- Customers withholding payment to question quality of work or deliver times
Therefore you need to ensure you’re explicit about how you expect to be paid. These payment terms should be agreed at the very beginning of any new business relationship, including timeframes, costs associated with late payments, discounts on bulk orders and acceptable payment methods. It can be beneficial to include these on every invoice you send.
You can encourage timely payments by providing customers with a variety of convenient ways to pay and offering discounts for prompt payment.
Top tips for getting paid
In general, the more detailed you make your invoice, the easier it will be for your customers to pay you. Each invoice you send must include the thirteen elements listed below:
However, an invoice can have all the necessary details and still cause problems for the payee. For example, an invoice which includes incorrect information will damage your credibility and discourage prompt payment. Using invoice templates or accounting software can help minimise errors, but it’s vital that you check your invoices for all of the following issues:
- Spelling and formatting mistakes
- Unexplained fees
- Unclear payment terms
- Addressed to the wrong person
Maintain good relationships
Forging a strong relationship with your payees can be highly beneficial for both parties. You should check that the customer is happy with the quality of goods immediately after receiving them and agree with them a period of time after delivery in which complaints can be raised. By operating in this manner, you're not only offering excellent customer service but also significantly reducing the likelihood of problems arising when payment is due.
It's also important to know who within the other company deals with your payments. Having a named contact will avoid invoices ending up with the wrong person and makes chasing late payments easier. It can also be beneficial to learn their payment dates and challenge any irregularities or delays
Every invoice you issue should include a ‘payment due by’ date. This date should not be a generic “30 days upon receipt” but rather the exact day you expect to be paid. This makes it easier for you to keep track and send customer reminders before the payment is due.
If the payment is still late, it’s vital you chase your customer on a regular basis. State when you invoiced, that payment is overdue, your payment terms and your new deadline date. Don’t allow them to take advantage of you as it will encourage them to make late payments in future.
Don’t let the problem escalate
If your customer continues to delay their payments or is a regular offender, then you should consider ceasing to trade with them. If their company relies on your product or services, then it can add the additional pressure needed to make them to pay.
Also make it clear in your payment terms that you will also penalise late payments by charging interest. You have a statutory right to claim interest on late payments at 8% over the Bank of England base rate. Don’t be afraid to charge your customers as this will set a precedent for encouraging prompt payment.
For additional tips on setting up your finances, managing cash flow and strategies for growing your business, check out Sage’s Ultimate Guide to Basic Business Accounting.