As a small business owner you know that maintaining steady cash flow is absolutely critical to the success of your business. Late payment of invoices across small to mid-sized businesses in the UK is very common. In fact the total amount of money owed to small businesses in the UK at the time of writing this article is estimated at £33.6 billion! (source).
If you find yourself struggling with late paying clients then it is very likely that you will also experience issues with your cash flow. So what can you as a small business owner do to ensure that your customers pay you on time and that your cash flow remains steady?
Well, below are 10 tips that are crucial to minimising overdue debtors and preserving cash flow:
- Know your customer or supplier with whom you are trading. If you provide a service or deliver a product ensure that you are trading with a reputable business. Specialist credit agencies will provide some assurance that you are dealing with an organization that has some credibility and payment track-record.
- Have a clear credit policy – it is an inevitable reality that most of your customers will expect to receive some level of credit. Most commonly this will be 30 days after invoice. Whatever you decide to be an appropriate policy for your business, make sure that it is clearly brought to the attention of your customers before they contract or buy from you. The easiest way to do this is to set out your credit policy and payment terms on any order form that your customers sign.
- Publish your business terms – putting in place a concise and clear set of trading terms and conditions will assist in ensuring that your customers are well aware of both your credit policy and your debt recovery process. Once they know that you have a transparent debt recovery process in place they are likely to make sure that you get paid on time.
- Get a signed order-form. Ensure that all of your customers and clients sign your order form (which includes your credit terms and terms of business) before you do business with them. This ensures that if you do have to pursue debt recovery proceedings you are able to prove to the court that your terms were accepted. The reality is that if a customer is struggling financially those suppliers with robust credit and debt recovery processes are the ones they are likely to prioritize when it comes to paying a selection of their debts.
- Know the law – In the UK the Late Payment Of Commercial Debts Regulations 2013 (click here for the Regulations) provides businesses with a defined set of rights for pursuing late payments. This includes the right to claim statutory interest at the rate of 8% above the Bank of England base rate in place at the time. At the time of writing the base rate is 0.5%, so you can currently claim interest of 8.5%pa on any commercial debt. In addition you can add administrative fees based of up to £100 per invoice based on the amount of the debt.
- Never hold off invoicing customers – If you invoice late then you are delaying your payment date. Have a clear policy and stick to it at all times. For some businesses it may be appropriate to invoice on the signing of the order form. For other it may be more appropriate to invoice after delivery of the service. Either way make sure you invoice on time, every time.
- Never limit the ways you can be paid by your customers and clients – Faster Payments and bank transfers are great – but where possible you want to be able to take payment by additional means such as debit/credit cards, PayPal or even cheque.
- There are many software tools that can remind you when payments are due. This can really assist in making sure that all invoices are chased as soon as the credit period expires and that you stay on top of chasing up late payments. Offer early payment incentives – One of the best ways to manage your cash flow is to offer early payment discounts. If you offer a discount for paying the same day the order is placed, or within 14 days or the order, you can make considerable improvements to your cash flow. Even better, if you offer retained services, try and have your customers sign up to a standing order so that the payment goes through each month automatically.
- Manage your own payments to improve your cash flow. Aim to make payments as they fall due in order to avoid them building up. Also, make monthly provision to accrue for periodic payments such as rent, rates or utilities. This will avoid the negative impact that a quarterly bill can bring to your cash flow.
- When necessary, look to providers such as Merchant Money who can bridge the delay in invoice settlement by offering short term loans or “factoring” issued invoice(s). Always ensure that you work with a reputable lender and check to see what the small print may say. Merchant Money is transparent – we don’t have small print… but some do and may levy additional fees.
Good cash flow management comes from good organiSation and planning. By taking the time to document and execute a thorough debt and credit management policy you will make great strides towards establishing cash flow stability.
Jan M Stefanowicz
CEO Merchant Money Ltd