Cash flow is critical to any business and for small businesses, managing cash flow can be particularly difficult. Most small business owners will agree that managing cash flow is the number 1 concern that keeps them awake at night.
While many factors can affect a business’ cash flow, it is almost impossible to find a business whose cash flow has not been impacted negatively by late payments.
Apparently, this is a global problem.
In its Late Payment Report 2016, the UK finance company MaketInvoice stated that globally, 72.5 per cent of invoices are paid late.
Even more interestingly, Australian businesses have been named the worst in the world for not paying bills on time. MarketInvoice found that the average time that it takes for an invoice to be paid in Australia is 26.4 days overdue.
Needless to say, this is not a proud record that we Australians want to keep. Not only it can cause serious uncertainty, cash flow challenges and unnecessary administrative burden to businesses, dealing with late paying clients can also be demoralising. If not carefully dealt with, business relationships can be seriously damaged in the process of payment recovery.
So can we help clients pay on time? What can we do to manage or minimise late payments? In this article, we share 4 practical tips to help businesses better managing late payments.
Take the Guess Work Out of the Equation
This may seem like a no brainer, but it is not unusual for businesses to issue inaccurate or hard-to-decipher invoices. Common issues include invoicing without banking details, contact information or sufficient job descriptions.
As much as we demand timely payments from clients, it is also our responsibilities to ensure that we adopt clear billing procedures and provide easily understood invoices to facilitate a timely response.
At Notonos Global, our consultants use Toggl to track our effort in servicing our clients. Software like Toggl, which offers a free entry-level plan, allows us to prepare timesheets easily for billing – a level of transparency that our clients very much appreciate when receiving invoices from Notonos Global.
Stay Calm and Be proactive
“Stay calm and be proactive” is the advice that Jarod from jarodspiewak.com gives when it comes to dealing with late payments.
The American based Search Engine Optimisation-guru Jarod Spiewak believes late payment is something that all businesses eventually will encounter. Rather than being reactive, businesses should be proactive and be prepared for the situation.
“In order to be proactive, you’ll need to have a firm grasp on your expenses. At a bare minimum, you should have 1 month’s worth of expenses in your bank account,” said Jarod.
While it can be extremely frustrating, it is important to stay calm and refrain from lashing out about late payments to avoid ruining business relationship. Sometimes the cause of late payments is innocent and can be easily fixed.
Misalignment of payment terms, for instance, is a common cause for late payments. A phone call to accounts payable in this case can resolve the problem easily.
Tools and Processes
Chasing up late payments can be time consuming, but processes and tools can eliminate a lot of hard work. There are dedicated cloud-based accounting software such as Zero, which provides business owners a simple and easy way to manage finance.
For example, setting an auto reminder schedule for late payments using an online accounting software is more efficient and accurate than manually tracking accounts with late payments or sending follow-up emails to clients individually.
Businesses should also establish smart billing processes to manage accounts and payments. Instead of agreeing to a 60 to 90 day billing cycle, consider a down payment term to offset your business costs. Think about how long before you need to personally contact customers if auto reminders for late payments fail. What about debt collections? Do you have a threshold before getting in touch with a debt collector?
Carefully think through these questions and develop business processes accordingly will minimise headaches in the future.
While processes and tools are certainly helpful providing a safety net to manage late payments, sometimes it may be worth it for businesses to consider credit check before taking on a new client. This is particularly useful when the project is significant.
If a prospective client has poor credit history, you have a choose to implement a strict down payment policy in line with the progress of the project if you decide to take on the client or you may simply decide to de-risk and say no to the business lead.
Take Home Messages
- Have good billing practice to ensure invoices that you issue are accurate and transparent
- Develop clear business processes so you know what to do if late payments occur
- Leverage on smart accounting software to manage business finance
- Consider credit check before taking on a new client