Owner-managers hit by late payment |
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Economy
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Written by Roberta Murray
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Thursday, 28 August 2008 |
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Tips to avoid becoming another business that goes down to poor cashflow.
Tips to avoid becoming another business that goes down to poor cashflow.
The Federation of Small Businesses (FSB) has recently claimed that SMEs are being exploited by larger corporations who delay invoice payments.
Research from entrepreneur think tank the Tenon Forum supports this with the number of SMEs experiencing late payment doubling in the past five years and more than half claiming big businesses are the worst offenders.
Carl Jackson, Head of Tenon Recovery, gives tips for small businesses on how to avoid becoming victims of late payment.
Always chase late payers.
It’s incredibly important to make sure those who delay payment are reminded about it until they do pay up. Try not to set a precedent by allowing certain clients or suppliers to become persistent late payers by attempting to ensure prompt payments from all.
2. Make sure the right person chases late payments.
Try not to waste valuable senior time chasing late payments – according the Tenon Forum, in 17 per cent of entrepreneurial businesses the owner-manager is responsible for pursuing tardy payment. Chasing late payment, rather than spending time growing the wealth of the business, can be counterproductive. By making someone else responsible for this, you can ensure that it will always be done and that they can factor it into their time, rather than it falling to the MD.
3. Have systems in place to chase for payment.
It may sound simple but many small businesses do not have any systems in place to chase late payments. By making sure you have an effective system in place, you can ensure that all outstanding invoices are paid as quickly as possible and those that still don’t pay up are pursued until they do.
4. Try not to be reliant on one customer.
Many business failures are caused by poor credit control and research from the Tenon Forum reveals that close to a fifth (18 per cent) of entrepreneurs admit that late payment has forced them to exceed their overdraft limit with five per cent claiming it’s given them a bad credit rating. If the majority of your business comes from one client or customer, a delayed payment from them could cause you serious problems. Where possible a single customer should amount to no more than 25 per cent of your annual turnover.
5. Assess the impact.
It is imperative to assess the impact of a late payment straight away so you can work out how to deal with it and the impact it will have on your cash flow going forward. In extreme circumstances, late payment can have catastrophic consequences for SMEs – Tenon Forum research shows that close to one in 20 entrepreneurs claim late payment has almost caused their business to fold. By drawing up cash flow forecasts, you can identify any funding gaps early and develop a plan of action.
6. Get to know your customers.
Make sure you run a credit check on any new customers. It might sound a little underhanded but it could save you a lot of time and money in the long-run. Take care not to offer each customer more than the amount of credit they are allowed and review this on an annual basis.
7. Don’t be your customers’ bank.
Make sure you set the ground rules for payment early on and make sure these are enforced for all clients. Your credit terms should be clearly stated on all invoices so that your customers are aware. You should also have contracts from all your customers agreeing to these terms and conditions.
8. Pay attention.
Make sure you’re aware of any reasons for the late payment, particularly when it comes to regular customers – make a judgement call on whether it is worth upsetting a regular customer who has fallen a few days behind on a payment for the first time. However, if you find a usually punctual payer begins to fall behind on payments this could be an indication of financial difficulties for their business.
9. Ask for help.
If you find late payers persist in not paying up what they owe, consider outsourcing the chasing to an external agency for collection. Whilst employing someone to chase tardy payment for you may seem like an unnecessary cost, for those customers who let the debt drag on this could save you time and money in the long term.
10. Cover yourself.
If you have concerns about debts and late payment, then consider insuring your debtor book. Although this can be expensive, it’s something you can budget for – whereas a large debt can occur without much notice and could have a much more serious impact on your business.
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The parties required to implement the necessary process agreed how it should work in detail (outlined on my blog). The remaining challenge was finding the SME-facing brand necessary to market the service effectively. Early discussions with the perfect brand yielded some progress, but ultimately launch depended on another of their initiatives progressing.
Maybe the continuing explosion of the late-paying problem, coupled with reduced savings rates on people's spare case, will hasten this solution.