You have spent time sourcing the lead, built a relationship, won the work and completed the order. Feeling pretty good now, I bet and rightly so. But have you been paid? How would you feel if 90% of the payments you received were late, and you had to spend around 70% of your time chasing debt?
Late payment damages thousands of small and micro businesses up and down the country and the problem doesn’t look to be easing. According to a study by Sage Pay in December 2013, the average small to medium business was owed £11,000, equating to £55 billion across the nation.
The financial impact for most business owners weighs heavy on their cash flow, emotions and even relationships.
Amy Davies is a freelance Journalist & Photographer based in Cardiff, and suffers the problems of late payment almost every month. She started by telling me about the impact this has on her and her business. Amy said “The impact for me is that I have to rely on credit cards, overdrafts and loans every month, as unfortunately, I can’t pay my rent, bills, etc late, but companies seem to think it’s acceptable to pay *me* late.” She added “While I’m not getting into huge amounts of debt every month or anything, it’s true to say that I need credit as a safety net and have had to use it on more than one occasion.”
Amy estimates that, as a freelance journalist, around 90% of the payments she receives are late and around 70% of her time spent is having to chase payment, either by email or letter. Time she should, and prefers, to use earning more money.
What Can Be Done To Minimise The Impact On Your Business?
- Get a deposit
If you’re laying out money on equipment, travel costs or parts, try asking for a deposit up front so that, whatever happens, you’re not out of pocket.
- Obtain written agreement to the terms, from both sides
Transparent relationships create trust on both sides as well as a good working practice. Mainly because all parties know where they stand and what is expected from them. If you’re happy asking for 7, 30 or 60 days, then ask your customer to agree to these terms. It can also help to manage your own expectations. For example, if you’d like to work on 7 day terms, but your customer will only work to 60, this conversation brings the issue up early enough to allow you to manage your cash flow or choose not to work with them.
- Offer an ‘early payment discount’
Incentives can work, although you have to make sure you factor this in to your profit margins a cash flow forecasting. Put simply, a 5%, or 10% for a customer to pay by a specific date can be enough to make sure they pay you quickly.
- Or a Late Payment Penalty
Alternatively to the early payment discount, is a late payment penalty. The penalty has to be realistic (for example, close to the base rate) and has to be signed and agreed by the customer before you do any work with them. This ensures that, if it goes all the way to a small claims court, this part of the invoice is covered. Otherwise you can’t claim on it.
I can’t guarantee that one or all of these will get rid of the late payment problem. Whatever you try, prevention is often much easier to manage than the cure.
Amy Davies finished by telling me that “The only “positive” thing about this now is that I expect it, so I’ve learned to put some money aside every month so I have a savings buffer for when the inevitable payments turn up …. although I don’t think anyone should have to do that because of poor payment practices!”
“Applying efficient and effective credit control is an essential cog in running a successful business. Making a profit is nice but cash flow is crucial for survival. Often credit control is seen as a job that only needs addressing when the purse is getting empty but credit control policies should be implemented very early on, even before the invoice becomes due.
Timely chasing can identity any problems or potential delays in payment before the due date, which could have a huge impact on your cash flow. Large companies often have their own dedicated credit control teams to manage payments and customer relationships, so credit control should not be overlooked by smaller businesses.
Sometimes sole traders or small businesses feel awkward requesting payment from their customers, but it doesn’t need to be an unpleasant experience, and with regular contact it can help towards building good relationships with your customers. Alternatively, a common option is to use freelance credit controllers. This gives businesses the flexibility to get help to chase payments as and when they are needed. Freelancers will usually offer a variety of options – other one-off jobs or rolling contracts of a few hours a week.” To get in touch with Jocelyn, connect via LinkedIn or Twitter.
A sale is not a sale until it’s been paid. Remember those words during every new and existing customer transaction.
What impact does late payment have for you? How to combat the challenges of credit control? As ever, I’d love to hear your stories and you can get in touch here.